FMC Agricultural Products provides crop protection and pest control products for worldwide markets. The business offers a portfolio of insecticides and herbicides, and is considered an industry leader for its innovative packaging.
In the Specialty Chemicals Group, FMC BioPolymer is the world"s leading producer of alginate, carrageenan, and microcrystalline cellulose, which are key thickening, texturing, stabilizing, and fat subst.i.tute ingredients used in the food industry. FMC Lithium is one of the world"s leading producers of lithium-based products and is recognized as the technology leader in specialty organolithium chemicals and related technologies.
In the Industrial Chemicals Group, FMC Alkali Chemicals is the world"s largest producer of natural soda ash and is the market leader in North America. Downstream products include sodium bicarbonate, sodium cyanide, sodium sesquicarbonate, and caustic soda. FMC Hydrogen Peroxide is the market leader in North America with manufacturing sites in the United States, Canada, and Mexico. FMC Active Oxidants is the world"s leading supplier of persulfate products and a major producer of peracetic acid and other specialty oxidants. Based in Barcelona, Spain, FMC Foret is a major chemical producer supplying customers throughout Europe, the Middle East, and Africa with a diverse range of products including hydrogen peroxide, peroxygens, phosphates, silicates, zeolites, and sulfur derivatives.
Financial Highlights, Fiscal Year 2010.
Given FMC"s large customer base of industrial users, the company took a modest revenue and earnings dip in 2009, but has largely regained its footing to prerecession 2008 levels. Revenues in 2010 of $3.11 billion were slightly below 2008 but well ahead of prior years; earnings per share of $4.83 were just ahead of 2008"s $4.63 and well ahead of 2007"s $3.40. On the basis of higher volumes, higher prices, and higher margins, the year 2011 is expected to produce $6.81 per share. Volume growth and rebounds occurred fairly evenly across all sectors of the business. The company has also been able to increase prices in key markets for the first time in a while as demand has strengthened.
Reasons to Buy.
FMC is well positioned in several areas of relative strategic importance in the chemical industry, in particular the lithium compounds business. The strength of the economic rebound combined with these leadership positions in specialty markets bode well for the company. Pricing strength, improving margins, and strong international sales (63 percent of sales in 2010) all add to a promising picture.
As an example of FMC"s strategic portfolio, the company is well positioned as the leading supplier of lithium-based compounds used in the lithium-ion battery industry. Lithium batteries are used extensively in technology products such as laptops, music players, and soon, electric cars. Every current hybrid car currently in production uses nickel metal hydride (NiMH) battery chemistry, but lithium batteries appropriate for automobile usage are not far off. Lithium"s unparalleled power-to-weight ratio and rapid recharge cycle time make cars lighter and more amenable to typical usage patterns.
FMC is a key player in a broad consortium of U.S.based companies working to establish a dominant domestic lithium battery industry. Lithium battery technology is the key to the future of the automotive industry, and some have said that the country that makes the batteries will make the cars.
Reasons for Caution.
While the company occupies a leadership position in several important chemical and ingredient markets, FMC can"t get away completely from its role as a commodity producer, particularly in such compounds like soda ash. As such, compet.i.tion and business cycles will always play a role in growth and stability. Additionally, while the company did start paying dividends in 2006, cash returns and long-term growth are relatively modest.
GROWTH AND INCOME.
General Mills, Inc.
Ticker symbol: GIS (NYSE) S&P rating: BBB+ Value Line financial strength rating: A+ Current yield: 3.2%.
Company Profile.
General Mills is the second-largest domestic producer of ready-to-eat breakfast cereals and the sixth-largest food company in the world. Their sales are broken out into three major segments: U.S. Retail ($9.1 billion), International ($2.6 billion), and Bakery and Foodstuffs ($2.0 billion). They also have unconsolidated net sales in the Joint Venture segment ($1.2 billion).
Major cereal brands, most of which bear the Big G label, include Cheerios, Wheaties, Lucky Charms, Total, and Chex. The company owns Pillsbury, which it acquired in 2001. Other consumer packaged food products include baking mixes (Betty Crocker and Bisquick); meals (Betty Crocker dry packaged dinner mixes); Progresso soups; Green Giant canned and frozen vegetables; Hamburger Helper; snacks (Pop Secret microwave popcorn, Bugles snacks, grain, and fruit snack products); Pillsbury refrigerated and frozen dough products including Pillsbury Doughboy, frozen breakfast products, and frozen pizza and snack products; and organic foods and other products, including Nature Valley, Yoplait, Go-gurt, and Colombo yogurt. The company"s holdings include many other brand names, such as Haagen-Dazs ice cream and a host of joint ventures.
The company"s international businesses consist of operations and sales in Canada, Europe, Latin America, and the Asia/Pacific region. In those regions, General Foods sells numerous local brands, in addition to internationally recognized brands, such as Haagen-Dazs ice cream, Old El Paso Mexican foods, and Green Giant vegetables. Those international businesses have sales and marketing organizations in thirty-three countries.
