Revenues are 72 percent from oil and liquids and 28 percent from natural gasa product mix that provides upside potential in either market. Each core area has significant producing a.s.sets and large, undeveloped acreage to provide running room for the future, but according to company doc.u.ments and its philosophy, no single region contributes more than 25 percent of production or reserves. In each core area, the company"s goal is to build critical ma.s.s that supports sustainable, lower-risk, repeatable drilling opportunities, balanced by higher-risk, higher-reward exploration.
Apache has increased reserves in each of the last twenty-one years and production in twenty-seven of the last twenty-eight years. Management believes the company"s portfolio of a.s.sets provides a platform for profitable growth through drilling and acquisitions across industry cycles.
Financial Highlights, Fiscal Year 2010.
A combination of higher oil prices, recovering demand, and acquisitions led to a healthy earnings recovery in 2010. While not quite approaching 2008 levels, earnings of $3 billion were sizably ahead of the $1.887 billion reported in FY2009, and revenues resumed a growth path. Higher energy prices and integration of recent acquisitions are now expected to deliver an FY2011 revenue total in excess of $15 billion and record earnings of over $4.5 billion, or almost $12.00 per share. With these figures, APA will establish themselves as one of the more profitable firms in the industry.
Reasons to Buy.
Apache offers an attractive combination of growth and risk management with considerable earnings and cash flow strength. It may be one of the better-managed oil and gas producers. The company has attained its desired goal of "critical ma.s.s" in its major production centers, thus improving long-term profitability. We like the three-dimensional balance portfolio of oil and gas, domestic and international, and exploration versus mature field utilization. The strategies to avoid overconcentration in one region or field and to avoid areas of extreme political risk bode well. Additionally, the company will benefit from strengthening oil prices and from stronger gas prices if that happens, and we believe it will eventually. Apache has made a specialty of buying up older fields and finding ways to profitably extract additional production. This sort of talent will become increasingly useful as easy oil becomes more and more scarce. For the most part, we think Apache"s acquisitions have made sense.
Reasons for Caution.
Although the company is committed to avoiding overreliance on any particular producing region, almost a third of its 2009 oil production came from its Egyptian fields; this might be a cause for concern, except that 2010 acquisitions coming on line will, at least for now, bring this percentage back closer to 25 percent. The company is also exposed to reduced effectiveness and output from its mature field operation. Finally, in May 2010 the federal government inst.i.tuted a widely publicized six-month moratorium on all deepwater drilling in U.S. territorial waters in the wake of the BP oil rig blowout in the Gulf of Mexico. Given Apache"s recent acquisitions of Mariner"s and Devon"s deepwater operations in the Gulf, the company continues to be exposed to such moratoriums.
Aggressive Growth.
Apple Inc.
Ticker symbol: AAPL ( NASDAQ) S&P rating: NA Value Line financial strength rating: A++ Current yield: nil.
Company Profile.
Apple Inc. designs, manufactures, and markets personal computers, tablet computers, portable music players, cell phones, and related software, peripherals, and services. It sells these products through its own retail stores, online stores, and third-party and value-added resellers. The company also sells a variety of third-party compatible products such as printers, storage devices, and other accessories through its online and retail stores, and digital content through its iTunes store.
The company"s products have become household names: the iPhone, iPod, iPad, and MacBook are just some of the company"s hardware products. And while the software may be less well-known, iTunes, QuickTime, and OSX are important segments of the business, each with their own revenue streams.
The company was incorporated in 1977 as Apple Computer, but has since changed its name to simply Apple. The name change in 2007 was the last step in a ten-year retooling that had already changed the company from a personal computer also-ran into one of the most recognizable and profitable consumer electronics brands in the world.
It"s hard to imagine the current consumer tech landscape without Apple"s presence at the top of the heap. Apple"s iconic products have become so successful and its marketing so ubiquitous that if it didn"t exist, it seems that we would have to invent something very much like it to fill in the void. Their product line, while comparatively narrow, is focused on areas where the user interface is highly valued, and Apple has leveraged this focus on the user experience into a business that is far and away the most profitable in the industry.
Enhancing the user experience is the industrial design. The Apple design ethic is extraordinarily well executed and is a large part of the value proposition for every product they release. Many of Apple"s customers are uncomfortable with any tech product not designed around Apple"s common content management interface. This overall focus on the user experience has been instrumental in creating an extremely loyal customer base and a brand cachet unequaled in the consumer electronics business. Apple was able to weather the downturn in consumer spending so well in part because many of its customers will forgo other expenditures in order to afford their next Apple purchase.
At various times during 2010 and 2011, Apple"s extraordinary business and financial performance has vaulted it to the top of the heap, as the world"s most valuable company in terms of market capitalization, even beyond ExxonMobil, Microsoft, and other heavyweights. Another fact: FY2010 earnings exceeded the highest 2004 share price. How many other companies can claim something like that? This is a testimonial to what can happen when a company creates extraordinary value through innovation and marketing excellence.
Financial Highlights, Fiscal Year 2010.
