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All Contents © 2017The Kiplinger Washington Editors
By Ryan Ermey, Staff Writer
| July 2017
We scoured the nation to identify the best stock in every state. Here are the 12 publicly traded companies based in the Midwest that we picked. Our list of Midwestern stocks is diverse, ranging from the biggest blue-chip name in burgers to a small producer of salt and specialty fertilizers.
A word of caution: Since we picked a single stock from each state, and choices in some Midwestern states are sparse, a few of these stocks are best suited to investors comfortable with a higher degree of risk. This is not a selection of our favorite stocks in the entire region, in other words. Take a look at the best stock to buy now in each state in the Midwest.
Headquarters: Oak Brook
Share price: $154.80
Market value: $126.2 billion
McDonald’s is in the middle of a multiyear turnaround. In 2015, the company initiated efforts to sell 4,000 corporate locations to franchisees by 2018, eventually reducing annual costs by $500 million. The company now plans to finish this process by the end of 2017. McDonald’s posted stellar first-quarter numbers, beating earnings estimates and posting a 4% gain in global sales for restaurants open at least a year, compared with the first quarter of 2016. One quarter doesn’t make McDonald’s a high-growth company, say analysts at Credit Suisse. But the results are impressive at this stage of the company’s turn-around effort. They add that years of investment overseas, in digital platforms and kiosks, for example, are helping international sales pick up steam. Credit Suisse believes the stock could hit $165, a 6.6% bump from the current price, over the next 12 months.
Plus, McDonald’s remains a safe bet for income investors. Mickey D’s has raised its dividend in every year since it began paying one in 1976. CEO Steve Easterbrook said in April that the company plans to return $22 million to $24 million to investors from 2017 to 2019 in the form of dividends and share buybacks. The stock currently yields 2.4%.
Share price: $129.39
Market value: $26.1 billion
The company that resulted from the 2015 merger of Zimmer and smaller competitor Biomet is the leading maker of orthopedic implants, such as knee and hip replacements, for the U.S., Europe and Japan.
The company has gotten off to a rocky start this year, as production delays at its manufacturing facility depleted inventory. As a result, Zimmer Biomet reduced its 2017 sales and earnings estimates. Concerns over the supply chain have created volatility in the stock, says CFRA analyst Jeffrey Loo. But he thinks that the shares already reflect those worries and that the issue will be resolved by the second half of this year. Zimmer shares trade at 15 times estimated year-ahead earnings—below health care companies’ current average of 16 times estimated earnings. Yet the global, long-term demand for Zimmer’s orthopedic implants remains intact, given aging populations and rising obesity levels. The stock is “top pick” at investment research firm Needham & Company, which assigns a 12-month price target of $153.
Headquarters: Cedar Rapids
Share price: $103.99
Market value: $16.9 billion
Before an $8.6 billion acquisition of B/E Aerospace in April, Rockwell was a leading manufacturer of avionics, flight control, communications and navigation systems that go into planes’ cockpits. In B/E, which manufactures, among other things, seating, lighting, oxygen systems and kitchen equipment, Rockwell has effectively acquired the rest of the plane.
Both companies are cash-rich, and the combined entity should be able to quickly pay down debt accrued during the merger, say analysts at Credit Suisse. The deal gives Rockwell more-direct exposure to commercial airlines, which is a more lucrative business than selling to other parts manufacturers. Credit Suisse analysts expect Rockwell to boost earnings by 24% and sales by 66%, cumulatively, through the two fiscal years ending in September 2018. They believe the stock has potential to reach $120 over the next 12 months, representing a potential gain of 15%.
Headquarters: Overland Park
Share price: $65.30
Market value: $2.2 billion
Compass Minerals produces two products, salt and sulfate of potash, more cheaply than its competitors. Compass’s rock salt mine, given its unique geology and location near a deepwater port, allows the company to efficiently deliver salt to customers who use it to deice frozen highways. And although sulfate of potash, a specialty fertilizer, is typically produced by adding sulfuric acid to standard potash at high temperatures, Compass makes its potash directly from salt brines, at a significantly lower cost.
