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All Contents © 2017The Kiplinger Washington Editors
By Ryan Ermey, Staff Writer
| July 2017
As part of our tour of the United States of Stocks, we took at closer look at publicly traded companies based in the southern states. Our list of 17 companies includes multinational blue-chip behemoths (the world's largest retailer is among them) as well as a number of smaller firms.
A word of caution: Since we picked a single stock from each state in the South and the District of Columbia, and choices in some places 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 stocks in the South to buy now.
Share price: $129.34
Market value: $17.1 billion
Price-earnings ratio: 31
The nation’s leading producer and distributor of crushed stone, Vulcan is trading near an all-time high thanks to a run-up in the stocks of building-materials companies following the presidential election. And if the current administration goes forward with its plan to spend $1 trillion to revamp the nation’s infrastructure, few companies stand to benefit more than Vulcan.
But considering the uncertainty surrounding the Trump White House lately, it’s good for investors that an infrastructure bill would only be icing on Vulcan’s already growing cake. Matt Miller, an analyst at stock research firm CFRA, sees private construction spending rising more than 10% in 2017. Supported by a steady recovery in nonresidential construction, he says, Vulcan’s earnings will grow by 57% in 2017, to $4.50 per share, followed by a 29% bump in 2018, to $5.80 a share. Miller rates the stock a “strong buy” with a 12-month price target of $160.
Share price: $75.52
Market value: $227.7 billion
Wal-Mart is the world’s largest retailer, at least in terms of floor space, with Wal-Mart, Sam’s Club and Wal-Mart International accounting for some 1.2 billion square feet worldwide.
Square footage didn’t help brick-and-mortar shops when the big, bad wolf known as Amazon came to blow them down, and Wal-Mart’s shares fell along with those of other retailers on news of Amazon’s bid for grocer Whole Foods. But Wal-Mart is making moves to better compete with the e-commerce giant, says Kevin Downing, an analyst at stock research firm Value Line. Wal-Mart recently launched free two-day shipping on orders of more than $35 (no membership required), and it introduced a discount, to take full effect by the end of June, on more than 1 million online-only items if customers are willing to ship them to their local store for pickup. In addition to buying Amazon rival Jet.com, the company has acquired online retailers Hayneedle, Shoebuy and Modcloth, with an acquisition of trendy men’s fashion start-up Bonobos in the works. Wal-Mart’s e-commerce strategy is paying off, says Downing. The retailer posted a 63% year-over-year gain in e-commerce sales for the quarter that ended in April 2017. What’s more, the company hopes to improve customers’ in-store experience, having raised wages and invested in employee training. These factors should spark modest earnings-per-share growth for the fiscal year ending January 2018, after two years of decline, says CFRA analyst Joseph Agnese. He rates the stock a “strong buy” and says the shares could trade at $87 over the next 12 months.
Share price: $81.34
Market value: $70.5 billion
In December 2015, DuPont agreed to merge with fellow chemical giant Dow Chemical. Having received regulatory approval in Europe and the U.S., the deal is expected to close in August. The “merger of equals” will result in a new company, to be called DowDuPont, equally owned by Dow and DuPont shareholders and dually headquartered in Delaware and Michigan. The companies’ management teams estimate the deal will create $3 billion in annual cost savings in the first 24 months for the combined company and add $1 billion in annual earnings growth in the first 36 months.
CFRA analyst Christopher Muir is bullish on the merger and believes post-merger shares could gain 11% in the 12 months following the deal. Upon completion of the merger, executives from the two companies are mulling the possibility of breaking the company into three more-focused publicly traded companies. Whether it splits up or remains intact, Muir believes DowDuPont will be well positioned to capitalize on long-term increases in demand for agricultural products, as well as take advantage of global economic growth.
Headquarters: Washington, DC
Share price: $85.96
Market value: $59.7 billion
Even after spinning off a number of units into a new, publicly traded company called Fortive (FTV) last year, Danaher is still an amalgam of a lot of different businesses. The company makes research tools for scientists, diagnostic and treatment tools for medical professionals, and products and services aimed at protecting the planet’s water supply.
Operating under these broad umbrellas, Danaher remains a serial acquirer that looks to scoop up innovative but underperforming companies from which it believes it can wring out extra profits. Value Line analyst Erik Manning says the strategy is “a proven winner over time” and should have earnings nearing $4 a share this year, an 18% bump from last year’s $3.34 per share. Analysts at Credit Suisse say Danaher’s shares are undervalued compared with the shares of the company’s peers and see a growing enthusiasm for Danaher’s diverse portfolio of companies that the analysts believe could propel the stock to $93 over the next 12 months.
