The 100 Best Stocks You Can Buy 2012 Part 22

Johnson Controls, Inc.

Ticker symbol: JCI (NYSE) S&P rating: BBB+ Value Line financial strength rating: A Current yield: 1.6%.

Company Profile.

Johnson Controls is a fairly low-profile U.S. manufacturer with three princ.i.p.al businesses that just now happen to all be in favor for the first time in years. JCI is a large manufacturer of automotive parts and suba.s.semblies, heating ventilation and air conditioning (HVAC) and other energy controls, and an a.s.sortment of battery technologies and products. Their products are found in over 200 million vehicles, 12 million homes, and 1 million commercial buildings. Their business operates in three segments: Automotive Experience, Building Efficiency, and Power Solutions.

Their automotive business is one of the world's largest automotive suppliers, providing seating and overhead systems, door systems, floor consoles, instrument panels, c.o.c.kpits, and integrated electronics. Customers include virtually every major automaker in the world, including newer start-ups and plants in China. The company now plans a third plant in that country. The business produces automotive interior systems for original equipment manufacturers (OEMs) and operates in twenty-nine countries worldwide. Additionally, the business has partially owned affiliates in Asia, Europe, North America, and South America. In fiscal 2010, the automotive business accounted for 48 percent of the company's consolidated net sales and 46 percent of profits.

Building Efficiency is a global leader in delivering integrated control systems, mechanical equipment, services, and solutions designed to improve the comfort, safety, and energy efficiency of non-residential buildings and residential properties with operations in more than 125 countries. Revenues come from facilities management, technical services, and the replacement and upgrade of controls/HVAC mechanical equipment in the existing buildings and "smart buildings" market. In fiscal 2009, Building Efficiency accounted for 42 percent of the company's consolidated net sales and 30 percent of profits.

The Power Solutions business produces lead-acid automotive batteries, serving both automotive original equipment manufacturers and the general vehicle battery aftermarket. They also offer Absorbent Gla.s.s Mat (AGM), nickel-metal-hydride, and lithium-ion battery technologies to power hybrid vehicles. Sales of automotive batteries generated 14 percent of the company's fiscal 2009 consolidated net sales and 24 percent of profits.

Financial Highlights, Fiscal Year 2010.

Johnson Controls suffered with the rest of the economy in FY2009 as a large supplier to the automotive and construction industries. FY2010 has been a different story.

A recovery in the auto industry and especially the U.S.based auto industry, combined with greater emphasis on energy-efficient buildings and focus on new battery technologies for electric vehicles have combined to not only bring JCI out of the doldrums but to bring in revenues and profits steadily beating forecasts. Revenues at the Automotive Experience group were 18 percent ahead of 2009, while Power Systems surged 19 percent and Building Efficiency logged a cool 10 percent increase.

Business is good, and a strong international component is making it better. The company raised 2011 guidance for a 12 percent sales increase with earnings in the $2.50$2.55 range compared to $2.00 in FY2010.

Reasons to Buy.

As previously noted, JCI is. .h.i.tting on all cylinders right now, with a resurgent automotive manufacturing climate, strong demand for energy-efficient buildings, and even stronger demand for effective battery technologies for current and future applications.

JCI will be a major partic.i.p.ant in the coming automotive applications of lithium battery technology. They are already in the 2009 Mercedes S-cla.s.s hybrid and are the exclusive suppliers to the upcoming (2012) Ford plug-in hybrid for its battery and battery controls. Johnson's joint venture with Saft Advanced Power Solutions (JCS) is also providing lithium-ion batteries to the Dodge Sprinter development program. JCI's subsidiary Varta has set up a JCS development center in Hanover, Germany, to support the European market.

Finally, we see plenty of opportunities to expand into overseas markets that, until recently, haven't held much promise for the company.

Reasons for Caution.

Needless to say, the automotive and building efficiency businesses can be intensely cyclical and economically sensitive; in fact, the construction industry is still in its doldrums or else JCI would be making even greater revenue and earnings gains. Also, JCI is a leader in the race for the next automotive power technology, but there's no guarantee that lithium will be the clear winner. Other technologies are making progress as well, and the politics of lithium sourcing are far from settled. Finally, operating margins in the 7 percent range don't leave much room for error.

GROWTH AND INCOME.

Kellogg Company.

Ticker symbol: K (NYSE) S&P rating: BBB+ Value Line financial strength rating: A Current yield: 3.2%.

Company Profile.

Founded in 1906, Kellogg is the world's leading producer of breakfast cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts, and cones.

