The 100 Best Stocks You Can Buy 2012 Part 35

Although 2010 started out slow, the fourth quarter numbers were impressive and should provide some momentum for TGT. The company recovered very quickly from the downturn. Moreover, Target has some of the highest customer satisfaction numbers in the industry. The company continues to take share away from specialty retailers in home lines, clothing, children's items, and other areas. People like the Target brand and a.s.sociate it with quality and good taste at a reasonable price, and more recently have come to make regular and frequent visits to the store because of the grocery department.

Target is also introducing a new store format called PFresh, which is very much like their Super Target in terms of items, but in a smaller format. They will carry 90 percent of the grocery items that a Super Target carries, but the s.p.a.ce devoted to the grocery area will be about 40 percent smaller. Grocery traffic may not require the amount of s.p.a.ce that has been allocated in the Super Targets, and a "deli" atmosphere may in fact be more conducive to impulse sales.

Improved economic conditions should improve Target's market share. Trend data indicates that Target performs better than its compet.i.tors during periods of economic growth. As consumer confidence improves through 2011, we expect Target to get the larger share of consumer spending growth. The company has guided fairly conservatively for 2011, but the company has delivered steady and solid results for so long that we believe the near-term news will continue to be good. Of course, we find the share repurchase activity combined with a reasonable dividend payout for a retailer to be quite an attractive combination.

Reasons for Caution

Target is up against some very tough compet.i.tors in Wal-Mart, Costco, and others. Also, these two compet.i.tors are growing their international presence, while Target, other than Canada, has none and has no plans for growth outside the United States. Target is tied more closely to the domestic consumer market, consumer confidence, and access to credit than either of its major compet.i.tors. We also see some risk in the grocery business, as groceries are very low margin and the company hasn't really figured out how to make the grocery offering complete with meats and fresh produce. Also, the credit card business is still a bit of a question mark.

AGGRESSIVE GROWTH.

Teva Pharmaceutical Industries, Ltd.

Ticker symbol: TEVA (NASDAQ) S&P rating: A- Value Line financial strength rating: A Current yield: 1.5%

Company Profile

Teva was founded in Jerusalem in 1901 as Salomon, Levin and Elstein, Ltd., a small wholesale drug business that imported medicines, loaded them onto the backs of camels and donkeys, and distributed them to customers throughout the area. Teva is now among the top fifteen pharmaceutical companies in the world and is the largest generic pharmaceutical company.

The company develops, manufactures, and markets generic and proprietary pharmaceuticals and active pharmaceutical ingredients.

Teva's generic portfolio is extensivein the United States. Teva USA markets nearly 400 generic pharmaceuticals in 1,300 dosage levels. Its innovative drug line is far smaller, but includes some widely prescribed and very profitable medications, including Copaxone (for the treatment of multiple sclerosis) and Azilect (for early and late-stage Parkinson's disease). The company also makes and markets a line of respiratory products for asthma, allergic rhinitis, and chronic obstructive pulmonary disease, and another line of women's health products including traditional and emergency oral contraceptives. Finally, the company also makes biopharmaceutical products including white blood cell stimulating factors for oncology and human growth hormone for children with growth hormone deficiency, among others.

The company has over sixty manufacturing and marketing facilities worldwide, with the bulk of its operations located in Europe, the United States, and Israel. Over 56 percent of Teva's sales are in North America and 85 percent in North America and Western Europe combined. The company is headquartered in Israel and shares trade as American Depository Receipts in the United States.

Financial Highlights, Fiscal Year 2010

Teva turned in yet another record year in FY2010, with sales up almost 16 percent to $16.1 billion, after a 25 percent gain in FY2009. Earnings rose to $4.55 per share, a gain of 35 percent over the previous year. The year was nothing if not successful. Almost $3.3 billion of sales were from Copaxone alone. Sales were up significantly across all product lines and geographies.

For FY2011, the company projects net sales between $18.5 billion and $19 billion with earnings in the range of $4.90 to $5.25, a bit lower than a.n.a.lyst estimates. One factor appears to be a new compet.i.tor for the Copaxone drug. On the other hand, the company has some 206 products, mostly generics, awaiting FDA approval. The branded product equivalents had $121 billion in sales in total. Some 134 of these applications are "Paragraph IV" patent challenges to branded products; if the company wins the cases, the revenue opportunities are large.

Reasons to Buy

Teva is the largest player in the volume-driven generic drug industry. Teva estimates that it supplies 16 percent of all prescriptions written in the United States, nearly twice as many as its next closest compet.i.tor (Mylan Labs). As previously mentioned, the pipeline of new product applications awaiting approval is large and lucrative. Strategically, the company intends to expand distribution of the generics worldwide, to start offering biogenerics, and to enrich its portfolio of proprietary medications.

The U.S. medical care reform bill included at least two provisions that should keep Teva shareholders happy. First was the decision not to allow imported prescription drugs into the United States. This will a.s.sure drug marketers of continued high margins for U.S.based sales, and the United States accounts for the majority of Teva's sales. The second was a provision that left intact the negotiation process whereby pharmaceutical patent holders could pay generic manufacturers not to develop competing products for a set period of time. We'd like to get in on thatwe tried not growing corn but we failed.

Over the past five years, the company's sales have grown 17 percent compounded, and earnings, cash flow, and dividends have all delivered compounded growth rates exceeding 20 percent. We see no real reason why this won't continue for a while. The company is in outstanding financial shape, with ample cash flow and credit for future acquisitions and funding of internal R&D.