Apple continued to fire on all cylinders in FY2010 and the first part of FY2011. Earnings for FY2010 came in at $15.15, almost 2.5 times the $6.29 reported for FY2009. Operating margins increased from 22.9 percent to 29.8 percent. For most companies, we"re talking about single- or low double-digit increases in these numbers, not multiples! And incidentally, revenues were up just under 50 percent to $65.2 billion. The size and growth in these numbers go a long way toward justifying the high stock valuation, so long as things continue along this path. In fact, Apple"s ten-year earnings growth is 30 percent, a very healthy number when you consider the size of the company and the power of compounding.
This step-up in revenue and profits was due largely to the launch of the iPad and iPad 2 and the continued growth of the iPhone as the de-facto standard in the smartphone business. The momentum should persist, with earnings expected north of $22 per share in FY2011 on revenues north of $98 billionanother 50 percent increase.
Reasons to Buy.
For the past five years, Apple has been the 800-pound gorilla of the consumer electronics s.p.a.ce. Scratch thatthey"ve been King Kong. Since 2006, revenues have more than tripled and profit has increased over seven-fold. While we here at 100 Best tend to look favorably on a company that increases its margin by 2030 basis points per year, Apple, over the five-year period, has increased its net margin by over 1,250 basis points (an average of 250 points per year).
Apple has accomplished this by taking fairly ordinary technology and relatively inexpensive components and putting them together with the utmost in user-centric and "cool" design to become the de facto, "gotta have one" standard. It has, by far, the most loyal customer base in the electronics industry, and it has capitalized on this by offering a regular "consumable" product in addition to its hardware offerings in the form of iTunes. High product margins plus even higher "consumable" margins spells success. It only remains to be seen what other markets, like home TV and home theater, it chooses to get into. If it redefines digital video the way it redefined digital audio, look out.
Reasons for Caution.
When you"re Number One, everybody wants a piece of the action, and who knows? Someone might succeed in crossing Apple"s moat with a better, or at least less expensive, product. The Google Android smartphone operating system and the products that use it seem closest at this point, but that"s like saying Mars is close to the Earth. There"s still a lot of work to do. Also, it"s hard to hit the buy b.u.t.ton on such a high-priced stock, although the P/E is a modest 15 and appears to be on the decline as earnings continue to soar. Also, we, as many others, would like to see Apple pay a dividend.
CONSERVATIVE GROWTH.
Archer Daniels Midland Co.
Ticker symbol: ADM (NYSE) S&P rating: A Value Line financial strength rating: A Current yield: 2.0%.
Company Profile.
ADM is one of the largest food processors in the world. It buys corn, wheat, cocoa, oilseeds, and other agricultural products and processes them into food, food ingredients, animal feed and ingredients, and biofuels. It also resells grains on the open market. Rather than the finished consumer products most food processors are known for, ADM produces and distributes intermediate components for food product manufacture and is the largest publicly traded company in this business by far. Exports account for 46 percent of sales.
The company is highly vertically integrated and owns and maintains facilities used throughout the production process. It sources raw materials from sixty countries on six continents, transports them to any of their 230 processing plants via their own extensive sea/rail/road network, and then transports the finished products to the customer.
The company operates in three business segments: Oilseeds Processing, Corn Processing, and Agricultural Services. Revenue and profit percentages are in parentheses: The Oilseeds Processing unit (43 percent/45 percent) processes soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed into vegetable oils and protein meals for the food and feed industries. Crude vegetable oils are sold as is or are further refined into consumer products, while partially refined oils are sold for use in paints, chemicals, and other industrial products. The solids remaining from this processing are sold for a number of applications, including edible soy protein, animal feed, pharmaceuticals, chemical, and paper.
The Corn Processing segment (13 percent/18 percent) milling operations (primarily in the United States) produce food products too numerous to list, but include syrup, starch, glucose, dextrose, and other sweeteners. Markets served include animal feeds and the vegetable oil market. Fermentation of the dextrose yields ethanol, amino acids, and other specialty food and feed products. The ethanol is processed for beverage stock or industrial use as the base for ethanol-blended gasoline and other fuels.
The Agricultural Services segment (36 percent/22 percent) is the company"s storage and transportation network. This business is primarily engaged in buying, storing, cleaning, and transporting grains to/from ADM facilities and for export. It also resells raw materials into the animal feed and agricultural processing industries.
Financial Highlights, Fiscal Year 2010/2011.
Fueled by worldwide demand for food products and biofuels, ADM has been on a roll for the past five years, with revenues, earnings, dividends, cash flows, and book value all turning in healthy double-digit increases. Volatility in agricultural commodity prices led to a surprise 25 percent operating profit drop in late 2010, but the core oilseed and corn businesses remained strong through this period. Most estimates suggest a P/E ratio under 10 and a price to cash-flow ratio between 6 and 7, solid figures for a strong player in this key agricultural business.
Reasons to Buy.
Core businesses are strong and growing, and China and other emerging markets growth will be particularly strong. The company is and has been a strong player in the biofuels industry. While there are some uncertainties (discussed below) the company"s experience and scale in ethanol and biodiesel are strong positives. The federal government recently paved the way to raising ethanol content in motor fuel from 10 percent to 15 percent. This business tends to do well when energy prices escalate, as they have recently. We like the solid track record for growth in shareholder value, which appears to be lagged by the growth in share price.