Share price: $112.15
Market value: $24.1 billion
There’s a lot to like about a company that keeps its promises to investors, and Royal Caribbean appears to be doing exactly that. Under its “Double Double” initiative, announced in 2014, the company set out to increase the return on investor capital (a measure of the return a company makes on each dollar invested in the business) to a double-digit annual rate, and to double earnings per share by 2017. Here we are in 2017, and Value Line projects return on investor capital this year of 10%, up from 5.9% in 2014. And Wall Street analysts, on average, expect the company to post $7.20 in earnings per share this year, more than twice 2014’s figure of $3.43 per share.
Investors have taken notice: The stock has soared 38% since the beginning of the year. But analysts still view the stock favorably. Value Line analyst Adam Platt notes that bookings for 2017 are already above last year’s record high, and they are being issued at higher prices. He adds that the addition of new ships should drive earnings growth through 2022, with newer ships yielding more revenue per room and proving more cost-efficient to run. Analysts at Wedbush are bullish on cruise-line operators overall, and Royal is their top recommendation, given its attractive mix of growing profitability and robust cost controls. They see the stock hitting $117 over the next 12 months.
Share price: $45.07
Market value: $192.6 billion
By the end of this year, Coke expects to finish selling its corporate-owned U.S. bottling system to franchisees. This process, called “refranchising,” should ding revenues of the legendary beverage-maker in the short run. Wall Street analysts, on average, expect sales to dip 17% this year, accompanied by a 2 cent slide in earnings per share, to $1.88. But the move represents the beginning of an important shift for the company, say analysts at Credit Suisse—one that allows the company to focus on building great brands while franchisees worry about day-to-day bottling operations.
Under the leadership of CEO James Quincey, who took the reins May 1, Coca-Cola is positioning itself as a “total beverage company,” according to Credit Suisse, with plans to make and market five categories of beverages: Carbonated soft drinks, coffee and tea, energy drinks, juice and dairy drinks, and water and sports drinks (in order of market share). Coke’s strong balance sheet gives it the flexibility to create new revenue streams through strategic brand acquisitions, says Credit Suisse. Analysts there believe the company is positioned to unlock earnings growth at the fastest rate in at least five years, and they rate the stock a “buy,” with a 12-month price target of $49. Coke’s generous dividend will compensate investors while they wait for Coke’s restructuring to boost earnings growth. Coke recently hiked its dividend for the 55th consecutive year; the stock currently yields 3.3%.
Share price: $74.54
Market value: $26.0 billion
Even if you haven’t heard of Yum Brands, chances are you’ve eaten at one of its more than 43,000 restaurants—mostly KFC, Pizza Hut and Taco Bell locations—which operate in more than 135 countries and territories.
Last November, the quick-service restaurant giant completed plans to spin off its China division, accounting for 17% of the company’s stores. The division has since operated as a franchisee, paying royalties to Yum for sales in China. The move marked the beginning of a transformation in which Yum intends to shift 98% of its stores to a franchisee ownership structure by 2019, up from 77% last year and 93% post spin-off. While the spin-off initially lowered the company’s revenues, the plan should result in higher profit margins and more-stable income, says Value Line analyst Robert Greene. Yum expects to cut annual spending on plant and equipment to $100 million in 2019, down from $500 million in 2015, and reduce operating expenses by a cumulative $300 million over the same period. These cost savings combined with the company’s commitment to reducing its share count via buybacks will drive 13% annual growth in earnings per share through 2018, says CFRA analyst Tuna Amobi. The dividend yield, though modest at 1.6%, should keep pace; Yum has hiked its quarterly payout by double-digit percentages every year since 2004. Amobi sees Yum’s stock hitting $78 over the next 12 months and rates it a “strong buy.”
Share price: $24.35
Market value: $13.4 billion
The third-largest telephone company in the U.S., CenturyLink provides broadband, voice and wireless services to residential and business customers.
The company’s stock plummeted last October when it announced plans to acquire telecom rival Level 3 Communications, likely over investor concerns that CenturyLink was overpaying, says Value Line analyst Daniel Henigson. That the company reported a 4% year-over-year revenue decline in the first quarter didn’t improve investor sentiment, and long-term concerns remain about wireless providers depleting CenturyLink’s highly profitable landline business. Though cautious about the revenue declines, CFRA analyst Angelo Zino says the company’s sales are growing in more-profitable areas, such as high-bandwidth broadband, and the Level 3 acquisition should increase CenturyLink’s geographic reach (the new company will serve some 350 metropolitan areas in more than 60 countries). He adds that the company has plenty of cash to support its mouth-watering dividend—the stock yields 8.9% annually. He rates the stock a “buy,” with a 12-month price target of $28.
