The 100 Best Stocks You Can Buy 2012 Part 7

Reasons for Caution.

Without the ARG acquisition, organic growth in 2010 and 2011 will be moderate and cyclical at best. APD could be too dependent on an acquisition like Airgas to fuel growth. Now, however, without the acquisition, the company can focus on its core business; additionally, concerns about paying too much have gone away.

GROWTH AND INCOME.

Alexander & Baldwin.

Ticker symbol: ALEX (NASDAQ) S&P rating: BBB+ Value Line financial strength rating: B+ Current yield: 3.2%.

Company Profile.

An old Hawaiian company with origins dating back to the missionary days of the 1830s, Alexander & Baldwin, Inc., together with its subsidiaries, operates in Ocean Transportation, Real Estate, and Agribusiness. The company offers container s.h.i.+p freight services primarily between Long Beach, California; Oakland, California; Seattle; Hawaii; Guam; China; and other Pacific Islands. Its most recognizable carrier is the wholly owned subsidiary Matson Lines.

The company operates some of the fastest container s.h.i.+ps in the Pacific Rim; it also has subsidiaries specializing in logistics, stevedoring, and port services in Hawaii, China, and on the U.S. mainland. Matson is one of the most technologically advanced s.h.i.+pping lines in the world with full Internet booking and s.h.i.+pment tracking capability. In many West Coast ports, Matson operates its own facilities, leading to further streamlining. The transportation business accounted for 86 percent of revenue and 97 percent of profits for 2009, a year in which other businesses struggled; that has since changed as will be discussed below.

The Real Estate subsidiaries develop and sell residential and commercial property primarily in Hawaii, currently owning over 89,000 acres in the state. This business develops and sometimes owns and operates commercial, industrial, and residential facilities, often located on lands acquired over 100 years ago in use for sugar cane, primarily in Kauai and Maui. The Agribusiness segment specializes in sugar and the production, marketing, and distribution of coffee, and represents a relatively small share of the company's business at 7 percent of revenue. In 2009, the Agribusiness sector operated at a $29 million loss.

Financial Highlights, Fiscal Year 2010.

The company earned $1.08 per share in 2009, its lowest tally in over fifteen years. The reasons are understandable with the global s.h.i.+pping slowdown and depressed commodity and real estate prices. The results could have been worse had the company not responded with cost controls as well as they did. A pickup in s.h.i.+pping demand and rising sugar prices combined to make 2010 a much better year than expected, with earnings through the first three quarters coming in at $1.74 versus the company's own forecast of $1.09. For the year, the company earned $2.22 per share, well ahead of 2009 and well ahead of forecast. ALEX is a cyclical business to be sure, but we feel that these results reflect more than just a return to prosperity, although earnings were over $3 during the height of the boom years in 2007.

Reasons to Buy.

Alexander & Baldwin is a long-term play on the continued growth and importance of trans-Pacific s.h.i.+pping, combined with the growth and value of Hawaii, Hawaiian real estate, and agriculture. It is a diversified play with healthy niche businesses, strong cash flows, and healthy dividends.

The Jones Act provides that no non-U.S. flagged carrier can operate between Hawaii and other U.S. ports, giving Matson, by far the largest carrier serving Hawaii, a virtual monopoly on that business. Matson's fleet is nonetheless also compet.i.tive with Chinese carriers servicing routes between Hawaii, Guam, and mainland China. Growth in China bodes well for the company, particularly given its strength in "fast" logistics and dedicated port facilities. This is a business where simple, dependable, and fast is good.

Reasons for Caution.

The company fights economic cycles; all three of its primary businesses are vulnerable. That said, we think the Matson franchise is one of the best in the China trade and will remain strong in the future even during periods of soft demand. As recently as 2010, the sugar business looked bleak, with sugar prices far below breakeven points. The company considered getting out of sugar altogether, but commodity prices have strengthened overall and the decline of other sugar-producing a.s.sets worldwide for similar reasons has left Alexander & Baldwin in a better position today. In addition, we're optimistic that sooner or later, sugar-based ethanol will gain traction in the United States. While these arguments attenuate some of the negatives, Alexander & Baldwin is probably not the best stock to own for those who don't sleep well when economic storm clouds gather.

AGGRESSIVE GROWTH.

Allergan, Inc.

Ticker symbol: AGN (NASDAQ) S&P rating: A+ Value Line financial strength rating: A+ Current yield: 0.3%.

