6 Large Caps to Buy for the Long Run

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 |  Includes: GM, HPQ, KO, MHS, PH, TWC
by: Investment Underground

By Roger Choudhury, Lead Editor

We searched for large-cap companies with expected robust growth in non-GAAP EPS in this fiscal year as well as the next fiscal year. Here is what we found:

General Motors (NYSE:GM): In 2010, the company made revenues of $135.592B (+29.64%) with GAAP EPS of $2.87. The next earnings release is on May 5, when analysts expect non-GAAP EPS of $0.90, a decrease of 45.69% from Q1 2010, with revenues of $35.4B. That would be an increase of 12.61%. For 2011, analysts estimate that GM will make $3.97 in non-GAAP EPS (+38.01%) with revenues of $143.3B (+5.71%). Also, in 2012, the Street forecasts non-GAAP EPS of $5.06 (+27.45%) and revenues of $155.9B (+8.79%).

Good news continues to roll in for GM. In Q1 2011, Chevrolet sold 1.1 million vehicles worldwide, which was a 15% increase from Q1 2010. This was the brand’s best Q1 ever. In April, the company as a whole sold 232,538 vehicles, which was +26.4% from last April. GM has revamped its production and cost structure to be leaner through fewer brands, fewer employees, wage decreases, and fewer facilities. As China, India, and the developing world expand, we expect GM to reap rewards in the long-run. Moreover, as anemic consumer demand returns to trend levels, GM should make inroads in the U.S. The company is also gaining market share with Toyota’s (NYSE:TM) supply losses due to the Japan earthquakes.

GM currently trades with a P/E of 11.4. The forward 2011 P/E is a mere 8.3. Non-GAAP EPS growth of 35%-plus deserves a multiple of at least 9, and so we believe that GM should trade north of $35.75/stock. There is also room for GM to run up well into 2012 because that forward P/E is only 6.5. With the aforementioned growth drivers, a price multiple of 9 pegs a price target of $45.50, going into 2013. We recommend GM for investors with an appetite for risk.

Hewlett Packard (NYSE:HPQ): In Q1 2011, the company posted $1.36 in non-GAAP EPS, beating the consensus by 5.43%, and growing by 23.63% over Q1 2010. Revenues also grew by 3.60% to $32.3B. However, this fell 1.98% below consensus estimates. The next earnings release is on May 18. For Q2 2011, analysts estimate that HPQ will earn $1.21 in non-GAAP EPS, an increase of 32.26%, with revenues of $31.6B. That would be an increase of 2.47%. For the entire FY 2011, the Street expects non-GAAP EPS to be $5.23 (+41.65%) with revenues of $130.6B (+3.60%). The company issued guidance of non-GAAP EPS of $5.20 - $5.28, with revenues between $130.0B and $131.5B. Looking into the near future, for FY 2012, the Street forecasts a non-GAAP EPS of $5.68 (+8.60%) alongside revenues of $136.1B (+4.21%). The company also has a debt to equity ratio of 0.41.

From a pure hardware-focused business model, the company is diversifying to services, storage and networking. This should drive margins higher. In fact, the non-GAAP operating margin in Q1 2011 expanded to 12.4% from 11.2% in Q1 2010. Moreover, the EBT margin in FY 2010 grew to 8.71% from 8.22% in FY 2009. Also, with a growing global economy, demand for IT goods and services provide decent revenue growth opportunity. In Q1 2011, when adjusted for the effects of currency, revenue was +5% in the Americas, +4% in Europe, the Middle East and Africa, and +2% in Asia Pacific.

HPQ trades below our fair value estimate, has a P/E of 10.2, and a PEG ratio of 0.8. The forward 2011 P/E is 7.7, and the gap between the trailing four quarters' P/E and the forward four quarters' P/E is approximately 1 since 2009. So, a forward P/E multiple of 8.5 is justified, and thus we place a price target of $44.50. At current prices, HPQ is a buy for conservative investors. The company also recently announced that it will raise its next dividend payment by 50% to $0.12, which would be a dividend yield of 1.1%.

Coca-Cola (NYSE:KO): In 2010, revenues grew by 13.32% to $35.119B, and GAAP EPS surged by 72.70% to $5.06. However, the profit margin declined to 63.86% from 64.22%. In Q1 2011, non-GAAP EPS rose by 18.8% to $0.82, and revenues surged by 40.13% to $10.545B. On an adjusted basis, the company would have earned $0.86 (+7%). Analysts forecasted non-GAAP EPS of $0.87 on revenues of $10.58 billion. For 2011, analysts estimate KO will produce $3.86 in non-GAAP EPS (-23.78%), but make revenues of $46.2B (+31.42%). With a longer term view, in 2012, the Street predicts non-GAAP EPS to be $4.26 (+10.36%) and revenues of $48.5B (+4.97%). The company also has a debt to equity ratio of 0.39.

The main promise of KO is that the emerging markets should drive demand growth. In fact, the company posted strong Q4 2010 results, with improved sales in North America, Europe and Japan, and continued strong growth in emerging markets. This includes double-digit volume gains in India, Russia and Turkey. By 2020, the company looks to make significant gains in Eurasia and Africa, where it sees nearly 70% of the world’s population growth and 45% of global urban growth and global middle class growth.

KO trades with a P/E of 13.1, and the forward 2011 P/E is 17.5. The market is attempting to price in the company’s new acquisitions, but previous P/E and forward P/E history shows that KO should be trading with a P/E in the high teens. Therefore, we place a price target of $74.50, which is a forward P/E of 19.3. We recommend KO shares for long-term investors.

KO also has a dividend yield of 2.7%, and the next dividend payment of $0.47 will be paid on July 1 to investors of record at June 15. Dividends have increased for 49 consecutive years, and the company has paid them since 1893.