Reasons for Caution

Teva's success is greatly affected by their ability to prevail in so-called "Paragraph IV" patent challengeschallenges to the exclusivity rights granted to the patent holder by the FDA. As of early 2011, 134 of Teva's nearly 206 product applications to the FDA were Paragraph IV applications. These applications tend to have a slow and uncertain outcome. The company has also relied heavily on Copaxone; many think the dominance of that drug in the MS market may be on the wane as Novartis rolls out its orally administered Gilenia drug. Recently, this risk has held the stock price back somewhat, but patient investors should focus on the big picture and regard such slowdowns as a buying opportunity. Also, in contrast to most of the companies on our 100 Best list, Teva has been adding to share counts to make acquisitions, a practice that is not among our favorites for long-term performance. We would like to see the company use its cash flow to buy back some of those shares.

GROWTH AND INCOME.

Total S.A. (ADRs)

Ticker symbol: TOT (NYSE) S&P rating: AA Value Line financial strength rating: A++ Current yield: 5.3 percent

Company Profile

Total S.A. (S.A. is short for "Societe Anonyme," which is the French equivalent of "incorporated") is the fifth-largest publicly traded oil and gas company in the world. Headquartered in France and primarily traded on the French CAC stock exchange, the company has operations in more than 130 countries. Total is vertically integrated with upstream operations engaged in oil and gas exploration and downstream operations engaged in refining and distribution of petroleum products; the company also has a chemicals subsidiary.

Upstream activities are geographically well diversified, with exploration occurring in forty countries and production occurring in thirty of them. Many of the E&P projects are done through partnerships to spread risk. The largest production regions are (in production volume sequence) in the North Sea, North Africa, and the Middle East, with smaller operations in Southeast Asia and North and South America. Liquids account for about 61 percent of production, while natural gas is 39 percent. The company is a leader in the emerging liquefied natural gas (LNG) market for export. The company has had good results in the exploration and production side, somewhat better than the industry, with production up 6 percent, led by an 18 percent increase in gas output.

Downstream operations are also worldwide and centered in Europe. Operations include twenty-five refineries worldwide, with eleven refineries and 85 percent of the company's total refining capacity in Europe. Total also operates 16,425 service stations, again weighted toward Europe and North Africa. The downstream presence is also growing in Asia Pacific (including China), Latin America, and the Caribbean. The company is currently building a new major refinery in Saudi Arabia to come on-line in 2013.

Financial Highlights, Fiscal Year 2010

The decline in energy prices and worldwide demand led to an "off" year in FY2009, with revenues slumping to a five-year low of $157 billion and earnings to $5.31 a share. FY2010 revenues recovered to the 2007 level preceding the 2008 oil price spike, with earnings of $6.25 per share and cash flows of about $10.65 per share. Total pays dividends in euros, so following dollar denominated dividends from year to year can be tricky, but weeding out this anomaly, dividend growth has been a healthy 19.5 percent over the past ten years and looks to continue at a healthy pace.

Reasons to Buy

Total S.A. is a solid energy sector play with many of the features that make "big energy" attractivenamely strong cash flows and high dividend yields and demand that isn't going away anytime soon. Companies with a price-to-cash-flow ratio under 5, implying a 20 percent annual cash return, aren't easy to find. In addition, Total provides a stronger international play than other energy picks on our list. The company has a dominant position in Europe, which albeit isn't growing but is a steady market, producing plenty of cash flow while allowing the company to dabble in more promising markets like China and others in Asia Pacific and Latin America. Energy prices, at least at this writing, are on the rise, and Total is well positioned to take advantage of higher prices for their production as well as recent strength in the refining business. Finally, those believing that the dollar will weaken longer term, particularly against the euro, will like the fact that the dividend is paid in euros, which would translate favorably to ever-cheaper dollars.

Reasons for Caution

The European economy may still have some speed b.u.mps ahead of it. We also remain cautious on investing in foreign companies because of differences in management style and accounting rules; they aren't necessarily bad but are difficult to understand and follow. Typically, we prefer U.S. companies that do a lot of business overseas. We feel the strengths of Total overcome these concerns.

AGGRESSIVE GROWTH.

Tractor Supply Company

Ticker symbol: TSCO (NASDAQ) S&P rating: not rated Value Line financial strength rating: A+ Current yield: 1.0%

Company Profile

Tractor Supply Company is the largest operator of retail farm and ranch stores in the United States. Their focus is on the needs of recreational farmers and ranchers and those who enjoy the rural lifestyle, as well as tradesmen and small businesses. They operate retail stores, many in a "big-box" format, under the names Tractor Supply Company and Del's Farm Supply. Their stores are located in towns outside major metropolitan markets and in rural communities. Representative merchandise includes supplies for horses, pets, and other farm animals, equipment maintenance products, hardware and tools, lawn and garden equipment, and work and recreational clothing and footwear.

Tractor Supply stores typically range in size from 15,500 square feet to 18,500 square feet of inside selling s.p.a.ce and additional outside selling s.p.a.ce. As of December 2010, they operated just over 1,000 retail farm and ranch stores in forty-four states. Del's Farm Supply operates twenty-seven stores, primarily in the Pacific Northwest, offering a wide selection of products (primarily in the horse, pet, and animal category) targeted at those who enjoy the rural lifestyle. The company does not plan to grow Del's significantly beyond its current size.

For FY2010, sales were divided between the following segments: livestock and pet products (39 percent); seasonal products like mowers and snow blowers (23 percent); tool, truck, and towing products (18 percent); clothing and footwear (10 percent); and agriculture (8 percent). Tractor Supply Company also sells a subset of its store goods online.

Financial Highlights, Fiscal Year 2010