One Mid-Cap for Your Portfolio
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My personal portfolio is a little small-cap heavy right now. So I've been doing some research to get a little more diversification. In my article The Best of the Big Boys, I explored which of the five largest publicly traded companies offers the best investing opportunity to buy and hold investors. In a similar fashion, I want to explore some mid-cap stocks. Mid-cap companies are companies with a $1-$10 billion market cap. I picked the five with the highest market cap in this category. The five that we'll be looking at are:
- Pentair Ltd (NYSE: PNR)
- FMC Technologies (NYSE: FTI)
- Magellan Midstream Partners (NYSE: MMP)
- Cemex (NYSE: CX)
- Liberty Interactive Corp (NASDAQ: LINTA)
I want to see if I can answer the following question: which offers the best investing opportunity for buy and hold investors?
I suppose every investor has the metrics that he/she likes to look at. Profit margin is of particular interest to me because to me it indicates how well a company is positioned in case a problem with the economy arises. Net Income is also important to me because I like to know how much money the company has available to put back into the business.
|Company||P/E||Forward P/E||Dividend/Yield||Profit Margin||Net Income|
|FMC Technologies||24.70||17.69||n/a||7.04%||$408.80 Million|
With all those numbers, it can be hard to analyze what is going on. So, I've decided to do the following. In each column, we'll award each company a number 1-5: one being the best, and five being the worst. Then we can add these numbers up to see how the companies do in relation to each other. In case that doesn't make sense...a perfect score would be five. The worst possible score would be 25.
- Pentair 15
- FMC Technologies 12
- Magellan 12
- Cemex 23
- Liberty 10
Cemex is last, or tied for last, in all five of these metrics. Liberty looks very strong compared to the other four. They are priced fairly low, and they bring in the most cash of the five.
Up or Down?
The metrics that we just looked at give us an idea of where the company is at this moment in time. It's a pretty static analysis. To get a more rounded view, I've included a couple of charts that show statistics over the past five years. This will help us gauge trends and directions.
Revenue is a good metric to look at because it can indicate customer base. If you're losing revenue, then you are likely losing customers and vice versa.
FMC Tech has seen its revenue climb nearly 60% over the last 5 years. That is very good growth. Magellan Midstream has seen 33% growth, but their growth kind of looks like a roller coaster, and it's currently on a decline. Liberty Interactive seems to have the most steady growth.
Cemex again emerges as the loser here. Revenues are down nearly 30% over the last 5 years. That's a trend that doesn't allow any investor confidence.
More than just revenues, we should also look at net income. Just because a company's revenue goes up, doesn't mean that they are actually making more money. Theoretically, revenue could go down while net income could go up.
When we analyze Pentair, we see that this is exactly what is happening. Revenue is up 7%, but profits are down 86%. Cemex's revenues fell 30%, but their net income is down an incredible 124%.
But on the other side of this statistic is Magellan. Revenues are up a measly 33%. But net income has soared over 500% in the last five years. This is an extremely encouraging sign as a potential investor.
At What Cost
I look at debt, because I'm curious on what kind of obligations a company will have down the road that could hurt profits.
Liberty has a scary amount of debt. $7 billion is a lot of money no matter who you are. But when you are a $10 billion company, its a ridiculous amount of debt.
Both FMC Technologies and Pentair have a comparatively low amount of debt, but look at the end of this chart. For 2012 both of their debts are increasing rapidly. Compare that to Magellan who's debt seems a bit more stable.
Which of these five companies offers the best investing opportunity for buy and hold investors? Based on what we've just looked at, I think we can draw some conclusions. The most obvious conclusion is that Cemex doesn't look to be a very good opportunity right now. Liberty looked good in a lot of metrics, but $7 billion in long term debt is too much for a $10 billion company.
I wasn't too thrilled with what we've seen with Pentair. Net income is falling like a lead balloon. Profit margins are razor thin. It seems like it wouldn't take much for this company to run into problems, not something I'm interested in as a buy and hold investor.
FMC Technologies gets my runner-up award. There are several good things going on here. Revenue is increasing. Net income is increasing. The stock seems to be reasonably priced. Debt is also low compared to the others.
Of these five, I think that Magellan Midstream Partners is our best opportunity. They have a great profit margin, good dividend, steady debt, and all the trends are pointing up. Based on what we've looked at, I'd be very comfortable in investing in this company. The only caution is that they are priced a little high as far as price to earnings. So maybe we should just be patient and wait for a pullback to get this stock at a better price.
thequast has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cemex, FMC Technologies, and Magellan Midstream Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!