The 100 Best Stocks You Can Buy 2012 Part 13

We continue to be concerned about the lack of international exposure, although that could also be viewed as an opportunity with a strong brand campaign and distribution channels in key markets. The company is exposed to higher commodity prices, although thus far has been able to recover them with price increases. With Burt's Bees, the company has also learned a lesson about overreaching with acquisitions; the beauty care maker may turn out to have been a fad not worth chasing, but we are concerned that the company could be tempted again into poor acquisitions to spur growth. It's just too hard to grow demand and market share for bleach, trash bags, and charcoal. While we considered dropping Clorox from the list, we feel that core brand strength, good management, and orientation toward shareholder returns continue to earn its stripes. One more gut check: At an $8.5 billion market cap, Clorox may be one of those companies that we'd buy if we had that kind of moneyand others may be thinking the same.

CONSERVATIVE GROWTH.

The Coca-Cola Company.

Ticker symbol: KO (NYSE) S&P rating: A+ Value Line financial strength rating: A++ Current yield: 2.8%.

Company Profile.

The Coca-Cola Company is the world's largest beverage company. For more than 100 years, the company has mainly produced concentrates and syrups, which it then sells to independent bottlers worldwide. These bottlers add water (still or carbonated, depending on the product), sugar, and other (often local) ingredients, then bottle and distribute the products to restaurants, retailers, and other distributors. The company owns the brand and is responsible for consumer brand marketing initiatives, while the distributors handle all downstream merchandising. The company operates in over 200 countries and markets nearly 500 brands of concentrate. These concentrates are then used to produce over 3,000 different branded products, including Coca-Cola.

In 2010, the company took a big step toward full integration of its supply chain with the purchase of the North American operations of Coca-Cola Enterprises (CCE), the largest of its network of bottlers, for some $12.4 billion, including debt a.s.sumption. The acquisition was expected to streamline distribution and marketing, give greater control of pricing, and cut about $350 million in redundant costs. At the same time, c.o.ke sold distribution in Norway, Sweden, and a future in Germany back to CCE, reaffirming the third-party bottler model in international, or at least European, markets.

The company has also been striving to expand its beverage offerings beyond the traditional carbonated soda drinks. Major brands besides c.o.ke include Minute Maid juices, Dasani and Evian bottled water, Powerade and Full Throttle sports beverages, and Nestea iced teas.

The total numbers are staggering: 570 billion servings per year, 1 billion beverages consumed per day, 18,000 servings per second, unit growth in 2008 equivalent to the entire j.a.panese market, processed through over 300 bottlers, and all handled through the world's largest beverage distribution system. Some 74 percent of the company's sales are overseas, and overseas markets are where the growth is.

Financial Highlights, Fiscal Year 2010.

c.o.ke rebounded well from the 200809 recession, resuming its 57 percent top line growth rate after a dip in 2009. Some of the 2009 dip was related to demand softness, some to currency fluctuations, and the company remains exposed, good or bad, to ups and downs in the U.S. dollar.

In late 2010, the company resumed its share buyback program with a commitment to repurchase some $1.5 billion in 2011. This isn't large with respect to the total market cap of $140 billion, but does show the company's commitment to returning cash to shareholders.

Operating margins were also flat in this period, but may start to notch upward with the consolidation of the supply and distribution chain and with continued progress in overseas markets.

Reasons to Buy.

Coca-Cola has global category leaders.h.i.+p in soft drinks, juices, and juice drinks, and ready-to-drink coffees and teas. They're number two globally in sports drinks, and number three in packaged water and energy drinks. In Coca-Cola, Diet c.o.ke, Sprite, and Fanta, they own four of the top five brands of soft drink in the world. They're everywhere, and with so many popular brands, the local bottlers can "test the waters," choosing among hundreds of products for the right ones for their area.

Although the company has lagged the market in terms of non-CSD (carbonated soft drink) product offerings, the growth of those products in c.o.ke's developing markets is very encouraging. c.o.ke has targeted moving forward, particularly in the growing economies of India, Indonesia, and China. The growth in the consumption of non-alcoholic ready-to-drink beverages tracks the per-capita growth in disposable income, and the company has identified key cities with the most promising demographics for its marketing efforts. If c.o.ke could realize the success in China, which is currently at about 20 per capita consumption (PCC), or beverages consumed per capita per year, that it has in Mexico (660 PCC), the effects would be huge.

The Coca-Cola name is probably the most recognized brand in the world, and is almost beyond valuation. Warren Buffett once uttered the cla.s.sic line about brand strength and intangibles in reference to c.o.ke: "If you gave me $100 million and said take away the soft drink leaders.h.i.+p in the world from c.o.ke, I'd give it back to you and say it can't be done."

c.o.ke has traditionally been a steady hedge stock, and offers a solid dividend with a steady track record of dividend growth (11 percent over the last ten years). It is also as close to a pure play on international business as you'll find in a U.S. company.