CFRA analyst Christopher Muir says Compass’s strong market position in salt allows the company to generate stable free cash flows (cash generated after capital expenditures). The company is committed to returning that cash to shareholders, and it recently raised its quarterly dividend for the 14th consecutive year, a 4% bump to 72 cents a share, for a yield of 4.4%. Despite warm weather in 2016 and early 2017, sales of salt used for deicing should rise later this year, says Muir, contributing to 22% sales growth estimated for Compass in 2017. And despite near-term pricing challenges in the potash market, he sees long-term growth in Compass’s fertilizer sales. He rates the stock a “buy,” with a 12-month price target of $72, representing a potential 10% gain in the stock’s price.
Share price: $34.19
Market value: $51.6 billion
Eight years after filing for bankruptcy protection, Motor City’s biggest automaker has a simple plan for success: Keep costs low and quality high.
GM has excellent earnings potential, says Morningstar analyst David Whiston, even though analysts expect U.S. light vehicle sales overall to stay flat or dip in upcoming years. The cars rolling off GM’s line boast the best quality and design in decades, he says. And the company has cut costs, reducing its North American division to just four brands, down from eight, for example, and negotiating benefit concessions with union workers. Whitson says GM's North American business could still break even if annual U.S. auto sales were as low as 10 million to 11 million cars per year (they hit a record 17.6 million in 2017). The company’s new structure, he believes, will allow it to realize solid earnings growth during upswings and not lose money during down economic cycles.Morningstar believes the stock is fairly valued at $51 a share, which would be up 49% from current levels. CFRA analyst Efraim Levy, who rates the stock a “strong buy,” assigns a more modest 12-month price target of $42 a share. With a yield of 4.4%, GM’s total return represents an attractive opportunity.
Share price: $89.09
Market value: $122.0 billion
Medtronic is reshuffling its business lines, joining forces with fast-growing partners and jettisoning laggards. In January 2015, Medtronic, which specializes in therapeutic medical devices such as pacemakers, defibrillators and stents, acquired Covidien, a leader in minimally invasive surgical devices.
With the acquisition, says CFRA analyst Jeffrey Loo, Medtronic becomes a worldwide leader in a diverse array of medical products. Then, in April, Medtronic agreed to sell its hospital-supply business, which focused on patient-care products, to Cardinal Health. Medtronic will use $1 billion of the after-tax proceeds to buy back shares, and it will pay down debt with the remaining $4.5 billion. Analysts at UBS say the sale exemplifies Medtronic’s commitment to selling its less profitable, slower-growing business segments in favor of higher-growth opportunities. The company has also committed to spending $10 billion on research and development in the U.S. through 2024. CFRA’s Loo says the stock is a “buy” and reckons it could reach a price of $100 a share over the next 12 months.
Headquarters: St. Louis
Share price: $116.84
Market value: $51.2 billion
One apparent fan of a proposed merger between German drug and pesticide manufacturer Bayer and seed giant Monsanto: Warren Buffett. Berkshire Hathaway disclosed in February that it bought 8 million shares of Monsanto during the fourth quarter of 2016, after the merger announcement in September. Should the deal meet regulatory approval, Bayer will acquire Monsanto for $128 a share in an all-cash transaction. Morningstar analysts say there’s an 80% chance the deal will close by the end of the year, given the lack of broad overlap between the two companies and, therefore, few antitrust arguments against the merger. The regulatory go-ahead would mean a merger arbitrage opportunity for holders of Monsanto stock, which trades at a 9.4% discount to Bayer’s offer price. Should regulators kill the merger, Bayer has agreed to pay Monsanto $2 billion as a “break-up fee.”
Either way, says CFRA analyst Christopher Muir, Monsanto is a leading innovator in genetically modified produce, and an increasing share of crops worldwide reflect Monsanto’s mark. The company’s dominant market position should allow it to command higher prices, which Muir believes will drive above-average long-term earnings growth. His 12-month price target for the stock matches Bayer’s offer price at $128.
Share price: $107.39
Market value: $86.7 billion
Shares of Union Pacific have been ho-hum this year, returning only 5% as the company has struggled with inconsistent shipping volumes and weak pricing due to competition from truckers and other railroads. But the country’s biggest railroad is barreling full-steam into the second half of 2017. Analysts at Credit Suisse say shipping volume is picking up, and Union Pacific’s transport prices have likely bottomed.