The company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Special K, Murray, Austin, Morningstar Farms, Famous Amos, Carr's, Plantation, and Kas.h.i.+.

The company operates in two segments: Kellogg North America (NA) and Kellogg International, with NA generating just under two-thirds of the company's revenue. NA operations are further divided into Cereals, Snacks, and Frozen/Specialty categories. International operates as three regional ent.i.ties: Europe, Latin America, and Asia Pacific. The company produces more than 1,500 different products, manufactured in nineteen countries and marketed in more than 180 countries around the world.

Kellogg is a conservatively run company, emphasizing long-term thinking and leveraging existing brand strengths while keeping a sharp focus on cost savings. They've created and manage to several internal measures of financial performance that are geared toward sustainable long-term growth.

Financial Highlights, Fiscal Year 2010.

Kellogg hit a bit of a flat spot during the 200910 period, as increased compet.i.tion from Ralcorp ("Post" brand) and a recall of some Eggo frozen waffle products. .h.i.t the bottom line. Compet.i.tion and some price cutting pressure in both the United States and Europe led to 5 percent sales declines, and in combination with increased marketing costs, led to as much as a 14 percent drop in earnings during FY2010 quarters. For 2011, the company projected a currency-neutral sales growth in the low single digits, a flat to slightly off net profit performance, and a low single-digits growth in earnings per share. Flat profits with EPS growth, of course, suggests stock repurchases, and the company has been fairly aggressive with them, buying back between 10 and 20 million shares per year and some 50 million of its 2004 reported 413 million share count since that year.

Reasons to Buy.

Kellogg owns just over a third of the U.S. market for ready-to-eat cereals, which makes them the most recognized brand and market leader in probably the most mature food category in the world. But, having invented it over a hundred years ago, they continue to respond to customer demand for new and interesting products, many with a health bent. In 2009, for instance, they released Special K Chocolatey Flakes, and added dietary fiber to Corn Pops, Apple Jacks, and Froot Loops. In 2010, they rolled out Eggo Thick & Fluffy waffles, Frosted Flakes with Fiber, "Scrabble" Junior Fruit Flavored Snacks, and three flavors of Special K cracker chips, Kellogg's strategy since 2001 has been to "win in cereal and expand snacks," meaning "hold onto market share in the mature segment and grow the newer segment with product innovation." This has worked well for them, as 25 percent of their revenues are from cereals, and snacks have grown (organically and through acquisition) to 30 percent of overall revenue. If they continue to succeed with this strategy we can expect to see continued steady growth in the top line; in addition they are working toward the stated goal of $1 billion in cost savings by the end of 2011.

We like Kellogg's growth in international markets. As discretionary income rises, so does consumption of prepared foods, and the international markets will reward companies that have the right products. Special K, for example, is growing at double-digit rates internationally and at triple-digit rates in India.

The company has a compelling history of slow but steady growth. Kellogg has been accelerating dividend growth in recent years; combined with share buybacks, the total shareholder return package and inherent safety make Kellogg a stock that will let you sleep at night.

Reasons for Caution.

Particularly in a soft economy, Kellogg faces threats from generic and store-branded products, especially on the cereal aisle. Price compet.i.tion is intense and required advertising and marketing spending can further eat into profits. Growth prospects beyond the single digits for this type of company are unlikely. The company also faces some exposure to commodity price increases, although they are well hedged for such increases.

GROWTH AND INCOME.

Kimberly-Clark.

Ticker symbol: KMB (NYSE) S&P rating: A Value Line financial strength rating: A++ Current yield: 4.3%.

Company Profile.

Kimberly-Clark develops, manufactures, and markets a full line of personal care products, mostly based on paper and paper technologies. Well known for their ubiquitous Kleenex brand tissues, KMB also is a strong player in bath tissue, diapers, feminine products, incontinence products, industrial and health carerelated paper products, and others.

The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. The Personal Care segment provides disposable diapers, training and youth pants, and swimpants; baby wipes; and feminine and incontinence care products, and related products. Brand names include Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend, and Poise. The Consumer Tissue segment offers facial and bathroom tissue, paper towels, napkins, and related products for household use under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle, and Page brands. The K-C Professional & Other provides paper products for the away-from-home, that is, commercial/inst.i.tutional marketplace under Kimberly-Clark, Kleenex, Scott, WypAll, Kimtech, KleenGuard, Kimcare, and Jackson brand names. The Health Care segment offers disposable health care products, such as surgical drapes and gowns, infection control products, face masks, exam gloves, respiratory products, pain management products, and other disposable medical products.