Reasons for Caution.

The per capita consumption (PCC map is quite interesting (see www.thecoca-colacompany.com/ourcompany/ar/map.html#/per-capita-consumption on the company's website) and reveals a big opportunity on the global stage. But the slight decline in U.S. PCC, from 396 in 1999 to 382 in 2009, is unnerving and may reflect the ongoing publicity and buzz about health, child obesity, and so forth. Unit volume in the United States has been flat (pardon the pun) for years, and an aging U.S. population doesn't help. The company is combating this with non-soda lines and offerings like c.o.ke Zero, but it remains to be seen whether c.o.ke can enjoy consumption growth on this continent anytime soon.

As c.o.ke consumers ourselves, we're continuously disappointed at the erosion of c.o.ke products in favor of Pepsi in many restaurants and fast food chains. We realize that PepsiCo owns a number of fast food chains and has a captive market there, but we wonder how and why c.o.ke is losing this important distribution and brand recognition channel, especially as far more people seem to specify c.o.ke than Pepsi when ordering their cola. It makes us wonder whether there are larger elephants in their sales and marketing room. It also serves as an example of what you, as an astute individual investor, can yourself observe about your companies in the course of daily life.

CONSERVATIVE GROWTH.

Colgate-Palmolive Company.

Ticker symbol: CL (NYSE) S&P rating: AA- Value Line financial strength rating: A++ Current yield: 2.7%.

Company Profile.

Colgate-Palmolive is the second-largest domestic manufacturer of detergents, toiletries, and other household products. The company manages its business in two straightforward segments: Oral, Personal and Home Care; and Pet Nutrition. The Oral, Personal and Home Care division produces and markets a number of familiar brands and products: Ajax, Palmolive, Irish Spring, Softsoap, Mennen, and SpeedStick, as well as the familiar Colgate brand of oral care products. These brands dominate the business, but Colgate is also one of the leaders in the pet nutrition market; its Hill's pet food brand represents 17 percent of its total sales.

Colgate is also strong in the global consumer products market, with a presence in over 200 countries and territories. About 75 percent of its business is international, with particular strength in Latin America.

Financial Highlights, Fiscal Year 2010.

The recession brought flat revenue for FY2009, which is typical of such a consumer staples company. Even in that "off" year, the company was able to deliver an eye-popping 21 percent growth in earnings per share due mostly to cost-cutting measures, price strength in key product lines, and a modest reduction in share count. Operating margins improved from 23.2 percent in 2008 to 26.2 percent in 2009.

The company got off to a good start in FY2010, with revenues for the first three quarters up 3 percent from FY2009 and earnings up 13.6 percent. The upward path reversed a bit in the fourth quarter, when a 1 percent unit volume increase was wiped out by an unfavorable foreign exchange climate, which had a negative 3.5 percent impact versus the FY2009 fourth quarter. With Colgate's high international exposure, such fluctuations have more impact. More intense compet.i.tion with Procter & Gamble and GlaxoSmithKline, especially in the oral care s.p.a.ce, brought some price decreases and additional marketing expenses. The combined impact resulted in FY2010 sales of $15.564 million, about $80 million off earlier projections, and earnings per share of $4.31, slightly off the FY2009 number.

Citing market share gains in oral care in Latin America, China, and India, the company is fairly optimistic about FY2011 gross margins, sales, and earnings, but has guided earnings growth only in the low single digits for the year. Higher marketing costs to bring new products to market was cited as one reason.

Reasons to Buy.

Colgate is the predominant global market leader in toothpastes. Nearly half of all toothpaste sold worldwide in 2009 was a Colgate product. Market acceptance for toothpastes in the United States is nearly 100 percent, but outside the country toothpaste is still a rapidly growing market. a.n.a.lysts suggest that worldwide, consumer oral care products are barely at 50 percent market penetration. Given this healthy potential for market growth, along with the improving demographics of a health-conscious and appearance-conscious pool of consumers, globalization gives a Colgate investor a lot to smile about.

Looking at the bigger picture, Colgate is probably a safer, steadier alternative in this consumer staple marketplace than Procter & Gamble (another 100 Best Stock), as it is less p.r.o.ne to reach for new, rapidly changing markets like cosmetics, and less apt to try to grow through acquisitions. This company is about slow, steady returns with little risk and little market volatility in bad times. We like the fact that Colgate has been able to grow earnings and dividends faster than sales; the focus on operational efficiency has paid off. We also like the company's focus on international markets, although currency adjustments create another source of volatility.

Reasons for Caution.

Colgate partic.i.p.ates in an increasingly compet.i.tive market, requiring more frequent new product rollouts and related marketing expenses just to keep up. Also, the Colgate business will not "fascinate" anyone and will probably not be a favored choice for more aggressive investors.

AGGRESSIVE GROWTH.