Factoring in productivity gains and increased demand for transported goods, including coal and “fracking” sand used in oil and natural gas production, Credit Suisse sees earnings per share up 14% this year, followed by a 14% boost in 2018. Income-oriented investors should note that the company more than tripled its dividend from 2010 to 2016. The stock currently yields 2.3%. Credit Suisse analysts are bullish on the stock, believing it can appreciate 22%, to $131, over the next 12 months.
Share price: $27.11
Market value: $5.3 billion
It’s steady-as-she-goes for MDU Resources, which operates in two main business segments: construction materials and services, and electricity and natural gas utilities.
In an effort to tamp down earnings volatility, the company jettisoned its oil and natural gas production and exploration division last year, thus reducing its exposure to prices for those commodities. After years of up-and-down earnings and revenues, MDU appears to be on a modest growth track. On the construction side, the company stands to benefit from increasing funding for transportation infrastructure projects, including those that stem from an Obama-era spending plan, says Value Line analyst Dominic Silva. MDU is among the largest sand and gravel suppliers in the U.S. On the utility side, the company operates in eight states where customer growth should outpace the national average over the next five years. Silva says the shares are timely, with potential to provide a good total return over the next three to five years. Helping matters on that front is the company’s dividend, which has grown for 26 straight years, making MDU a dividend aristocrat – a company that has increased its dividend for at least 25 consecutive years. The stock currently yields 2.8%.
Share price: $354.75
Market value: $33.0 billion
Shares of paint giant Sherwin-Williams have been on a tear, but they could still climb higher.
The company agreed in March to buy fellow paint company Valspar for $113 per share. CFRA analyst Christopher Muir expects the deal to meet regulatory approval and close in August, and he believes the combined company will be able to achieve $320 million in annual savings within the next four years. The merger will drive earnings growth, says Dmitry Silversteyn, an analyst at investment research firm Longbow Research. Moreover, the combined company should be able to use its prodigious free cash flow to pay down debt while still accelerating growth of its dividend. Long-term demographic trends lend rosy growth prospects to the company, as expected strong housing starts, driven by millennials buying their first homes in coming years, should support paint sales. Silversteyn rates the stock a “buy” with a 12-month price target of $400.
Headquarters: Rapid City
Share price: $70.52
Market value: $3.8 billion
Black Hills is the parent company of Black Hills Energy, a gas and electric utility in the Midwest and western U.S. The company also mines coal, and it has a gas and oil exploration and production business.
Last year’s earnings dipped, largely due to the acquisition of SourceGas in February 2016, which cost Black Hills 56 cents per share in merger expenses. Those costs put a damper on what is typically the company’s strongest earnings season, says Value Line analyst Paul Debbas. But with the integration largely complete, earnings are poised to grow this year by 12% and then by 10% in 2018, say analysts at Credit Suisse. They say the company is working to significantly cut costs and reduce debt through 2019, at which point they expect Black Hills to pursue growth opportunities through reinvestment in the business and possible mergers and acquisitions. Credit Suisse assigns the stock an “outperform” rating with a 12-month price target of $73.
Share price: $160.53
Market value: $20.7 billion
Rockwell manufactures and develops software and equipment that companies use to automate their factories. The company is a leader in the “Internet of Things” – its ethernet-enabled Logix system provides data collection, monitoring and analytics from the factory floor to managers accessing the system online. The system can enable both discrete manufacturing (which creates many duplicate products -- on an assembly line, for instance) and process manufacturing (which produces large batches based on formulations or recipes). “As factory operators seek to cut costs and drive operating efficiency, the two methods increasingly overlap,” says Morningstar analyst Barbara Noverini.
That’s a sweet spot for Rockwell in a traditionally bifurcated industry. CFRA analyst Joe Agnese expects improving demand for Rockwell’s products and services in 2017, particularly from manufacturers in the consumer products and automotive industries. His 12-month price target of $179 represents a 12% increase over the current share price. What’s more, after a 6% bump in March, the company has now hiked its annual payout for eight straight years. The stock currently yields 1.9%.
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