Growth from Two Old Hands

12/29/2006 12:00 am EST

Focus:

Richard Moroney

Editor, Dow Theory Forecasts

Demonstrating that you don't have to buy speculative stocks to achieve decent growth rates, veteran investor Richard Moroney, offers his take on two old-school businesses that continue making their marks with impressive growth, but also strong fundamentals...

"FedEx (FDX NYSE) the world's leading provider of guaranteed express-delivery services, operates in 220 countries. FedEx Express accounted for 66% of revenue in fiscal 2006 ended May and international business represented 37% of express revenue. FedEx has increased its capacity on flights between Europe and Asia and expanded its delivery network on those continents. In November, FedEx agreed to buy Prakash Air Freight Private Limited, one of the largest express-delivery companies in India, for $30 million. This month, FedEx paid $234 million for ANC Holdings, a delivery company in the United Kingdom.

"In the November quarter, the company earned $1.64 per share, up 7%. Excluding costs related to a labor agreement, FedEx earned $1.89 per share, well above the $1.76 consensus. The excluded costs could be classified as operating expenses, and the shares fell on the earnings news. Revenue rose 10% to $8.93 billion. FedEx projects per-share profits of $6.60 to $6.90 per share, excluding the labor contract costs in fiscal 2007 ending May, versus the $6.82 consensus. While the fiscal 2007 guidance is unimpressive, FedEx's long-term growth story remains compelling, and the stock retains its Long-Term Buy rating.

"Johnson & Johnson (JNJ NYSE) has more than 230 operating units selling pharmaceuticals, medical devices and diagnostics, and consumer products across the globe. J&J holds leading positions in many market categories. The company stands to benefit from the aging population in the developed nations of North America and Europe and the growing spending power of consumers in emerging markets.

"Generic drugs pose a threat to all pharmaceutical makers, but J&J is better positioned than many of its peers to weather the competition. J&J's strong research-and-development budget ($5.1 billion, or 13% of revenue in the nine months ended September) and solid pipeline of new drugs provide a competitive advantage. This month, the Food and Drug Administration approved Invega, a schizophrenia treatment.

"About 56% of J&J's revenues come from medical devices and consumer products, which have solid growth prospects. An aggressive acquisition strategy should help sustain sales growth. J&J has historically done a good job of integrating its purchase. This month, the Federal Trade Commission approved J&J's $16.6 billion purchase of Pfizer's (PFE NYSE) consumer-products business. Consensus estimates project per-share-profit growth of 9% in 2007 and 7% in 2008, targets the health-care giant should be able to beat. J&J is a Buy and a Long- Term Buy."

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