I like these energy companies’ stocks. Yet some of the other top performers in the Dow leave me cold, including top- ranked Caterpillar Inc., up 23 percent, and Boeing Co., up 22 percent.
Here are my “buy,” “hold” or “sell” rankings on the 10 stocks that are the Dow’s leaders for the first four months of 2011. Stock prices are rounded to the nearest dollar.
Caterpillar ($115, up 23 percent). Sell. I dislike this stock for several reasons. As a major exporter, Caterpillar has benefitted from a weakening dollar for most of the past nine years. I suspect that trend has played out.
The Peoria, Illinois-based company has debt amounting to more than twice stockholders’ equity. And valuations are off- putting. Caterpillar shares fetch 5.9 times book value (corporate net worth per share) and 21 times the past four quarters’ earnings. In my opinion, it’s too late to buy.
Boeing Co. ($80, up 22 percent). Sell. Boeing stock has been strong this year as airline traffic has picked up. Yet the Chicago-based company has had an embarrassing year. Its new 787 airliner is coming to market three years late, if there are no further delays. It was surprised by a hole that developed in the fuselage of a Southwest Airlines Co. 737 jet last month. And the National Labor Relations Board criticized the company for possible “illegal retaliation” against union workers.
Exxon’s Profits
What bothers me more is that the company’s debt is almost three times equity. And first-quarter revenue was $14.9 billion, the lowest first-quarter figure since 2006.
Exxon ($88, up 20 percent). Buy. Exxon is the largest U.S. oil company by market value. The Irving, Texas-based company is also the most profitable among the 30 largest U.S. energy companies, measured by return on total capital.
Friends in the oil business tell me that Exxon, because of its operating prowess and financial muscle, generally gets its pick of the best drilling locations and the best petroleum geologists in the field. Even with its nice gain this year, the stock sells for 12 times earnings. That’s modest compared with the multiple of 14 for the Dow or 15.5 for the Standard & Poor’s 500 Index.
Good Balance Sheet
Chevron ($109, up 20 percent). Buy. Based in San Ramon, California, Chevron is the second-largest U.S. energy company by market value. It has a strong balance sheet, with debt only 11 percent of stockholders’ equity. There’s not a lot of growth here, or at Exxon either, for that matter. Yet profitability is high: Chevron earned 19 percent on stockholders’ equity last year.
Pfizer Inc. ($21, up 20 percent). Buy. Big pharmaceutical companies have barren pipelines, the conventional wisdom says. That doesn’t square that with the fact that New York-based Pfizer has more than 100 drugs in clinical trials, including 25 in Phase 3, the most advanced. The stock sells for nine times earnings and yields 3.8 percent in dividends.
International Business Machines Corp. ($171, up 16 percent). Hold. IBM’s profitability is magnificent. Earnings for the Armonk, New York-based company grew right through the recession, set a record last year and should break it this year. If I owned IBM I would hold it, but I wouldn’t deploy new money into it. One reason: the stock sells for nine times book value. I usually prefer a price/book multiple of two or less.
Mouse House Rules
Walt Disney Co. ($43, up 15 percent). Buy. In the past five years, Disney increased earnings at a 7 percent annual clip. Imagine what the Burbank, California, company could do in a good economy.
People are used to evaluating Disney based on how its theme parks are doing, but television these days is a bigger part of Disney’s pie. It owns ABC Television Network, the Disney Channel, and 80 percent of ESPN, among other media properties.
American Express Co. ($49, up 14 percent). Buy. New York- based American Express appears solid following a recession- induced bump. The company stayed profitable during the recession, but at a reduced level. At $3.35 a share, earnings in 2010 missed the 2007 record by a penny. This year analysts expect $3.82.
Too Expensive
DuPont Co. ($57, up 14 percent). Sell. DuPont, the chemical maker with headquarters in Wilmington, Delaware, has a few flaws in my view. The company is cyclical -- no sin for a chemical manufacturer, yet a potential concern nevertheless. That’s why I would prefer to buy the stock when it’s cheap. It’s not a bargain now. The shares trade at 16 times earnings and almost five times book value. In addition, DuPont’s debt, which is a bit more than stockholders’ equity, is higher than I like.
United Technologies Corp. ($90, up 14 percent). Sell. The Hartford, Connecticut-based company’s three biggest units -- Pratt & Whitney aircraft engines, Otis elevators and Carrier air conditioning all showed modest revenue declines from 2008 through 2010. Yet the stock sells for 17 times earnings. I like the company, but regard the stock as untimely now.
Disclosure note: I own Pfizer for several clients and Exxon Mobil for a few. I have no long or short positions, personally or for clients, in the other stocks discussed in this week’s column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
--Editors: Steven Gittelson, James Greiff