To give an idea of what drives growth at KMB, in the first quarter of 2010, Personal Care sales grew 8.1 percent, consumer tissue grew 2 percent, K-C Professional & Other products grew 12.1 percent, and Health Care products grew at a 23.2 percent rate.

The company sells its products to a variety of retailers, ma.s.s merchandisers, and distributors. Wal-Mart accounts for some 13 percent of sales. Sales have been centered in the United States, but the company is reaching out to foreign markets. The company was founded in 1872 and is headquartered today in Dallas, Texas, with a historical, technology, and manufacturing base in the Fox River Valley in Wisconsin.

Financial Highlights, Fiscal Year 2010.

Kimberly-Clark experienced a moderate drop in revenues in 2009 as consumers became more thrifty and steered clear of premium brands. Organic revenue growth came in slightly lower than earlier projections, but the company regained a low single-digits growth pace with $19.7 billion in revenues. Price increases and strong international sales continued to be a big part of the story. On the profit front, the company reported FY2010 earnings of $4.45 per share, slightly off from $4.52 in 2009. Earnings were aided by ongoing cost-cutting efforts stemming from its rather bluntly named "Project FORCE"Focus on Reducing Costs Everywhereprogram. These costs cuts were offset by higher raw pulp and other commodity prices, which will bear watching going forward.

For FY2011, the company is expecting earnings growth in the 35 percent range, or $4.90$5.05, on revenues of $20.4 billion. More encouraging was the announcement of the latest dividend increase, to $2.80 per year from the previously indicated $2.64. The dividend has doubled since 2003; on top of that, the company has retired about 20 percent of its outstanding shares since that time.

Reasons to Buy.

Kimberly-Clark has shown itself to be a steady business in all kinds of economic climates. The high yield and strong track record of raising dividends and buying back shares is a definite plus. Strong cash flow has financed these initiatives as well as funding international expansion and enhanced marketing efforts. With a dividend well over 4 percent and growing, share buybacks, and steady performance, the company seems to make shareholder interests a priority.

The company has stellar brands, and should do well expanding them into overseas markets, a relatively untapped frontier compared to some of its peers. Also, compared to some peers, especially Procter & Gamble, the company is less inclined to go for "glamour" markets such as cosmetics, choosing instead to add to margins through operating efficiencies and scale. Safety-oriented investors may find this approach preferable. In addition, Value Line gives the company an "A++" for financial strength and a top rating for safety, the latter of which it has maintained since 1990.

Reasons for Caution.

While the paper products business is steady, it isn't easy to see where growth would come from. The company, rightly so, is targeting international expansion, but compet.i.tion and currency fluctuation make the results far from certain. The cost of pulp and paper raw materials can also be highly volatile. Investors should focus on income and safety with this issue; any growth would be a plus.

GROWTH AND INCOME.

Lubrizol Corporation.

Ticker symbol: LZ (NYSE) S&P rating: BBB+ Value Line financial strength rating: A Current yield: 1.3%.

Company Profile.

Lubrizol has been "taken out" by Berks.h.i.+re Hathaway in a $9.7 billion deal ($135 per share) announced March 14, 2011, meaning that you are no longer able to invest directly in this company. However, we retain the issue on our 100 Best list for now, first, because the transaction isn't complete and second, and more importantly, to present a good model for what Warren Buffett seeks in companies he acquires.

Lubrizol produces and supplies specialty chemicals and other materials that improve the quality and performance of its customers' products in the global transportation, industrial, and consumer markets. Typical applications include fluid additives for engine oils, gasoline, and diesel fuel; machine lubricants; and additives, coatings, thickeners, and other performance, consistency, and protective additives for pharmaceuticals and specialty materials. A maker of everything from hydraulic fluid to polymer thickeners for skin cream, the company could be easily described as a "high tech" chemical company, as exemplified by the recent press release "Permax 805 Vinylidene Chloride Emulsion Provides APE-Free, Corrosion Resistant Solutions for Metal Substrates." Pretty s.e.xy stuffif you're in the right industrial/commercial audience.

The company is geographically diverse, with global manufacturing, supply chain, technical, and commercial infrastructure targeted to serve a technically advanced audience. They operate production and/or laboratory facilities in twenty-seven countries, in key regions around the world. Lubrizol sells its products in more than 100 countries.

The company reports results from two segmentsLubrizol Additive and Lubrizol Advanced Materials.