The 100 Best Stocks You Can Buy 2012 Part 30

Praxair is the largest gas provider in the emerging markets of China, India, Brazil, and Mexico. Praxair China now has fifteen wholly owned subsidiaries and at least ten joint ventures. Asian markets account for 8 percent of Praxair's sales, and these markets are growing steadily.

The petroleum industry is recovering heavier and heavier crude oil sources, such as the tar sands in Alberta. To refine these sources at existing facilities requires the input of greater and greater volumes of hydrogen. The largest of Praxair's forty-two current major projects are hydrogen production facilities in North America serving refineries, and hydrogen for refining is now Praxair's largest growth market. ExxonMobil's recent purchase of XTO for its oil shale holdings and fracturing technology is a strong indicator of future growth in heavy crude refining.

Praxair is moving quickly on a solution for carbon sequestration at coal-fired facilities (primarily power plants) that may be funded soon by the DOE and, if successful, could generate revenues on the order of $150 million per installation.

Four large players control 75 percent of the world's industrial gas supply. Since the end products are essentially identical, simple transportation costs tend to drive regionalization of the markets. Praxair, with its many plants and pipelines, has created substantial barriers to entry in many of its established and emerging markets.

Reasons for Caution

The company no longer has to deal with the effects of an Air Products-Airgas merger, but consolidation of smaller players by Praxair's compet.i.tors may force Praxair to follow suit at some point. As hydrocarbon energy products are feedstock for many of Praxair's products, the company is sensitive to increases in energy prices.

CONSERVATIVE GROWTH.

The Procter & Gamble Company

Ticker symbol: PG (NYSE) S&P rating: AA- Value Line financial strength rating: A++ Current yield: 3.0%

Company Profile

Procter & Gamble dates back to 1837, when William Procter and James Gamble began making soap and candles in Cincinnati, Ohio. The company's first major product introduction took place in 1879 when it launched Ivory soap. Since then, P&G has continually created a host of blockbuster products and has some of the strongest, most recognizable consumer brands in the world.

P&G is a uniquely diversified consumer products company with a strong global presence. P&G markets its broad line of products to nearly 5 billion consumers in more than 180 countries.

The company is a recognized leader in the development, manufacturing, and marketing of quality laundry, cleaning, paper, personal care, food, beverage, and health care products, including prescription pharmaceuticals. The company operates in three business units: Beauty and Grooming, Health and Well Being, and Household Care. Among the company's nearly 300 brands are Gillette, Tide, Always, Whisper, Pro-V, Oil of Olay, Pringles, Duracell, Ariel, Crest, Pampers, Pantene, Vicks, Bold, Dawn, Head & Shoulders, Cascade, Iams, Zest, Bounty, Braun, Comet, Scope, Old Spice, Charmin, Tampax, Downy, Cheer, and Prell.

Total 2010 sales exceeded $79 billion and the company has nearly 135,000 employees working in more than eighty countries. International sales account for 62 percent of the business.

Financial Highlights, Fiscal Year 2010 (ended June 30, 2010)

P&G's FY2010 revenues and per share earnings remained flat at just under $79 billion and $3.53 respectively. The company issued FY2011 guidance calling for a resumption of single-digit growth, driven primarily by consumer spending and international growth; revenues are expected to grow in the 35 percent range. Organic growth is expected in the 46 percent range, and the company issued two sets of earnings estimates: $3.89$3.99 from continuing operations and "core" earnings between $3.91 and $4.01. Translation: The company expects to spin off a few brands, as it did recently with its Zest soap products to a private equity firm, and as it has done several times recently to food products producer J. M. Smucker (a 100 Best Stock).

Reasons to Buy

Regardless of developments in the world economy, people will continue to shave, bathe, do laundry, and care for their babies, and P&G is the global leader in baby care, feminine care, fabric care, and shaving products. Everyone should consider at least one defensive play in their portfolio, and P&G deserves to be at the top of the list.

P&G is a market leader in consumer health care, a $240 billion market, with just a 5 percent share. Similarly, beauty and grooming is a $300 billion market, and P&G is the market leader with just a 13 percent share. P&G plans to grow their core businesses over the next several years and even small changes in market share in markets this size generate large returns.

P&G is extending its reach to capture share in channels and markets that are currently underserved. Developing markets are a huge opportunity, representing 86 percent of the world's population, and P&G feels it can be a leader in many product categories. Emerging markets already represent 32 percent of their revenue, up from 20 percent in 2002. P&G is also broadening its distribution channels to pursue opportunities via drug and pharmacy outlets, "convenience" stores, export operations, and even e-commerce. P&G does less than $1 billion in online sales at this time, and the company feels it can increase that substantially.

P&G's recent concentration on the beauty and health care segments has paid benefits, and the company plans to focus on expanding its product offerings in these segments. According to a company spokesperson, "More than 70 percent of the company's growth, or roughly $20 billion in net sales, has come from organic growth and strategic acquisitions in these businesses. Well over half of P&G sales now come from these faster-growing higher-margin businesses."

P&G regards innovation as one of its key differentiators and aggressively pursues new market opportunities, both in the U.S. market and globally. The company has realigned its once-secretive R&D efforts to be more open and collaborative with researchers in the public s.p.a.ce, including academic technology research and market research. This should help the company reduce costs and become more nimble in the marketplace.