Financial Highlights, Fiscal Year 2010.
For the fiscal year ended May 31, 2010, General Mills net sales grew at a scant 0.7 percent to 14.8 billion, while year-to-year per share earnings grew at a healthier 15.6 percent to 42.30 from $1.99 in FY2009. Internal efficiencies, operating leverage, and moderating ingredient costs caused net profit margin to exceed 10 percent for the first time in recent history. The rise in ingredient costs in the latter two thirds of calendar 2010 brought an essentially flat performance in the company"s early FY2011 performance.
Reasons to Buy.
General Mills continues to enjoy solid brand strength and a compet.i.tive position in a very compet.i.tive cereal and packaged food market. Recent trends have pointed to brand leveraging (e.g., Chocolate Cheerios, Wheaties Fuel) and the results have been encouraging. There"s evidence that the recession "taught" more people to eat at home, and those folks are starting to return to more premium brands found on store shelves. Finally, while the company has developed some international markets, notably in Latin America and the Caribbean, and generates about 24 percent of its sales overseas, we feel that additional international expansion may bring some opportunity.
Earnings, operating margins, and cash flows have all followed a steady track modestly upward and in tune with management guidance. The company has continued its policy of share repurchase, further reducing the number of outstanding shares by 2.5 percent. Since 2004, the company has reduced its share count from 758 million to about 640 million. The company also raised the dividend 10 percent in 2010 and has boosted its dividend "raises" in recent years. Finally, General Mills is a notably safe and stable stock with a beta of 0.20, one of the lowest on our list.
Reasons for Caution.
As a food products producer, the company is vulnerable to spikes in commodity prices; recent commodity price trends have given some cause for worry, especially as they are not easy to pa.s.s on to consumers in a compet.i.tive and recessionary environment.
AGGRESSIVE GROWTH.
Google Inc.
Ticker symbol: GOOG (NASDAQ) S&P rating: AA- Value Line financial strength rating: A++ Current yield: Nil.
Company Profile.
Google operates the world"s leading Internet search engine. The vast majority of its income (96 percent in 2010) is derived from the delivery of targeted advertising through the Google AdWords and Google AdSense products. Sales of advertising management services and the licensing of its search technology (Google Search Appliance) to other companies generates the remainder of its revenue.
The operational model is simple, elegant, and provides for timely and thorough customer and client management. Google"s AdWords scans the HTML code that"s displayed on a user"s screen, searching for keywords. When keywords are found, ads relevant to the keywords are displayed on the page as well. Advertisers select their own target keywords and pay when customers click on their ads. Google and the advertiser are notified of every click, and other tracking information relevant to the click is transmitted as well.
Advertisers get targeted ads without a great deal of up-front cost, and the ads appear on pages from Google"s large roster of partners, from AOL to the Washington Post. Partners in turn receive a share of the advertising revenue when ads on their pages are clicked.
The company also provides, free of charge, a number of worthwhile programs. Google Docs, for example, mimics most of the popular commercial office suites. They also provide, at no charge, their own browser, 3D modeling software, image manipulation software, website authoring software, mapping software, mail portal, and personal search engine. Google also owns and operates YouTube, one of the most popular social media sites on the Internet.
For the first six months of 2010, the company offered its Nexus One mobile phone for sale direct to consumers on the Google website, but that business has been discontinued. But that doesn"t diminish Google as a player in the mobile and tablet market; its Android operating system is catching on as a serious compet.i.tor to the highly successful iPhone.
Financial Highlights, Fiscal Year 2010.
Revenues rose 24 percent over 2009, reflecting both an improved business environment and the continued migration of advertising revenues from offline to online media. The company realized improved earnings on this growth due to a shift in traffic volume away from partner sites and toward company-owned sites, where margins are significantly higher. The company says this pattern has accelerated over the past few years and they expect it to continue "for the foreseeable future." Good news for the company and great news for value investors.
Reasons to Buy.
Last year we wrote that Google, in losing the bidding war for wireless spectrum s.p.a.ce (to Verizon), managed to win a battle. They were able to persuade the federal regulators to include in the final issuance doc.u.ments some common-carrier provisions that appeared to be very beneficial to Google"s longer-term plans: support for context and location-sensitive search and ad placement. Google"s win last year now has the potential to pay off in a big way, as the scenario described above is no longer speculative. Google"s most recent annual report includes the following statement of their position on the mobile ad s.p.a.ce: "Google Mobile extends our products and services by providing mobile-specific features to mobile device users. Our mobile-specific search technologies include search by voice, search by sight, and search by location. In 2010, we acquired AdMob, Inc., which offers effective ad units and solutions for application developers and advertisers. We continue to invest in improving users" access to Google services through their mobile devices." This sounds to us like the mobile s.p.a.ce holds a fair amount of promise for Google"s traditional ad-based revenue and the potential for new developments.
