The 100 Best Stocks You Can Buy 2012 Part 24

It's hard for us to summarize MCD's 2010 any better than they did, so here is an excerpt of their earnings press release in early 2011: Global comparable sales increase of 5.0 percent, with positive comparable sales across all geographic segments for every quarter.

Consolidated revenues up 6 percent (5 percent in constant currencies) to a record-high $24 billion Combined operating margin increase of 90 basis points to 31.0 percent Consolidated operating income increase of 9 percent (9 percent in constant currencies) with the U.S. up 7 percent, Europe up 8 percent (12 percent in constant currencies) and APMEA up 21 percent (11 percent in constant currencies) Earnings per share of $4.58, up 11 percent (11 percent in constant currencies) Return of $5.1 billion to shareholders through share repurchases and dividends paid The reasons for their success include new menu offerings and a continuing drive to move more stores to a franchising model. The latter in particular is responsible for the operating margin increases. Rents and royalty incomes are a low cost and very stable revenue stream with low capital requirements, and we expect this refranchising trend to continue even as McDonald's opens new locations. The company has also benefited from "reimaging" its stores, particularly in Europe, and plans to add 1,100 stores and reimage a comparable number in 2011.

The expansion in financial performance slowed somewhat toward the end of FY2010, with sales only 4 percent and earnings only 5 percent ahead of the year ago period. The company did say it was off to a good start in FY2011 with a same-store sales growth projection of 45 percent, which should lead to a larger figure for overall top line growth. The company also raised its dividend 11 percent during FY2010.

Reasons to Buy

In the early part of the decade, McDonald's had been adding mainly company-owned stores in an effort to boost revenues, they aren't as profitable, and there were signs that people were becoming tired of the menu and more concerned about health. In 2003, McDonald's initiated a new strategy that called for increasing sales at its existing stores by expanding menu options, expanding store hours, and renovating stores. They also began franchising a higher percentage of its stores, driving revenue with reduced capital expense. The strategy has paid off handsomelyrevenues have grown by 40 percent, which would be impressive on its own, but operating margins have grown from the mid-20s to the mid-30s, with most of that increase coming in the 20082010 timeframe, and not surprisingly, net income has increased more than two and a half times in that same period. At the same time, share buybacks have reduced share counts from 1.26 billion down to about 1.05 billion. These factors have produced substantial shareholder returns, much of which is actually getting returned to shareholders, as the dividend has climbed from 40 cents per share to $2.44 per share in the eight-year periodnearly 150 percent over the same period. As a result, the share price is six times its 2003 low.

McDonald's has an exceptionally strong international franchise, and is growing particularly well in China. Local menus continue to evolve, and the convenience that fast food provides is highly valued.

McDonald's' menu additions are proving very popular, and consumers are welcoming the novelty of the newer menu items like McCafe, brewed teas, smoothies, McRib sandwiches, the Angus burger line, and expanded salad selections.

Reasons for Caution

Concerns over childhood obesity have drawn attention to dietary factors, and fast food restaurants will likely be central to most conversations on the topic. Some states are requiring the posting of signs with caloric content next to item price, but it's not clear that this will lead to a decline in sales in the near term. The stock has also enjoyed a long-run higher compatible with the steady earnings growth; similar growth in the near future may be harder to attain.

CONSERVATIVE GROWTH.

McKesson Corporation

Ticker symbol: MCK (NYSE) S&P rating: A Value Line financial strength rating: A+ Current yield: 0.9%

Company Profile

McKesson Corporation is America's oldest and largest health care services company, and engages in two distinct businesses to support the health care industry. Pharmaceutical and medical supply distribution is the first and by far the largest business: The company is the largest such distributor in North America. The company delivers to approximately 40,000 pharmaceutical outlets as well as hospitals and clinics throughout North America.

Second and not to be ignored is a technology solutions business that provides clinical systems, a.n.a.lytics, supply chain management, and connectivity solutions to hospitals, pharmacies, and an a.s.sortment of health care providers. While the distribution business, at $105 billion for FY2010, provides 97 percent of the company's revenue, the information technology business is no less important and is a $3 billion business all by itself. McKesson's software and hardware IT solutions are installed in some 70 percent of the nation's hospitals with more than 200 beds.

The company offers products and services covering most aspects of pharmacy and drug distribution, including not only physical distribution and supply chain services but also a line of proprietary generics and automated dispensing systems, record keeping systems, and outsourcing services used in retail and hospital pharmacy operations.

In late 2010, the company completed a $2.16 billion acquisition of U.S. Oncology, a distributor of products targeted to the cancer care industry. With that acquisition, McKesson becomes the leading supplier of materials, technology, and operational platforms to the oncological community.

Financial Highlights, Fiscal Year 2010

The McKesson business is about as close to recession-proof as one can become. Sales flattened only slightly in FY2010 (ending March 2010) to $108.7 billion, while earnings continued a nice upward run at $4.58 per share, up 12.5 percent from the previous year and up from $2.18 per share in 2004. During this period, the company benefited somewhat from the H1N1 flu scare and vaccine distribution volume, so FY2011 revenue comparisons are relatively flat. With operational improvements and the integration of the U.S. Oncology business, the company expects to earn between $4.90 for FY2011. In 2010, the company raised its dividend 50 percent to $0.72 per share, and authorized a $1 billion stock buybackboth easily afforded in light of the company's strong cash flows.