Comcast Corporation.

Ticker symbol: CMCSA (NASDAQ) S&P rating: BBB+ Value Line financial strength rating: B+ Current yield: 0.6%.

Company Profile.

Comcast is one of the nation's leading providers of communications services and information and entertainment content pa.s.sed through those services. The core business is Comcast Cable, the familiar cable TV network that has evolved into a "pipe" for delivering bundled high-speed Internet services, phone services, and on-demand content. This business, which serves some 24 million subscribers in thirty-nine states, has up until recently represented 95 percent of the total business.

The company has been evolving its information and entertainment business over the years through its owners.h.i.+p of regional sports networks and national channels such as the Golf Channel, E! (an entertainment channel), fandango.com, and others. The company took a major leap forward as a content provider with the early 2011 closing of the acquisition of 51 percent of NBC Universal (GE still owns the other 49 percent), almost instantly turning the company into not only a connectivity powerhouse but a media powerhouse as well. With that acquisition, Comcast is now regarded as the largest integrated content development and distribution business in the United States.

Most likely in an attempt to evolve and to overcome the legacy of negative public opinion about cable operators, the company has been building its Xfinity brand to compete with satellite operators and such offerings as AT&T U-verse and Verizon FiOS. Customers can buy bundles of service including TV, including new on-demand video and, as an emerging offering, on-demand TV. (The company owns a stake in the leading free TV website Hulu, a new on-demand TV service that bears watching.) With Xfinity, customers can also get up to 105Mbps Internet service, probably the best service for downloading large chunks of video content. Through the Xfinity package and brand, Comcast also announced a new Internet 2go wireless Internet service through a 4G network. In short, Comcast has evolved from being a lackl.u.s.ter cable TV service to a full-scale communications utility with some of the highest performance products on the market.

The vast majority of Comcast customers are residential, although the company also offers a "Business Cla.s.s" service to meet the needs of small and mid-sized organizations. The company also owns the Philadelphia 76ers and Flyers and a series of Universal theme parks through the NBC Universal subsidiary.

Financial Highlights, Fiscal Year 2010.

For many years until about 2005, Comcast was a fairly lackl.u.s.ter company with lackl.u.s.ter financial performance; earnings bounced back and forth between losses and very modest profits. The growth in the Internet and, most likely, the ability to bundle high speed Internet service in contrast to satellite providers, served as an awakening for the company in the marketplace and financially. In the past five years, compounded revenues have risen 15 percent, earnings 47.5 percent, and cash flow 21.5 percent. In FY2010, the company posted $1.29 in earnings, almost flat from the year before but burdened with acquisition costs, on revenues of about $37.7 billion. Projections call for resumed earnings growth to $1.50 per share in FY2011 and in the $1.70$1.75 range in FY2011. Annual revenue growth is estimated at about 13 percent. In early FY2011, the company raised its dividend to $.45 a share and beefed up its share repurchase program some 75 percent over FY2010 to $2.1 billion.

Reasons to Buy.

Comcast is one of those companies that has spent years building its product and infrastructure, and is now finally figuring out how to utilize it more profitably while at the same time offering a better value proposition to customers. Although there are some risks in entering the oft-fickle media business, we generally like Comcast's efforts to make the most of its network. What really intrigues us at this point is the on-demand services for both video and TV. While NetFlix and others are bringing such services to market, because of bandwidth and other considerations, they probably make the most sense to deliver through the extremely high bandwidths of a cable system. Comcast owns the largest such system and is putting it to useand starting to question whether the compet.i.tors should be able to use its network. While such restrictive thinking can annoy customers and bring out the ant.i.trust regulators, it should serve to build business, and the Xfinity offering makes this offering much more consumer friendly. In short, Comcast is doing a lot of the right things both in the marketplace and financially.

Reasons for Caution.

In most people's minds, Comcast is still a cable company, and people don't like cable companies. If the company becomes too aggressive in the media content market, and particularly if it restricts others from using its "last mile" of cable, that could bring some grief in the court of public opinion, not to mention regulation. The company faces extreme compet.i.tion in most of its markets, although it may have at least a temporary bandwidth advantage at present. Finally, scenarios where the top two executives make over $50 million combined and have a controlling interest in the voting Cla.s.s B shares can turn out to be a negative.

GROWTH AND INCOME.

ConocoPhillips.

Ticker symbol: COP (NYSE) S&P rating: A Value Line financial strength rating: A++ Current yield: 4.0%.

Company Profile.

ConocoPhillips is the third-largest U.S.based integrated energy company and the sixth largest worldwide based on market capitalization. It is also the second largest petroleum refiner in the United States and the fifth largest refiner in the world. ConocoPhillips has the eighth-largest stock of proven petroleum reserves in private hands. Their businesses span the hydrocarbon value chain from wellhead through refining, marketing, transportation, and chemicals.