A Shopping List of 15 Solid Companies Amid This Market Turmoil

by: Valuentum

With the markets shedding over 6% across all major market indices today, we've widened our watch list to include names that have reported strong second-quarter earnings (some reporting as recent as a few weeks ago). We think firms with strong earnings potential are ones that could see the biggest bounce when the market recovers, as multiple compression from both a declining price and expanding earnings makes these names particularly interesting for investors falling in the value camp.

Though we fall short of making generalities, we're less enthused about firms that have reported generally weaker second-quarter earnings, despite their share price declines. In other words, we're looking to add best-of-breed names to our Best Ideas portfolio, which we make available to our subscribers, at the most opportune time, and we use a rigorous discounted cash-flow valuation process and a thorough competitive advantage assessment to augment our investment process.

Kraft Foods (KFT)

Kraft Foods (KFT) reported solid second-quarter results and indicated that it would split its high-growth global snacks business and its mature, high-margin North American grocery business. The firm also bumped up its 2011 organic net revenue growth and operating earnings per share outlook, to at least 5% (was 4%) and $2.25 (was $2.20), respectively. We were impressed with the firm’s second-quarter performance and think its move to create two independent public companies will create value for shareholders over the long haul.


CBS Corp. (CBS) reported strong second-quarter results that showed excellent performance pretty much across the board. Revenue jumped 8% from the same quarter last year thanks to solid performance in content licensing and distribution, while operating income before depreciation and amortization (OIBDA) jumped over 50% thanks to strong growth in every segment and a seven percentage point improvement in its OIBDA margin.

Ancestry.com (NASDAQ:ACOM)

Best idea, Ancestry.com (ACOM) reported solid second-quarter results that showed nice subscriber growth and impressive EBITDA margins. The firm raised its outlook for revenue and adjusted EBITDA in 2011, but held the line with its previous subscriber guidance, a move we think is conservative given the huge influx of subscribers in its first quarter. We think the firm has tremendous upside and are retaining our current position in our Best Ideas portfolio.

Precision Castparts (NYSE:PCP)

Metal-bender and best idea, Precision Castparts (PCP) reported excellent fiscal first-quarter results that showed continued strength in the commercial aerospace end market and additional traction in industrial gas turbines (sales were up 15%) and its seamless pipe business (sales were up 28%). We think the name is still worthy of a position in our best ideas portfolio.

EDAC Technologies (NASDAQ:EDAC)

EDAC’s (EDAC) second-quarter results were nothing short of fantastic. The firm’s revenue reached record levels, jumping 16%, while net income almost tripled. Sales in all three of its major product lines improved – EDAC Aero, APEX Machine Tool and EDAC Machinery – while the firm’s bottom line improved materially thanks to more cost-effective manufacturing and a better product mix (gross margin increased 460 basis points in the period).

Roper Industries (NYSE:ROP)

Roper Industries (ROP) reported solid second-quarter results that showed significant revenue and earnings expansion. Sales jumped 23% (16% organic) in the period to an all-time high, while net earnings expanded over 40%, despite a higher tax rate. The firm’s adjusted EBITDA margin expanded over 280 basis points to 28.5% in the period, a strong showing. Free cash flow jumped 41% from the same period a year ago to $145 million, which represented 21% of the firm’s sales in the quarter. This is the strongest free-cash-flow conversion rate the firm has seen in years (at least since 2006), and we expect Roper to continue to achieve free-cash-flow levels in the high-teens and low twenties as a percentage of revenue, on average, going forward.

Eaton Corp (NYSE:ETN)

Eaton Corp. (ETN), a diversified industrial manufacturer, reported excellent second-quarter results that showed strong revenue growth and solid earnings expansion. The firm’s top line expanded 21% during the period (14% core), while the company’s segment margins at the operating level reached all-time highs of 13.9%. This led to net income expansion of almost 50% from last year’s quarter, a fantastic showing. Eaten also bumped up its end-market growth expectations for 2011 by a percentage point to 11%, while it raised the midpoint of its full-year earnings per share guidance by $0.15 to $4.06 per share at the high end.