Company Profile.

Allergan is a health care products company making pharmaceutical, over the counter, and medical device items for the ophthalmic, neurological, dermatology, urology markets, and an a.s.sortment of aesthetic medical procedures such as breast aesthetics and obesity intervention, and other specialty medical markets. The company was founded in 1977 and originally marketed ophthalmic products for contact lens wearers and other products for eye inflammation and other disorders.

The company operates in two segments. The Specialty Pharmaceuticals Segment markets the ophthalmic products, including contact lens products, glaucoma therapy, artificial tears, and allergy and infection fighting products. Specialty Pharmaceuticals also sells Botox for a variety of medical conditions and for aesthetic use. Botox is used not only for the familiar skin wrinkle therapies, but also for neuromuscular disorders; recently it has been approved for use in treating chronic migraines, a new market with substantial potential. The segment also offers a number of popular skin care and acne medications for both acute care and aesthetic use.

The Medical Devices Segment makes and markets breast implants for augmentation, revision, and reconstructive surgery, and obesity intervention products including the "Lap-Band" system and the Orbera Intragastic Balloon System. The segment also markets other skin and tissue regenerative products for aesthetic and reconstructive purposes for burn treatment and other traumas.

The approximate business breakdown by revenue is 47 percent eye care, 30 percent neuromuscular including Botox, 11 percent breast and facial implants, 6 percent obesity implants, 1 percent urological, and 5 percent other. Foreign sales account for about 35 percent of the total.

Financial Highlights, Fiscal Year 2010.

After a modest slowing of revenue and earnings growth during FY2009, the company resumed its growth pace in FY2010 with revenues of approximately $4.9 billion and earnings of $3.13 per share, roughly a 13 percent increase from the previous year. Operating and net margins continued to expand as post-recession activity s.h.i.+fted customers toward more elective, and more profitable, treatments. Operating margins rose to 34 percent from the mid- to high-20s experienced through most of the previous decade. For FY2011, the company projects revenue between $5.02 billion and $5.22 billion and earnings in the range of $3.54$3.60 per share.

Reasons to Buy.

Allergan tends to be more economically sensitive and cyclical than other pharmaceutical and medical products companies because much of what they sell supports cosmetic, thus elective, and thus cash-paid (in contrast to insurance paid) procedures. Of course, this is a negative when the economy is soft, although the company sells enough regularly required products such as eye care products to not be hurt too much by bad times. We like the issue because it will do especially well in good times. Further, with aging and demographics we see a greater trend toward taking care of personal aesthetics through cosmetic procedures. At the same time, new technologies such as a "cohesive-gel" breast implant and others means that taking care of such issues is becoming safer, easier, and more mainstream, a trend that should make the business stronger going forward. New uses for Botox, such as the migraine treatments, overactive bladder symptoms, and others are also promising. We also think the company has strong potential in overseas markets.

Reasons for Caution.

All pharmaceutical and medical device products come with an inherent risk of short- and long-term failure with painful financial and brand-image consequences. Cosmetic devices could be even more vulnerablewitness what happened to Dow Corning with breast implants in the 1970s. We also think the time will come soon, if not already, to give more back to the shareholders in terms of dividend and/or share repurchases; the stock price has followed and may have even preceded the company's prospects, which tends to mitigate yield and share repurchases and should make investors shop carefully for buying opportunities.

CONSERVATIVE GROWTH.

Amgen Inc.

Ticker symbol: AMGN (NASDAQ) S&P rating: A+ Value Line financial strength rating: A++ Current yield: Nil.

Company Profile.

Founded in 1980, Amgen is the world's largest and one of the first independent biotech medicines company. The company develops medicines and therapeutics based on advances in cellular and molecular biology, mainly for grievous or chronic illnesses such as cancer, kidney disease, rheumatoid arthritis, bone disease, inflammation, nephrology, and others.

Interestingly, the company generates most of its approximately $15 billion in revenues each year with nine major products, most of which you won't have heard of unless you have one of these diseases or are in the medical profession: Aranesp, Enbrel, EPOGEN, Neulasia, NEUPOGEN, Nplate, Prolia, Sinsipar, and Vectibix. The explanations of these products are far too technical for most of us to comprehend. Witness company literature describing its products: Neulasta (pegfulgrastim), a pegylated protein based on the Filgrastim molecule, and NEUPOGEN (Filgrastim) a recombinant-methionyl human granulocyte colony-stimulating factor, (G-SCF), both [of which] stimulate the production of neutrophils (a type of white blood cell that helps the body fight infection)."

