Birmingham Capital Management recently disclosed its 13F filings. The fund majorly invests in consumer goods companies that form ~22% of its portfolio followed by industrial goods companies that are ~16.5% of its portfolio. As per the recent filings, the company entered a new position in Colonial Properties Trust, a Birmingham based real estate investment trust primarily investing in office and retail properties in the US. Aside from that, the fund has increased its positions in around 24 stocks including Energen Corporation (NYSE:EGN), PepsiCo, Inc. (NYSE:PEP), Verizon, AT&T, Philip Morris, ExxonMobil, Duke Energy, McDonald’s, etc. In this article, I have picked three of my favorite stocks from their positions.
|Companies||Increase from the previous filings|
Philip Morris International Inc. (NYSE:PM)
Tobacco companies in the US are currently operating in a gloomy economic environment that was reflected in the underperformance of their stocks in 2H12. Overall cigarette volume growth is limited, which is impacting the total sales of tobacco companies. But, I feel there are two factors which could reverse the scenario in 2013. First, the increase in cigarette prices in the industry. Second, the emerging markets’ growth to offset the decline in the mature markets. On similar lines, the international focus of Philip Morris has helped it to escape the industry’s headwinds. Among the international regions, I am highly confident about Asia as a strong opportunity for the company to improve its consumer base. Markets, such as Indonesia, with limited regulations and overall acceptance of cigarette consumption provide a good potential upside to Philip Morris’s sales volume. I expect the company’s market share in Asia to gradually increase from ~21% in 2009 to ~35% by the end of 2013. This is a significant upside catalyst for the company’s stock, as the Asian operations contribute around 45% to the company’s stock value.
On the less positive side, what might hold back investors is the large tax hikes on cigarettes in the Philippines. It is an important market to the company, as it holds around 90% of the share in that region. These hikes will be gradually increased till 2017. Based on these hikes, I expect the sales volumes to decline by 25% which could drag EPS by ~4 cents in 2013.
However, I feel that despite the mounting macro factors, Philip Morris is well placed with a combination of double digit EPS growth and an attractive ~4% dividend yield. I am bullish on this stock for the long-term.
Energen Corporation (NYSE:EGN)
Energen recently reported its 4Q12 results in which its 2012 overall oil production jumped ~40% as compared to last year. The company witnessed a good year mainly due to its record activities (production increased by ~44%) in the Permian Basin that now forms around 65% of the company’s proved reserves. As a result, the company’s operating revenue increased by ~50% y/y to ~$433 million. The company has announced that it will invest ~$975 million in 2013 focusing mainly on development of its assets in the Permian Basin in Texas. I feel this move will help the company to further boost its production in 2013 which would help in enhancing its revenue. But, on the less positive note, the company’s EPS of ~$0.65 was towards the lower end of the guidance range mainly due to the LOE (lease operating expense) which increased ~1% to ~$12.73 per BOE.
Following the results, the company has increased its quarterly cash dividend by ~3.6% which will be paid on 1 March ’13. This is the 31st consecutive year in which the company has hiked its dividend, raising its yield to ~1.20%. This steady dividend payout provides an attractive risk-return opportunity to the investors.
Moving on to 2013, the company is looking to add new locations in the Delaware Basin that is famous for holding large oil fields. Towards the end of 2012, Energen drilled four Wolfcamp wells in this basin that are still under completion. In 2013 the company plans to drill 12 more test wells in Delaware Wolfcamp and 6 wells in Wolfcamp/Cline in Midland Basin. The development program in the latter case will only begin in late 2013. Therefore, I feel the potential benefits will start flowing in 2014 and beyond. I would recommend a hold rating for the stock for the short-term. But if you are targeting a stock on the long term horizon, this surely is a good bet.
PepsiCo, Inc. (NYSE:PEP)
Pepsi is also among those beverage companies in the US which are struggling against the mounting pressures of health related issues of the carbonated drinks. The company generates ~14% of its CSD (carbonated soft drinks) sales from North America, which is likely to get affected by the troublesome trends in the market. Despite this, the company has maintained a decent average dividend yield of ~2.8% in the last five years and the forward yield is ~3.0%. This is the reason why investors still have not lost their confidence in the company. Under this tremendous pressure, the company has resorted to various promotional campaigns to enhance its market share. In the future, the company plans to spend ~$500 million in 2013 on promotions of Gatorade, Mountain Dew, Pepsi, and Tropicana. The promotions would mainly focus on North America where the company is facing a tough fight from Coca-Cola. I see this move as an important one to improve the company’s sales in this region.
Another positive aspect for the company is its snacks division. Pepsi’s snacks division has been operating well in the last few years as is currently the most profitable segment. It is consistently maintaining a good operating margin of ~20% for the last five years. This provides a huge opportunity in front of the company to enhance its overall profitability. I see Pepsi as a company with a favorable product mix, right international exposure, and high cash flow for supporting its promotional activities. And, I expect the company’s revenue growth to be in the middle single digits in 2013.
To end, I feel both Philip Morris and PepsiCo are placed in tough macro conditions in their respective industries. However, the strong international focus and a healthy portfolio have always helped these companies offer attractive returns to shareholders. I recommend a buy rating for these two stocks. On the other hand, Energen’s short term prospects remain uncertain over its long development programs. Therefore, I will stick to my hold rating for this stock.
The article 2 Stocks You Must Buy Despite A Gloomy Industry Outlook originally appeared on Fool.com and is written by Madhu Dube.
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