CNH Global (CNH), the second-largest maker of farm equipment after Deere (NYSE:DE), posted fantastic second-quarter results, with net sales increasing 24% and net income more than doubling. The firm experienced substantial strength in agricultural equipment and construction equipment revenue, up 22% and 30%, respectively, and translated this performance into solid profitability improvement. CNH’s operating margin increased to 10.7% during the quarter from 8.4% in the same period a year ago.

Coca-Cola (NYSE:KO)

Coca-Cola (KO) reported second-quarter results that showed strong worldwide volume growth of 6% led by expansion outside of the US, namely Eurasia and Africa (up 7%), the Pacific, which includes China (up 7%), and Latin America (up 6%). Demand for the firm’s brand Coca-Cola was particularly impressive in China (up 24%) and Russia (up 17%). Total revenue increased 47% (due primarily to its acquisition of Coca Cola Enterprises’ North American operations), though concentrate sales and currency contributed 6 percentage points of growth, respectively.

Harley Davidson (NYSE:HOG)

Harley-Davison (HOG) reported solid second-quarter results that showed strong retail motorcycle sales and solid earnings improvement. Sales of motorcycles and related products advanced 18% as US dealers sold 7.5% more new Harley-Davidson motorcycles in the period compared to last year’s quarter, marking the first year-over-year jump in the metric since the fourth quarter of 2006.

International Business Machines (NYSE:IBM)

International Business Machines (IBM) posted strong second-quarter results. The firm’s top-line increased 12% (5% adjusting for currency), while net income advanced 8% from the same period a year ago. The firm indicated that hardware, software and services revenue grew at a double-digit pace, and the company raised its full year 2011 operating earnings per share guidance to at least $13.25 from at least $13.15 previously.

McDonald's (NYSE:MCD)

In its second quarter, McDonald’s posted revenue growth of 16.1% and operating margins of 31.7%, which came in 120 basis points higher than our forecast. This culminated in diluted earnings per share of $1.35, beating our estimates by eight cents. We weren't expecting such large margin expansion (180 basis points over the previous quarter), given the input-cost headwinds that have impacted most companies. However, the advantage of being the largest restaurant-chain in the world allowed them to effectively squeeze suppliers and keep costs in check.

United Technologies (NYSE:UTX)

United Technologies (UTX) posted excellent second-quarter results, with sales advancing 9% (6% organic) and net income jumping nearly 20% from the prior-year period. The firm’s operating margin for the quarter was 15.9%, 120 basis points higher than last year. Impressively, the firm noted that for the first time since mid-2008, all six of its business segments showed organic growth in the period. Further, order rates at Otis were up 23% thanks to strong demand from Asia and China, while order rates for commercial HVAC new equipment at Carrier jumped 13%.

Honeywell (NYSE:HON)

Honeywell (HON) reported second-quarter results that showed strong sales growth and solid earnings expansion. The firm’s top-line expanded 15% in the period (7% organic growth), while earnings per share jumped over 40% from the same quarter a year ago thanks to a 70 basis-point expansion of segment margins to 14.3% in the quarter. Honeywell bumped up its full-year revenue guidance to the range of $36.1-$36.7 billion (up $100 million from its previous range) and its 2011 earnings-per-share estimate to the range of $3.85-$4.00 per share from $3.80-$3.95 per share previously.

Apple Corp. (NASDAQ:AAPL)

Apple (AAPL) reported its fiscal third-quarter results after the market close Tuesday, and they were fantastic. The firm’s top- and bottom-lines exceeded both consensus and our expectations, and we continue to believe that there is further upside to the shares. We added them to our Best Ideas List June 17, a trading session before its near-term bottom at about $310 per share.

Disclosure: Valuentum includes ACOM, PCP, AAPL, and EDAC in its Best Ideas portfolio.