My Annual Top Ten Stock Picks For 2012: Part II

Includes: F, HXL, IMAX
by: Chris Katje

This article marks the fourth annual year of providing a top ten list on Seeking Alpha of stocks I believe will outperform the market. This year the picks are divided into three articles as the analysis is lengthier than before. I hope you enjoy the picks and can use the information to do further research or make a winning pick for 2012. Start prices are from January 3rd, 2012. Analysts estimates and price targets are from Yahoo Finance. (Click here for Part I)

Over the past three years my return has been:

2009: 10 Winners 0 Losers, +999% Total Return, Average 99.9%, Three Double Baggers
2010: 8 Winners 2 Losers, +329% Total Return, Average 32.9%, One Double Bagger
2011: 2 Winners 8 Losers, -113% Total Return, Average -11.3%

Ford (NYSE:F)

Industry: Automotive

Start: $10.76

2012 Predicted Earnings: $1.58

Price to Earnings: 6.8

Price Target: $15.00

Analysts Target: $16.00 (13 Analysts)

Top Three Reasons to Buy

1. Growing Market Share

2. Domestic Automotive Recovery

3. Emerging Market Growth

I could write a whole article on Ford and the fact that I bought shares for $10 fully expecting a double in two to three years but will focus on several key drivers.

For the first time in several years Ford grew its market share. The company competes with General Motors (NYSE:GM), Toyota (NYSE:TM), Honda (NYSE:HMC) and several other automotive companies. Ford has focused on eliminating brands that did not see growth like Jaguar and Range Rover, which were sold to Indian company Tata Motors (NYSE:TTM). Ford holds the number one position with its F-150 truck.

Refusing to take bailout money during the automotive crisis has left Ford with a high debt load. The company has been paying back on its debt to increase its interest payments due each year. Part of the reason I bought shares is due to the fact that the company was not bailed out and has done this on its own. CEO Alan Mulally, a former Boeing executive, has transformed the company and focused on reviving the company’s image with the consumer.

Ford brands like the Focus and Fiesta both saw increases of over 20% during 2011. The truck and SUV segment saw gains too thanks to the Explorer, Escape, and F-150 brands.

Some analysts have stayed away from the company due to European fears and slowed down sales. European sales make up a small portion of the company’s sales and Ford instead has invested money in newer emerging markets. Brazil and India are two markets that Ford is aggressively pushing its smaller cars into.

The company has beat analyst’s estimates the last three consecutive quarters. Look for 2012’s conservative earnings to get beat by this great American company once again. Now is the time to buy shares of this company on the right part of the comeback path.

Hexcel (NYSE:HXL)
Industry: Aerospace

Start: $24.21

2012 Predicted Earnings: $1.39

Price to Earnings: 17.4

Price Target: $30.00

Analysts Target: $28.03 (15 Analysts)

Top Three Reasons to Buy:

1. Boeing 787 Dreamliner Backlog

2. Diverse Product Base

3. Increasing Gross Margins

In December of 2011, I wrote an article entirely dedicated to aerospace company Hexcel. It shames me a little bit to say that I came across the company from Jim Cramer, but from an online article and not his Mad Money show, which I had been a viewer of several years ago. Cramer named the stock a “Buy, Buy, Buy” and after further research I determined the stock should be a buy too.

The company has products on planes, space shuttles, satellites, wind turbines, automobiles, bicycles, skis, snowboards, golf clubs, fishing rods, surfboards, and tennis rackets. The automobile market is not a large one for Hexcel but is where I see their biggest growth possibility. As I wrote in December, new government regulations for cars to achieve higher miles per gallon ratios could lead to adoption of Hexcel products. The products the company creates in aircraft are lightweight and help improve fuel efficiency.

The recent launch of the long awaited Boeing 787 Dreamliner is a big positive for Hexcel. The company makes composite products that are present in window frames and doors of the planes and each plane is responsible for over $1.5 million in revenue for Hexcel. Boeing was three years off of its initial targeted delivery date of the first Dreamliner but now appears to be on track. Boeing is targeting a rate of 10 Dreamliners a month to be manufactured by the end of 2013. Over 3,300 total Dreamliners are expected to be sold by Boeing through 2028 according to Boeing. Over the next 16 years Hexcel could earn close to $5 billion just from Dreamliner sales. The ten per month puts Dreamliner revenue at $180 million in annual revenue for Hexcel by 2014.

Hexcel makes up over 2% for the Dow Jones Aerospace ETF (NYSEARCA:ITA) and represents its 17th largest position. Aerospace is in a bullish seven year cycle according to Jim Cramer. The introduction of the Dreamliner has helped to show the large demand for new aircraft as airplane companies expand their supply of planes. The stock is also a large holding of the First Trust Clean Edge Green Index ETF (NASDAQ:QCLN), where Hexcel represents almost 5% of assets.

Industry: Movies

Start: $18.33

2012 Predicted Earnings: $1.06

Price to Earnings: 17.3

Price Target: $35.00

Analysts Target: $26.81 (15 Analysts)

Top Three Reasons to Buy:

1. Strong 2012 Lineup

2. China Expansion and Backlog

3. Exclusive Deals

In my most recent article on Imax, a stock I own in my portfolio, I discussed the 2012 lineup and the reasons I am bullish on the stock going forward. Below is a summary of many of those key points.

Imax’s current 2012 lineup:

Underworld Awakening – January 20

Journey 2: The Mysterious Island – February 10

The Lorax – March 2

John Carter – March 9

Wrath of the Titans – March 30

Titanic 3D – April 6

Dark Shadows - May 11

Men in Black 3 – May 25

Jack the Giant Killer – June 15

The Amazing Spider-Man – July 3

Ice Age: Continental Drift – July 13

The Dark Knight Rises – July 20

Gravity – November 21

The Hobbit: An Unexpected Journey – December 14

The lineup is not complete as many gaps in dates can be seen so the company has the ability to double the number of movies to get closer to a release number of 25-30. It is nice as an Imax shareholder to see blockbusters like Spider-Man, Batman, and The Hobbit coming to Imax screens as they will provide nightly sellouts and a nice source of revenue for those reporting quarters.

Imax’s strong backlog of theaters in China show that the stock and company is truly global. The United States is beginning to slow in its theater growth and the company will rely on international expansion to grow its base of theaters. China’s Imax theater count including operational and backlog was 207 in December. The company has the ability to double that number in five to ten years in my opinion. I highlighted in my last article on Imax the signing of two theaters in Indonesia, with one theater expected to open in 2012 and the other in 2013.

The opening of Mission Impossible: Ghost Protocol came earlier in Imax theaters. In the opening weekend which saw Imax with exclusive distribution of the movie, over $11 million was recorded. As of December 31st, the movie has grossed $141.2 million. Twenty three percent of that box office total was from Imax screens, which represented a smaller nine percent of theater counts. The success of the movie can likely be attributed to two main factors: the early release and the action sequences shot with Imax cameras. Over thirty minutes of the film were shot with Imax screens including a scene with the World’s tallest building in Dubai, to help expand the viewing to the audience to capitalize on the larger screen experience. More and more movies are shooting important scenes with Imax cameras and this could become a nice source of revenue for the company. I also believe, as I have wrote before, that Mission Impossible led the way with exclusive deals with more likely coming this year. I expect 2012 to see at least two movies released early on Imax screens before they take worldwide release.

Click here for Part III

Disclosure: I am long ATVI, F, IMAX.