Fluor
The recession has pounded the construction industry, with engineering and infrastructure stocks sinking as cash-strapped municipalities delay large public projects. But the sector should get a boost from an ambitious public works spending plan expected to be part of President-elect Obama's economic stimulus package.
Fluor stands to prosper. About 45% of the engineering and construction company's business is in the U.S., and Phil Dodge, an analyst at Stanford Group, says the company will probably work on larger projects like interstate highway renovations.
Even without a stimulus package, Fluor has been flourishing. The company's revenue rose 38% to $5.7 billion in the third quarter of 2008; earnings doubled to $1.01 per share. It has robust businesses inside and outside the U.S., including oil and gas, mining, power, and global infrastructure. And Fluor generated a record $8.8 billion in new contracts for the third quarter, including a $3.4 billion project for the BP Whiting Modernization Project in the U.S. and a $1.8 billion contract to build the world's largest offshore wind farm near the coast of England. Fluor has even raised its earnings guidance for 2009, one of the few companies to do so. Despite that, the shares are trading at only ten times earnings, making it a stock that seems engineered to rise next year.
Johnson & Johnson
Think of Johnson & Johnson as a comfort stock. Strength and stability seem like cardinal virtues at a time when even the bluest of blue chips - AIG, Citigroup, and Goldman Sachs, to name a few - have suffered calamitous stock declines.
Its triple-A credit rating (J&J is one of only six U.S. corporations with that distinction) means J&J can borrow money at lower cost than its competition. And J&J's fortress-like balance sheet, with $150 million in net cash - $14.8 billion in cash and $14.6 billion in long- and short-term debt - means it can easily complete the $10 billion share-repurchase program it began in 2007 (it has so far bought $7.4 billion in stock), increase its dividend, or swoop in for a cheap, strategic acquisition to boost earnings.
The company has done well despite the current turmoil. In the third quarter, earnings per share jumped by 10.4% over the previous year, and it is growing rapidly overseas. Worldwide sales rose by 6.4% in the quarter, and nearly all of that increase was booked in Latin America and Asia.
A severe economic slowdown in 2009 will put pressure on the consumer segment, and generic drug competition will weigh on pharma. For 2009, earnings per share are expected to grow by 3%, according to research firm CapitalIQ. Pharma will be the biggest albatross as patents expire on blockbuster drugs like Topamax, a migraine and epilepsy treatment.
J&J is trading near its 52-week low at $55, and at a price/earnings ratio of 12. That may seem steep when so many stocks are trading at P/Es of eight or lower. But it's the lowest for J&J since 1979 - the company has averaged a P/E of 22 over the past three decades - and far below its consumer-staples peers. And even with stocks, comfort is worth paying for.
Medco Health Solutions
For decades, Americans' health coverage has been fraying, and every new President vows to tackle the problem. The incoming Obama administration has made similar promises. As the largest pharmacy benefits manager (PBM), Medco Health Solutions is poised to benefit from potential reforms. But this well-managed enterprise should thrive even if the government fails to overhaul health care, because the company already addresses the overarching problems of high costs and low quality.
Increased use of generic drugs should also give Medco a lift. "Generics benefit prescription benefit managers because the margins on generics tend to be better," says Les Funtleyder, author of Healthcare Investing and an analyst at Miller Tabak. In just a few years we will see some of the biggest blockbusters come off patent, including Pfizer's Lipitor, the cholesterol treatment that is the top-selling name-brand drug on the market. Bristol-Myers's heart-attack-prevention drug Plavix and Eli Lilly's bipolar-disorder treatment Zyprexa also lose their patent protection in the next three years. "Even if health-care reform doesn't generate increased use of generics, these expirations will," says Funtleyder.
Medco has been doing well even without those external factors. The company keeps its corporate customers happy; it has a retention rate of 98% for 2008. Earnings per share jumped in the third quarter by 49%, and the company gave a full-year 2009 earnings estimate of $2.45 to $2.55 per share, up 15% to 21% over its 2008 guidance. Moreover, the company trades at a P/E ratio of 15, the same as rival Express Scripts, despite Medco's dominance in the category.
Pfizer
It's no secret why Pfizer's shares have dropped 40% in the past two years: The pharmaceutical giant's top seller, cholesterol medicine Lipitor, loses patent protection in 2011. Drugs representing more than a third of Pfizer's revenues will cede their exclusivity in the next five years.
What many investors don't know (or disbelieve) is that Pfizer, which used to chase the ever elusive next blockbuster drug, has changed its ways. The company is now aiming for numerous little hits rather than a few mega-successes, developing 114 drugs, 25 of which are in the final stage before being submitted for approval. (By contrast, rival Merck has nine in the latter category.) Pfizer is also shifting its emphasis from obesity and heart disease to other fields, including pain, Alzheimer's, and cancer. Such markets are not only lucrative but also expensive for generics to enter - a vital shield against the next wave of cheap drugs.
The company's most immediate salve may be its wallet: Pfizer has $26 billion in cash, which is more than Merck, Eli Lilly, and Bristol Myers-Squibb combined. CEO Jeffrey Kindler could snap up a biotech company, many of which are available at low prices; until then, investors can tide themselves over with the company's 8% dividend (again, the best in its class). Caption: CEO Jeffrey Kindler drastically restructured Pfizer last year, breaking the company into smaller, more concentrated units.
Potash Corp. of Saskatchewan
Six months ago, Potash Corp. of Saskatchewan - the world's largest fertilizer company - peaked at $240 a share. Today it's $56, only three times projected earnings per share for 2009.
Yes, slumping grain markets and credit-crunched farmers have sent fertilizer prices tumbling. And yes, it's possible - likely even - that analysts will trim 2009 earnings estimates further. But a P/E of three means there's margin for error. Next year's earnings could straggle in 50% below expectations, and Potash Corp. would still be reasonably priced. The current price assumes the company will earn less than $5 a share in 2009, Citigroup analyst Brian Yu recently noted. The analyst consensus for 2009: $16.
The long-term case for higher grain prices - and thus stronger fertilizer demand - remains intact despite the global recession and withering commodities markets. Government mandates mean biofuel production will continue to rise. Ethanol will consume 33% of this year's U.S. corn crop vs. 23% of last year's. Global population growth and an expanding Third World middle class are expected to lead to a 10% rise in food-related grain demand by 2017.
Potash Corp. is well positioned compared with its competition. Prices for fertilizers based on nitrate and phosphate have plummeted, while those for potash (its specialty) are at record levels. One reason: It's brutally expensive to enter the business, as potash mines cost $2 billion to $4 billion to build.