Share price: $73.20
Market value: $17.7 billion
Like all active asset managers these days, T. Rowe Price faces pressure to win investor dollars that are increasingly finding their way to passively managed mutual funds and exchange-traded funds. But the venerable fund house’s first-quarter results were still respectable. The company posted a 12% increase in sales over the same quarter last year, as assets under management rose 16% and investment advisory fees rose 14%. (Advisory fees account for more than 80% of the firm’s annual revenues.) Value Line analyst Frederick Harris expects earnings growth of 12% this year and a more modest 4% in 2018. But the performance of T. Rowe’s funds is encouraging. Through March, 82%, 79% and 85% of T. Rowe’s mutual funds beat their peers on a three-, five-, and 10-year basis, respectively. The funds’ strong relative performance should continue to attract investor assets, says CFRA analyst David Holt. And because about two-thirds of the company’s managed assets are in retirement accounts, he adds, T. Rowe boasts a higher rate of asset retention than that of many competitors. He rates the stock a “buy,” with a 12-month price target of $79. Following a 5.6% bump, the company’s quarterly dividend stands at 57 cents per share, for a yield of 3.1%.
Share price: $46.05
Market value: $3,892.1 million
Hancock provides financial services to customers in the Gulf South region through its subsidiaries, Hancock Bank, which operates in Alabama, Florida and Mississippi, and Whitney Bank, purchased in 2010, operating in Louisiana and Texas.
Results have been mixed since the merger, with charge-offs on loans made to energy companies dinging profits in recent years. But things may be looking up. In April, the bank acquired $1.6 billion worth of deposits, $1 billion in assets (mostly cash) and 29 branch locations from failed First NBC Bank in a transaction with the Federal Deposit Insurance Corporation. This was just five months after Hancock purchased $1.3 billion in loans directly from First NBC, along with $500 million in deposits and nine branches. Value Line analyst Michael Ratty says the deals should help the company boost earnings this year, as should growth in fee revenues and interest income. And with energy companies stabilizing, Hancock can set aside much less money for nonperforming loans. Wall Street analysts, on average, expect earnings to increase 40% this year, followed by a 21% jump in 2018. “HBHC shares have been in the penalty box for far too long,” says David Long, an analyst at financial services company Raymond James. He rates the stock a “strong buy” with a 12-month price target of $54.
Share price: $22.25
Market value: $8.1 billion
Known for brands such as Hanes, Champion, Playtex and Maidenform, Hanesbrands manufactures and sells undergarments, as well as activewear, and sporting and intimate apparel.
In recent years, the company’s mantra has been “sell more, spend less, generate cash.” With growth stagnating among its core undergarment brands, Hanes has found ways to sell more through acquisition. Three foreign companies Hanes acquired last year – Champion Europe, Champion Japan and Pacific Brands – are expected to add $420 million to revenues this year. Amplifying the “spend less” and “generate cash” themes is the recently announced Project Booster, a pledge to generate $100 million in annual cost savings and $300 million per year in additional cash from operations by 2020. Unlike most clothing companies, Hanes primarily operates its own manufacturing facilities, which means acquisitions can be cheaply and efficiently incorporated into its business, and the company has done a good job of harnessing acquisitions to drive earnings growth, says Morningstar analyst Bridget Weishaar. She adds that temporary factors – such as last year’s industrywide lag in sales of basic apparel, including underwear, T-shirts and socks – have knocked down the stock, creating an opportunity for investors to buy shares on the cheap. Morningstar’s $34 “fair value” estimate implies an increase in the stock price of more than 50%. And investors receive a generous dividend. The company hiked its payout by 36% in March; the stock yields 2.7%.
Share price: $68.50
Market value: $15.6 billion
Magellan is a master limited partnership (MLP) that operates pipelines and storage terminals for crude and refined petroleum products in the central and eastern U.S. Income investors have long favored Magellan for its stable, fee-based business, which helps insulate the company from swings in commodity prices. Even so, earnings were pressured recently by a downswing in oil prices that decreased demand for refined petroleum products, although the company remained among the most profitable in its peer group, says Morningstar analyst Jeffrey Stafford. Shares now trade well below historical averages, says CFRA analyst Stewart Glickman, and the company is in an excellent position to capture an uptick in demand for refined products. What’s more, Magellan ended 2016 with enough available cash to cover 140% of its cash distribution to shareholders, which Glickman believes will grow by 10% in 2017. He rates the stock a “strong buy” and sees shares hitting $92 over the next 12 months.
Share price: $87.61
Market value: $4.2 billion
Blackbaud develops and services software used by philanthropic, higher-education and nonprofit organizations to manage their finances and member relations.