The company"s recent (and rather tentative) moves to monetize media content on YouTube have gone reasonably well, but will require some critical ma.s.s to compete with NetFlix. The company has said they will move faster in this s.p.a.ce, but this remains to be seen.
We like the recently announced management changes. A lot. Google has done some tremendous things in their s.p.a.ce, but they"ve begun to look very cautious, and we think that"s really just the effect of overlapping responsibilities and the inability to reach consensus at the top of the organization. Three very bright, very confident young men will not always agree and will not always agree to disagree. Having more clearly defined roles and responsibilities will lead to a more dynamic company and faster decision-making.
Finally, while the $600-plus share price might spook a lot of investors, the ratios of price to earnings and price to cash flow are actually more reflective of a more conservative "value" stock. We feel that if Google would split its stock, with its strong growth-oriented business and investment profile, the stock could actually command a higher price per unit of earnings. This company is the epitome of the growth equals value premise mentioned in our introduction. By the way, we don"t necessarily recommend a split, for there is no "real" change to a share"s value or its prospects. But it"s an intriguing possibility going forward.
Reasons for Caution.
It"s a nice problem to have, but we have to wonder what the company plans to do about the cash situation. Even though they"ve been in acquisition mode seemingly from day one, the fact is they spent about one month"s earnings on all of last year"s acquisitions. The increases of $10 billion per year for the past two years give us pause: Are the opportunities they take a pa.s.s on really that bad? Can"t they afford to be just a wee bit more aggressive, particularly during a period such as we saw recently where share valuations were as low as they"re ever likely to be? As long as the company remains dependent on a single revenue stream, the big bankroll looks a bit like lost opportunities.
CONSERVATIVE GROWTH.
W. W. Grainger, Inc.
Ticker symbol: GWW (NYSE) S&P rating: AA+ Value Line financial strength rating: A++ Current yield: 1.6%.
Company Profile.
If you"re running a production operation and have a sudden and urgent need for a hand truck, a "Keep Out" sign, a positive displacement pump, or a pair of safety gla.s.ses, who do you call? You certainly can"t afford to send someone out to Home Depot or some such, and no "big-box" retailer would stock even a small fraction of the 1 million items that W.W. Grainger stocks anyhow.
Grainger is North America"s largest supplier of maintenance, repair, and operating supply (MRO) products. They sell more than a million different products through a network of over 600 branches, eighteen distribution centers, and several websites, with a catalog containing some 307,000 items (a fascinating read if you like this sort of thing). Grainger also offers repair parts, specialized product sourcing, and inventory management supplies. Grainger sells princ.i.p.ally to industrial and commercial maintenance departments, contractors, and government customers. The company has nearly 2 million customers, most in North America.
Their Canadian subsidiary is Canada"s largest distributor of industrial, fleet, and safety products. They serve their customers through 166 branches, five distribution centers, and offer bilingual websites and catalogs. Grainger, S.A. de C.V. is Mexico"s leading facilities maintenance supplier, offering customers more than 40,000 products.
Grainger"s customer base includes governmental offices at all levels, heavy manufacturing customers (typically textile, lumber, metals, and rubber industries), light manufacturing, transportation (shipbuilding, aeros.p.a.ce, and automotive), hospitals, retail, hospitality, and resellers of Grainger products. Grainger owns a number of trademarks, including Dayton motors, Dem-Kote spray paints, and Westward tools.
Many of Grainger"s customers are corporate account customers, primarily Fortune 1000 companies that spend more than $5 million annually on facilities maintenance products. Corporate account customers represent about 25 percent of Grainger"s total U.S. sales. Both government and corporate account customer groups typically sign multi-year contracts for facilities maintenance products or a specific category of products, such as lighting or safety equipment. In 2009, the company averaged 95,000 transactions per day.
The Grainger strategy is centered on the idea of being easy to do business with. Customers can interact with a direct sales force, interact with one of the 400 distribution outlets in the United States, or order through an e-commerce website. Released quietly during the dot.com boom, www.grainger.com handles some $1.5 billion, or about 25 percent of the company"s U.S. business each year, a solid e-commerce success story.
Financial Highlights, Fiscal Year 2010.
Grainger"s FY2010 sales and earnings rebounded smartly and beyond expectations from the recession lows. Revenues were up 15 percent from 2009, while earnings were up some 30 percent from $5.33 per share to $6.92. Some one-time factors were in play, including the BP Gulf oil spill and resulting cleanup. For FY2011, the company projects sales growth continuing at a 59 percent clip, with earnings coming in the $7.15$7.90 range. Cost cutting measures, such as consolidating two of its largest operating segments, and other measures have driven operating margins up from the 1011 percent range to the low 13 percent range.
The company took on $500 million in debt, ostensibly to finance further expansion/acquisitions. It has a clean balance sheet with no other significant long-term debt. Cash flow has been strong, and that cash has been used among other things to repurchase shares. Since 2004, the company has retired 20 million of the 90 million-plus shares it had outstanding at the time; that figure was 106 million in 1994. The company has also raised its dividend in each of the last thirty-nine years.