In a move that should reduce operating and some marketing and advertising costs significantly, the company recently announced a departure from its traditional model of managing brands as wholly separate businesses with brand-specific advertising budgets, products research labs, and so forth. Synergies from combining ads and ad strategies alone should get more bang for the buck and reduce total costs across the company's many portfolios.

Finally, the company offers an excellent combination of brand and marketplace strength, safety and defensiveness (beta = 0.52), current yield, and growth opportunity.

Reasons for Caution

In a slow economy, consumers will be motivated to save wherever possible. Among Procter & Gamble's chief compet.i.tors for shelf s.p.a.ce are low-cost store brands and generics. A change in consumer preference may dilute market share for P&G, but since it has the number one or number two retail positions in the majority of its key global categories, P&G feels that any s.h.i.+ft in purchasing patterns will damage its traditional compet.i.tors more than it will P&G. Rising commodity costs can affect P&G, and the expansion into the health and beauty business brings more exposure to often-fickle consumer tastes and shorter brand life than the company may be used to.

AGGRESSIVE GROWTH.

Ross Stores, Inc.

Ticker symbol: ROST (NASDAQ) S&P rating: BBB Value Line financial strength rating: A Current yield: 1.2%

Company Profile

Ross Stores is the second-largest off-price retailer in the United States. Ross and its subsidiaries operate two chains of apparel and home accessories stores. It ended FY2009 with a total of 1,005 stores, of which 953 were Ross Dress for Less locations in twenty-seven states and Guam and fifty-two were dd's DISCOUNTS stores in four states. Just over half the company's stores are located in three statesCalifornia, Florida, and Texas.

Both chains target value-conscious women and men between the ages of eighteen and fifty-four. Ross's target customers are primarily from middle-income households, while the dd's DISCOUNTS target customers are typically from more moderate-income households. Merchandising, purchasing, pricing, and the locations of the stores are all aimed at these customer bases. Ross and dd's DISCOUNTS both offer first-quality, in-season, name-brand and designer apparel, accessories, and footwear for the family at savings of either 2060 percent off department store prices (at Ross) or 2070 percent off (at dd's DISCOUNTS). Both stores also offer discounted home fas.h.i.+ons and housewares as well.

Ross believes it derives a compet.i.tive advantage by offering a wide a.s.sortment of products within each of its merchandise categories in well-organized and easy-to-shop store environments. Its strategy is to offer compet.i.tive values to target customers by offering a well-managed mix of inventory with a strong percentage of name brands and items of local and seasonal interest at attractive prices.

Financial Highlights, Fiscal Year 2010

Almost overnight, the recession made customers very cost, price, and value conscious, and Ross knocked the ball out of the park in FY2009. That year, sales increased 11 percent to a record $7.2 billion on the strength of a 6 percent rise in comps. Net earnings for the year grew 45 percent to a record $443 million, up from $305 million in 2008. Per share net rose 52 percent to $3.54, on top of a 23 percent gain in 2008.

Even as the economy showed signs of recovery, the strength continued. Earnings grew another 36 percent to $4.83 a share in FY2010, while sales tacked on another 9.5 percent. For FY11, the company sees earnings between $4.90 and $5.10 a sharea nice run from $1.90 in 2007. The company also authorized a $900 million stock repurchase through FY2012, which would retire approximately 12 percent of shares outstanding. The company has already reduced share counts 19 percent in six years, from 146 million in 2004 to about 118 million in 2010. Ross also raised the dividend 38 percent to $0.88 per share.

Reasons to Buy

The recession helped Ross gain mainstream appeal across a wider set of customers. While some of those customers will "defect" back to full-price retail stores as things improve, a greater number will probably continue to shop at the stores. At the same time, the company was successful with operational improvements begun in 2009 to improve merchandising and inventory management, which led to better stocking of a more favorable mix of goods and improved inventory turnover. These marketplace and operational improvements have led to the financial success one would expect and then some, and the company continues to improve its inventory management and should see greater profitability almost regardless of the economic environment.

We like the combination of brand and operational strength in the business with a bias toward increasing shareholder returns. We also like owning a company that is helped by a sudden drop in the Consumer Confidence Index; that's a rare bird these days.

Reasons for Caution

The stock has recently traded at an all-time high, and there are questions about Ross's ability to acquire the same quant.i.ty and quality of merchandise as the economy picks up and full-price retailers begin to see higher levels of foot traffic. Such inventory follows a cycle, and if full-price retailers cut back on orders, there is less for everyoneand if the economy picks up, they will sell more, so less for Ross. Upshot: Inventory management improvements at full-price retailers could make things tougher for the company.

AGGRESSIVE GROWTH.

Schlumberger Limited

Ticker symbol: SLB (NYSE) S&P rating: A+ Value Line financial strength rating: A+ Current yield: 1.1%

Company Profile

Schlumberger Limited is the world's leading oilfield services company. It provides technology, information solutions, and integrated project management services with the goal of optimizing reservoir performance for its customers in the oil and gas industry. Founded in 1926, today the company employs more than 77,000 people in eighty countries.

The company operates in two business segments: Schlumberger Oilfield Services is, at 91 percent of revenues and 93 percent of profits, by far the largest segment, and supplies a wide range of products and services including oilfield services such as formation evaluation, directional drilling, well cementing/stimulation, well completions, and productivity. Consulting services provided include consulting, software, information management, and IT infrastructure services that support core industry operational processes. WesternGeco, which accounted for 9 percent of the company's revenue, provides reservoir imaging, monitoring, and development services to land, marine, and shallow-water well projects.