Medco Health Solutions (NYSE:MHS): In 2010, revenues grew by 10.31% to $65.968B, and GAAP EPS rose by 21.07% to $3.16. However, gross and EBT margins remained razor thin at 6.57% and 3.54%, respectively. On April 28, Q1 2011 results were released, and the company beat analyst estimates of $0.88 with $0.91 in non-GAAP EPS. That was a 24.65% increase from Q1 2010. Revenues came in at $17.020B (+4.34%), slightly missing the analyst consensus of $17.06B. For 2011, analysts estimate that the company will earn $4.09 in non-GAAP EPS, an increase of 29.44%. Medco also estimates revenues of $68.9B, which would be an increase of 4.38%. The company also recently announced non-GAAP EPS guidance of $4.02 to $4.12, which would be growth of 13% to 16% from 2010. For 2012, the Street has projected a non-GAAP EPS of $4.98 (+21.76%) with revenues of $71.3B (+3.48%). Medco Health Solutions is aiming to pioneer “the world’s most advanced pharmacy” alongside clinical research.

S&P sees strong fundamentals for the pharmacy benefit management industry as health plans, governments, and employers seek to control drug costs. Similar to CVS (NYSE:CVS), greater use and demand of generic drugs should widen margins in the coming quarters. MHS is already reaping rewards: Generic volumes increased 9.3%, and gross margins improved to 6.3% from 6.1% in Q1 2010.

MHS trades with a P/E of 18.2. Using non-GAAP EPS, forward 2011 P/E is 14.7. The gap between the trailing four quarters' P/E and forward four quarters' P/E is ~2.5, so 18.2 is a fair P/E. So, we place a $74.50 price target on MHS. Now would be a good time to get in.

Parker Hannifin (NYSE:PH): For the nine months ended March 31, 2011, non-GAAP EPS rose by 125.61% to $4.58, and revenues increased by 24% to $8.94B. Also, the EBT margins improved to 11.55% from 6.41%, despite higher cost of sales (+18.55%) and SG&A (+13.64%). Additionally, Q3 2011 sales were a record $3.2B (+23.9% from Q3 2010), and beat analyst estimates of $3.1B. The company also exceeded analyst estimates for non-GAAP EPS of $1.55 with $1.68. For 2011, analysts estimate PH will earn $6.27 in non-GAAP EPS (+84.26%) with revenues of $12.1B (+20.83%). The company also issued guidance from a range of $6.20 to $6.40 per diluted share. For 2012, the Street forecasts non-GAAP EPS to be $7.33 (+16.90%) with revenues of $13.3B (+9.91%). Parker Hannifin is the leading diversified manufacturer of motion and control technologies and systems in the world, providing precision-engineered solutions for a wide variety of mobile, industrial and aerospace markets.

With a stagnant U.S. economic recovery, we expect business volumes to increase steadily. However, the most growth will come from emerging economies. The global Purchasing Managers Index (PMI) was at 55 at the end of April, which was the lowest since last November. However, a PMI above 50 indicates expansion in the manufacturing activity, specific to a region around the world, in the mobile and industrial markets. The company’s focus on productivity enhancements should also contribute to higher than average revenue growth in such an economic environment.

PH trades with a P/E of 15.5, and the forward 2011 P/E is 14.7. It seems that the market missed the fact that PH just turned in great results. Also, consider that in FY 2004, GAAP EPS grew by 73.21% and revenues were +10.86%. Back then, P/E was 19. For FY 2011, the company is expected to grow EPS by 80%+ with revenue growth of 20%+. PH deserves a higher price multiple of 17, and we place a price target of $106.50. We recommend PH for investors looking to fill a gap in their portfolio with industrials. On April 27, the Board of Directors approved a 16% increase in the dividend to $0.37, which implies a current yield of 1.6%. The company has a debt to equity ratio of 0.31.

Time Warner Cable (NYSE:TWC): In 2010, revenues grew by 5.60% to $18.868B, and GAAP EPS jumped by 19.34% to $3.64. The EBT margin also improved to 11.64% from 10.70%. Q1 2011 results came out on
April 28, and the company beat the consensus of $0.98 with $1.01 in non-GAAP EPS (+68.33% from Q1 2010). Revenues also beat the analysts’ estimate of $4.787B with $4.827B (+4.95% from Q1 2010). For 2011, analysts estimate TWC will earn $4.51 in non-GAAP EPS (+24.91%), with revenues of $19.6B (+4.08%). Going forward, in 2012, the Street forecasts a non-GAAP EPS of $5.66 (+24.00%) with revenues of $20.4B (+4.08%). Time Warner Cable is among the largest providers of video, high-speed data and phone services in the U.S., serving more than 14.5 million customers.

The core cable industry business model remains intact despite this difficult economic environment. The cable industry also has a great opportunity to continue growing in the broadband arena. In fact, in TWC’s high speed data segment, revenues grew by 11.3% in Q1 2011 compared to Q1 2010. For Comcast (NASDAQ:CMCSA), high speed internet revenues rose by 8.8% in Q1 2011. We are also more optimistic due to the accommodative regulatory environment for broadband service providers, stemming from the Net Neutrality vote.

TWC trades with a P/E of 19.2, and a forward 2011 P/E of 16.9. We believe that a P/E of 19.5 is fair, considering the 1.5 to 2 units gap between the trailing four quarters' P/E and forward four quarters' P/E. So, we place price targets of $88 post-2011 earnings results and $110 post-2012 earnings results. This is a buy at current price levels. TWC has a dividend yield of 2.4%, and a debt to equity ratio of 2.67.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.