Wanted: good management

6/30/2008


In an environment of sluggish economic growth, surging commodity prices, and uncertainty about the financial sector, favoring shares of well-managed companies makes sense. Stocks supported by healthy profit margins, solid returns on capital, and improving efficiency should be in demand in the year ahead.

To that end, we ranked Forecasts stocks along with the companies in the S&P 1500 Index based on 13 key metrics related to the quality of management, including inventory and receivables turnover, gross and operating profit margins, return on equity, and return on investment. We also considered trends in the above measures, as well as three-year growth in tangible book value, sales, earnings, and cash flow.

To qualify as well-managed, we required a company to rank among the top one-fifth of the more than 1,500 companies based on a composite score of the 13 factors. To narrow the field, we eliminated companies with composite scores below peer-group averages. Also eliminated were stocks with Quadrix® Overall scores below 80 or below sector averages. The 15 stocks in the table below made the cut.

WELL-MANAGED FIRMS
Listed below are 15 stocks that rank among the best based on a composite scoring system designed to uncover well-managed companies. The score considers inventory and receivables turnover, return on equity, return on investment, and gross and operating profit margins. Also considered were three-year growth rates in book value, sales, earnings, and cash flow.
——— Current Year ———
Sector Average
Company (Price; Ticker)
Est.
EPS
($)
Change
(%)
Est.
P/E
Quadrix
Overall
Score *
Composite
Score *
Advice
Capital Goods
72
63
General Dynamics
($87; GD)
5.9
16
15
91
85
Buy †
Lockheed Martin
($104; LMT)
7.46
5
14
90
92
Focus Buy †
Oshkosh ($34; OSK)
4.37
22
8
91
93
Buy
United Technologies
($68; UTX)
4.89
14
14
78
86
Buy †
Energy
82
71
Chevron ($99; CVX)
11.49
38
9
99
97
Buy †
Schlumberger
($107; SLB)
4.79
15
22
87
97
LT Buy
Health Care Equipment & Services
63
55
St. Jude Medical
($41; STJ)
2.2
19
19
88
99
LT Buy
Materials
58
47
Freeport-McMoRan
($116; FCX)
11.39
16
10
99
88
Focus Buy †
Media
55
47
Disney ($32; DIS)
2.33
21
14
89
98
LT Buy
Software & Services
64
52
Microsoft ($28; MSFT)
1.88
27
15
87
86
Buy †
Technology Hardware & Equipment
61
51
Harris ($52; HRS)
3.46
24
15
80
98
Focus Buy †
Hewlett-Packard
($45; HPQ)
3.57
22
13
93
91
Buy †
Qualcomm
($46; QCOM)
2.13
6
22
95
90
Focus Buy †

Western Digital
($36; WDC)

4.18
116
9
100
97
Buy
Utilities
53
48
Energen ($76; EGN)
4.45
4
17
89
95
LT Buy
* Percentile ranks, with 100 the best.    † Also a Long-Term Buy.

Spotlighted in the following paragraphs are two well-managed companies with solid operating momentum and bright growth prospects.

Over the last 10 years, Schlumberger ($107; NYSE: SLB) has grown its dividend at an annualized rate of 6%. But that growth rate accelerated to 23% over the last three years, suggesting the company is confident about its prospects.

Schlumberger has ample reason for optimism. The North America region seems to be turning around after a slump. Increases in natural-gas prices have reinvigorated exploration and production in the region. High oil prices are supporting strong spending worldwide as well, and Schlumberger has positioned itself as a global player.

As dozens of new offshore drilling rigs enter the market over the next few years, energy producers will be seeking help from Schlumberger, particularly in the lucrative deepwater segment. Already a technological leader in its industry, Schlumberger will lay out $3.8 billion in capital spending this year. The company seems poised to gain market share over the next two to four years. Schlumberger is a Long-Term Buy.


With five-year annualized growth of 19% in sales and 20% in per-share earnings, St. Jude Medical ($41; NYSE: STJ) has distinguished itself from other medical-device makers. Consensus estimates call for a 19% increase in per-share profits this year, followed by 12% in 2009.

There is some concern that the market for implantable cardioverter defibrillators, devices that regulate hearts beating too fast, has stalled. However, sales of St. Jude’s defibrillators and related equipment rose 20% in the March quarter. A combination of overseas expansion and new products should help St. Jude gain defibrillator market share and drive sales growth well above that of the overall market.

St. Jude’s atrial-fibrillation segment will likely benefit from the launch later this year of the Eon Mini, the world’s smallest and longest-lasting implantable neurostimulator to treat chronic pain. The U.S. Food and Drug Administration approved the Eon Mini in April. At 18 times estimated year-ahead earnings, St. Jude trades below its five-year average forward valuation of 24 and the average of 20 for medical-device makers. St. Jude is a Long-Term Buy.


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