Reasons to Buy

The distribution business has proven to be rock solid and will likely continue that way. Demographics and the addition of millions to the "insured" health-care rolls will keep demand moving in the right direction. McKesson dominates its niche. Additionally, hospitals and other care providers are starting to get the memo that it is time to improve operational efficiency, and McKesson's technology solutions are hard to ignore, although many might do so at first glance as they are only 3 percent of the business. As most distributors do, McKesson operates on very thin margins; the expansion of technology services and generic equivalent drugs should help. The company has reduced its share count about 16 percent since 2005 and will continue to buy back shares.

Reasons for Caution

Some, and perhaps much, of the optimism previously mentioned has already been priced into the stock; the company will have to continue to seek growth opportunities to keep the earnings momentum going. That could result in more acquisitions, and while the U.S. Oncology buyout has been favorably received by investors, that is no guarantee that all such moves will be. Additionally, and as mentioned, the company does operate on thin margins and as such has a low tolerance to mistakes or major changes in the health care s.p.a.ce that could be brought on by legislation or regulation.

AGGRESSIVE GROWTH.

Medtronic, Inc.

Ticker symbol: MDT (NYSE) S&P rating: AA- Value Line financial strength rating: A++ Current yield: 2.3%

Company Profile

Medtronic is the world's largest manufacturer of implantable medical devices and is a leading medical technology company, providing lifelong solutions to "alleviate pain, restore health and extend life," primarily for people with chronic diseases. The seven business segments are (with contribution to FY2010 revenues in parenthesis): Cardiac Rhythm Disease Management (33 percent) develops products that restore and regulate a patient's heart rhythm, as well as improve the heart's pumping function. This segment markets implantable pacemakers, defibrillators, monitoring and diagnostic devices, and cardiac resynchronization devices, including the first implantable device for the treatment of heart failure.

Medtronic Cardiovascular (18 percent) develops products and therapies that treat a wide range of vascular diseases and conditions. These products include coronary, peripheral, and neuro-vascular stents, stent graft systems for diseases and conditions throughout the aorta, and distal protection systems. The segment also develops products that are used in both arrested and beating heart bypa.s.s surgery, and markets the industry's broadest line of heart valve products for replacement and repair, plus autotransfusion equipment and disposable devices for handling and monitoring blood during major surgery.

Medtronic Spinal and Biologics (22 percent) develops and manufactures products that treat a variety of disorders of the cranium and spine, including traumatically induced conditions, deformities, herniated discs and other disc diseases, and tumors. The Biologics business is the global leader in biologics regeneration and pain therapies across a variety of musculoskeletal applications including spine, orthopedic trauma, and dental.

Medtronic Neurolmodulation (10 percent) employs many technologies used in heart electrical stimulation to treat diseases of the central nervous system. It offers therapies for movement disorders, chronic pain, urological and gastroenterological disorders, and psychological diseases, including incontinence, benign prostatic hyperplasia (BPH), enlarged prostate, and gastroesophageal reflux disease (GERD).

Medtronic Diabetes (8 percent) offers advanced diabetes management solutions, including insulin pump therapy, glucose monitoring systems, and treatment management software.

Medtronic Surgical Technologies (6 percent) develops and markets products and therapies for ear, nose, and throatrelated diseases and certain neurological disorders; among them are precision image-guided surgical systems.

Financial Highlights, Fiscal Year 2010 (FY2010 ended April 30, 2011)

Medtronic's revenues grew 8 percent year/year to $14.6 billion, while non-GAAP (our standard for this company) earnings rose 9 percent to $3.58 billion. Per share earnings grew 10 percent.

Fourth-quarter revenues broke $4 billion, a first for Medtronic. The final number, $4.2 billion, represents a 10 percent increase over 4Q2009 revenues. Earnings for the quarter were $986 million, up 8 percent over the prior year.

International revenue grew 15 percent for the year, representing 41 percent of the company's total revenue. International's fourth quarter revenue grew 20 percent over 4Q2009.

Dividends were increased 34 percent to $.85/share, and the company bought back 25 million shares of stock, or approximately 2.3 percent of the outstanding shares.

Reasons to Buy

Medtronic has a dominant market share in three of its six core lines (ICD, Diabetes, and Neurological). Although the company saw some near-term slowdowns in its businesses due to the economy and delayed treatments for certain medical conditions, the company is well-positioned to take advantage of the aging demographic and increased use of technology to provide long-term care solutions.

The company is a pioneer, technology leader, and a successful innovator in many surgical and implant technologies, including the restoration of normal brain function and chemistry to millions of patients with central nervous system disorders. The company's DBS (Deep Brain Stimulation) systems treat disorders by modulating the nervous system with electrical stimulation, chemicals, and biological agents delivered in precise amounts to specific sites in the brain and spinal cord. This system has been used successfully to treat the most severe symptoms of conditions such as Parkinson's disease, and in March of 2010, Medtronic received FDA approval for techniques employing DBS devices for treatment of epilepsy.

Medtronic has enjoyed steady growth and has achieved the quintuple-playdouble-digit compounded ten-year growth in revenues, earnings, cash flow, dividends, and book value. The dividend, relatively generous for a "tech" company of this sort, has almost tripled in six years. The stock price has been relatively flat during this period, offering reasonable entry points.

Reasons for Caution

Medtronic may be entering the "mature" life-cycle phase in many of its product lines, meaning future growth opportunities may be harder to come by. The company has also relied on small acquisitions for a lot of its growth, a somewhat riskier strategy than growing "organically."

AGGRESSIVE GROWTH.

Monsanto Company

Ticker symbol: MON (NYSE) S&P Rating: A+ Value Line financial strength rating: A Current yield: 1.5%