Get that? We didn't either, really. Ordinarily we'd be reluctant to recommend a company with only nine productsproducts we don't really understandin such an R&D-intensive business and changing technology. But Amgen is an exceptionmaybe an exception for biotech in generalbecause it has turned these products into a cash machine. The company earned about $5 billion on that $15 billion in sales with about $6 billion in cash flow and $17 billion in cash on the balance sheetnot bad for a limited product a.s.sortment.

The company has made some acquisitions, and recently completed the acquisition of BioVex, a small outfit with a promising technology to stimulate immune system destruction of tumor cells.

Financial Highlights, Fiscal Year 2010.

FY2010 revenues came in at just over $15 billion, 3 percent higher than FY2009, with earnings of $5.15 per share. The company booked about $1.5 billion in net free cash flow to the cash account.

Amgen is part of the pool of drug and health care companies to be negatively affected by the recently pa.s.sed health care reform legislation. The company estimates a hit of $400$500 million in revenue, including $150$200 million in excise fees under the act, compared to a total cost of $200 million in 2010. For FY2011 in total, the company projects revenues between $15.1$15.5 billion, and earnings between $5.05$5.20 per share.

Reasons to Buy.

Amgen hasn't put any blockbuster new products on the market lately, and as a result, growth rates, once stellar, have moderated. Recent stock prices reflect that, and show what happens when a high-flying, emerging company matures. Yet, the company is regarded as the dominant player in this biotech niche, and has had success with R&D and approval processes thus far. The company just received approval for two new metastatic cancer treatments, and is excited about new prospects from the BioVex acquisition. With a price-earnings ratio hovering near 10 and the aforementioned cash and cash-generation capability, any uptick in business or new product breakthrough will get the gravy train moving again in our opinion. Amgen is an unusual example of current value combined with a technology expertise and leaders.h.i.+p giving strong growth potential for a next leg upward.

Reasons for Caution.

With so much R&D and other expense going into a handful of products, any failure or FDA rejection can be very costly. The company, as mentioned, faces some impact from the new health care reform legislation, and initiatives to reduce health care costs could affect Amgen. And, we normally shy away from companies whose products we don't understand. Finally, while the company has very strong financials, there are no cash dividends being paid or any indication of any to come. We feel, especially if the product pipeline has really matured, that the cash and earnings position justifies some current shareholder return, and we hope the company avoids the temptation to make expensive acquisitions going forward.

AGGRESSIVE GROWTH.

Apache Corporation.

Ticker symbol: APA (NYSE) S&P rating: A- Value Line financial strength rating: A Current yield: 0.5%.

Company Profile.

Established in 1954 with $250,000 of investor capital, Apache Corporation has grown to become one of the world's top independent oil and gas exploration and production companies and currently has a market cap over $30 billion. Today, Apache is a $43 billion "upstream" oil and gas producer with an effectively deployed strategic portfolio approach to diversification to reduce risk and maximize returns.

Apache's domestic operations focus on some of the nation's most important producing basins, including the Outer Continental Shelf of the Gulf of Mexico, the Anadarko Basin of Oklahoma, the Permian Basin of West Texas and New Mexico, the Texas-Louisiana Gulf Coast, and East Texas. Recently, the company acquired the Gulf Coast a.s.sets of Devon Energy and the Permian Basin and New Mexico a.s.sets of BP PLC among other acquisitions, giving rise to a 35 percent increase in production during 2010.

In Canada, Apache is active in British Columbia, Alberta, Saskatchewan, and the Northwest Territories. The company also has exploration and production operations in Australia's offsh.o.r.e Carnarvon, Perth, and Gippsland basins; Egypt's Western Desert; the United Kingdom sector of the North Sea; China; and Argentina.

Apache's strategy is built on a portfolio of a.s.sets that provide opportunities to grow through a combination of original exploration, maximizing output on mature fields and acquisition activities. The company has seven core areastwo in the United States, and one each in Canada, Egypt, the North Sea (U.K.), Australia, and Argentina.

The company's portfolio is fairly well balanced in terms of gas versus oil, domestic and international production (in 2010 oil production was 54 percent overseas and 46 percent domestic), all to achieve moderate levels of geologic and political risk and healthy reserve life.