ADM continues to make acquisitions, most in the emerging markets of Asia and South America. Sales growth outside the United States has far outpaced domestic growth, and ADM"s presence and extensive transportation capability give it a decided advantage over its smaller compet.i.tors, many of which are focused only in certain markets or certain industries. ADM"s market and geographic breadth reduce its exposure to both climatic and political variables.
Reasons for Caution.
ADM is heavily invested in the corn-ethanol-fuel processing chain. Continued concern about the efficiency of corn-based ethanol and its effects on food supply lead some to wonder whether the Republican-controlled Congress will abolish the forty-five-cent per gallon tax credit for ethanol production, and there is also concern that the tariff on imported Brazilian sugar-based ethanol may go away. Both would adversely affect ADM"s ethanol business. While ethanol prices have strengthened moderately, corn and other commodity prices have risen and become more volatile, adding some risk to the business. That said, the relative price and earnings stability and the low 0.24 beta suggest a stock that lets you sleep at night.
GROWTH AND INCOME.
AT&T Inc.
Ticker symbol: T (NYSE) S&P rating: A- Value Line financial strength rating: A+ Current yield: 5.8%.
Company Profile.
Measured by revenue, AT&T continues to be the world"s largest telecommunications holding company. It is the domestic market share leader in local and long-distance voice services, which is hardly a s.e.xy business in the twenty-first century. More importantly, it is the largest provider of consumer, commercial broadband, and wi-fi services in the United States, and has become a large player in IP (Internet-based) television. But the largest portion of the business overall is its AT&T Wireless subsidiary, the leading and probably the most progressive cell phone service provider in the country. Beyond these consumer and commercial products, the company"s servers and long-distance lines const.i.tute a major part of the global Internet.
Its traditional wireline subsidiaries offer services in thirteen states, and the wireless business provides voice coverage primarily for traveling U.S. customers and U.S. businesses in 220 countries. It has approximately 150 million total Consumer Revenue Connections, with a sales revenue mix of approximately 49 percent wireless, 21 percent wireline data, 26 percent wireline voice, and 5 percent advertising and other. The company has long been focused on offering "one-stop-shop" serviceswireline, data, wireless, and other services with one price on one bill. These efforts have had varying success, but the latest venture called U-verse, an IP-based bundling TV, data, and voice services turning the TV, the PC, and the cell phone into integrated display and transaction devices, is a particularly important development.
In late 2010, AT&T"s largest wireless compet.i.tor Verizon finally boarded the iPhone and iPad gravy train, formerly the exclusive domain of AT&T. Whether that is a negative remains to be seen. However, in an effort to stay in a position of product and technology leadership, the company made a $2 billion commitment to buy wireless spectrum from Qualcomm Corporation to build out its 4G network for some 230 million potential customers in late 2010.
In early 2011, the company announced a blockbuster acquisition of Deutsche Telekom"s T-Mobile subsidiary for $39 billion. This acquisition, currently under regulatory review, would reduce the number of major wireless compet.i.tors from four to three (AT&T, Verizon, and Sprint), give the combined company access to 130 million subscribers, and add to AT&T"s presence with budget-conscious "pay-as-you-go" customers. The combined unit could either expand that market or work to upsell them to more profitable smartphone services; the result will probably be a combination of the two. It remains to be seen how this big step in the company"s wireless evolution will play out.
Financial Highlights, Fiscal Year 2010.
AT&T reported moderate earnings declines through the recession and has seen some margin pressure from the compet.i.tive cell phone environment, as consumers migrated to less expensive or pay-as-you-go plans and handset subsidies increased. That said, a 9 percent compounded revenue growth over the last five years is healthy for a company of this size, and the company continues to forecast a 7 percent growth rate for 2011. Operating margins are healthy at 21 percent of revenues versus about 11.5 percent for the industry. Recent reported results show modest earnings growth, and the dividend, P/E ratio (12.4), and price to cash flow of about 5 all suggest financial strength and steady income returns for customers.
Reasons to Buy.
AT&T is particularly well positioned today to capitalize on its breadth and its recent investments. For now, the company is still the main provider of wireless services for the successful iPhone and iPad products and is working on a large 4G wireless network. The combination of technology innovation and product marketing leadership should bode well for the future; we continue to believe that U-verse is a very attractive product for customers in the digital transitionpeople who are in the process of rolling over to their first broadband connection, or those who are consolidating voice, data, and TV into one provider. It allows AT&T to retain what would have been lost AT&T customers and to capture new customers who are discarding their old wired voice service. In the process, AT&T trades one low-value voice connection for a very high value data link, through which they can provide upselling opportunities for additional services that cost very little more to deliver.
If AT&T is able to manage this rollover business well (and so far, it appears that they are), then their dull, boring, unprofitable wireline customers become a field of opportunity. Not only that, but many of the smaller regional carriers in the country with a similar customer base become attractive buyout opportunities as well.