None of the company’s competitors offer the extensive suite of services that Blackbaud does, giving the firm a significant edge, says Morningstar analyst Rodney Nelson. Because Blackbaud’s software handles complex processes, it’s costly and difficult for companies to switch to a competing service, and more than 90% of Blackbaud’s customers renew their service contracts annually. Blackbaud boasts a roster of more than 35,000 customers, and it has a massive revenue lead in what Nelson calls an “underpenetrated and expanding” market for such software sales, currently commanding $6.3 billion in annual revenues. In recent years, the firm has grown by acquisition in all of its markets. Analysts at Stifel are encouraged by recent financial results, with the company expanding year-over-year revenue growth while migrating customers away from traditional service contracts to its more profitable subscription-based cloud software. They rate Blackbaud a “buy” with a 12-month price target of $96.
Share price: $66.61v
Market value: $8.6 billion
Scripps owns Food Network, HGTV, DIY Network and the Cooking Channel, along with other national television networks. The company owns 98% of the content it airs on its channels, and it produces programming more cheaply than competitors. Scripps spends $550 million annually to create 2,500 hours of content, less than half of what Discovery Communications (DISCA) spends for roughly the same number of hours. Scripps recently inked a deal to bring new short-form programming to Snapchat, in hopes of reaching the next generation of viewers, but its bread and butter comes from its core viewership of wealthy, 24- to 54-year-old women – a lucrative demographic for advertisers. Scripps derives 68% of revenues from ad sales. A recent study found that more than 30% of viewers of both Food Network and HGTV were likely to buy products advertised on the network, “making the channels the most influential in the U.S.,” according to research from Morningstar. CFRA analyst Tuna Amobi rates the stock a “buy” with a 12-month price target of $80.
Share price: $26.00
Market value: $55.7 billion
Enterprise Product Partners is a master limited partnership that owns a network of pipelines and storage depots. It transports and stores natural gas, natural gas liquids, crude oil, refined energy products and petrochemicals. Value Line analyst James Flood calls it “arguably the best-run MLP in the industry.” Another fan, Morningstar’s John Buethe, says that “while many other midstream operators are playing checkers, Enterprise Products Partners is a chess master.” Particularly compelling, says Buethe, is the company’s industry-leading position in natural gas liquids, which should see a 40% boost in demand by 2018. Enterprise ended 2016 with enough available cash to cover 122% of its distribution. That augurs well for more boosts to its payout, which currently stands at $1.66 per unit, for an annual yield of 6.4%. Analysts at Credit Suisse see earnings rising by 15% this year and assign the stock a 12-month price target of $34, along with a “buy” rating.
Share price: $65.20
Market value: $21.3 billion
Hilton’s 812,000 hotel rooms currently represent about 5% of the industry worldwide, but that number is about to go up. Last year, the company signed deals to add 106,000 rooms to a pipeline that now totals 310,000 rooms, with 50,000 to 55,000 slated to become available this year. All told, more than one in five hotel rooms under construction belong to a Hilton brand.
Hilton is focusing on recently launched brands, such as Curio and Tapestry, which aim to combine the benefits of boutique hotels (cozy, intimate and locally focused) with the advantages of being part of a chain (such as a loyalty program). Four of five new customers at these hotels, the company says, are likely to stay at another Hilton property afterward. That bodes well for Hilton’s long-term expansion plan, say analysts at UBS. In the meantime, Bank of America Merrill Lynch analyst Shaun Kelly says that Hilton’s recent renegotiation of a credit card agreement with American Express will boost fee revenues from the co-branded Hilton Honors card . He rates the stock a “buy” with a 12-month price target of $73.
Share price: $37.81
Market value: $1.7 billion
WesBanco is the holding company for WesBanco Bank, which provides financial services at 174 branches in West Virginia, Ohio and western Pennsylvania.
The stock has fallen 11% this year, amid uncertainty surrounding the bank approaching $10 billion in assets – a threshold at which banks face greater regulatory scrutiny. Miguel del Gallego, a portfolio manager at ClearBridge Small Cap Value, which holds the stock, sees the recent dip as an unwarranted discount in the stock’s price. He concedes that near-term earnings could be dinged as management adjusts to more regulation, but he remains confident of the bank’s ability to navigate the process and return to delivering share-price gains and dividends that he says “are among the best, relative to peers.” He adds that the management team has a track record for successful acquisitions under CEO Todd Clossin and that the bank could seek to offset heightened compliance costs by boosting revenues via more mergers. Del Gallego believes $45 a share is a fair value for the stock over the next 12 months, representing a 19% gain on the current share price.
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