By Ahmed Ishtiaq
The end of 2012 is upon us, and the year has been good for a lot of stocks. Some companies have shown exceptional growth, while on the other hand some companies have had a miserable year. It is time to choose some mouth-watering investment options for the next year. In this article, we have identified three companies that we believe provide an excellent investment opportunity. We expect these companies to have solid growth and a significant appreciation in value over the next year. These companies have shown exceptional EPS growth with solid margins.
UnitedHealth (NYSE:UNH) provides health insurance and related services to more than 78 million Americans. Products include risk-based health insurance, non-risk-based plan management for self-insured employers, Medicare and Medicaid plans, pharmacy benefit and disease management, and data and consulting services.
- The company has shown average EPS growth of over 25% over the past three years, compared with the industry average of 14%. In addition, it has an operating margin of 8.6%, compared with the industry average of 6.4%.
- UnitedHealth has recorded three-year average revenue growth of about 8%. The company reported revenue of $101,862 million at the end of 2011, significantly higher than $87,138 million reported at the end of 2009. Trailing twelve months revenue has already exceeded the revenue figures of last year by more than $6,000 million, indicating continued revenue growth.
- The company has made exceptionally efficient strategic investments over the years. As a result, it is best positioned to benefit from the opportunities in the Medicare and consumer directed health plans. Furthermore, the company has the highest growth in the Medicaid enrollment.
- Balance sheet of the company is exceptionally strong, giving it a great platform for future growth. Long-term debt and cash of the company stood at $11.14 billion and $8.9 billion, respectively. Strong cash position gives it a great platform for expansion in the future.
- Moreover, the stock is currently trading at a P/E ratio of 10.5, compared with the industry average of 12.2. ROE for UNH is 19.1 at the moment.
Southern Company (NYSE:SO) generates and distributes electricity to more than 4.4 million customers in the Southeast. The company owns four electric utilities in Alabama, Georgia, Florida, and Mississippi and has more than 43,500 megawatts of generating capacity. It is one of the most widely held stocks in the United States.
- Revenue growth has been moderate for the company over the past three years. At the end of 2009, the company reported revenue of $15.7 billion, which grew to $17.6 billion by the end of 2011. Over the past two years, the revenue growth has been around 6% for the company.
- Southern Company has long-term EPS growth rate of 3% and dividend growth rate of 4%. At the moment, the stock pays an annual dividend of $1.96, yielding 4.53%.
- Heavy capital expenditures have caused the company to have negative free cash flows in the past. However, the company generated $1.3 billion in positive free cash flows at the end of 2011 and $381 million during the past twelve months.
- Southern Company is a great dividend pick; however, it may be slightly overvalued at current price levels. Nonetheless, it is one of the best run utility companies with solid operations, and it should be able to continue its dividend growth. However, in order to achieve the dividend growth over 4%, the EPS growth will have to increase.
- At the moment, the stock is trading at a P/E ratio of 17.1, compared with the industry average of 15.9.
Ford Motor Co
Ford Motor Company (NYSE:F) manufactures automobiles under its Ford and Lincoln brands. The company has about 16% market share in the United States and more than 8% share in Europe. Ford and Lincoln brand sales in North America and Europe made up 59% and 26% of 2011 auto revenue, respectively.
- Revenue growth has been impressive for the company despite slow global economy. The company reported revenue of $118 billion at the end of 2009, which grew to $136 billion by the end of 2011. Trailing twelve months revenue has also been robust and stands at $132 billion.
- The company has turned its focus on smaller fuel-efficient vehicles, which should help the company compete well in the market. Ford will be better positioned globally due to these small and fuel-efficient vehicles
- The company is also focusing on cost reduction, which should decrease the pressure on its earnings. Despite lower revenue during the past twelve months, the gross profit margin has remained over 16% for the company due to a decrease in costs.
- The U.S. economy has started showing signs of recovery with a positive impact on the auto industry of the country as well. Improving economy should enable the company to increase its revenue over the next year.
We believe these three stocks provide an excellent opportunity to make solid returns over the coming year. These companies are well positioned in their respective industries to capture growth opportunities. We believe these stock should be held for the long term, in order to realize the potential. In addition to attractive returns, these stocks provide an excellent source of diversification to the portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.