The Pros Weigh In

Dec. 21, 2004
Stock-market analysts pick their favorites around the world.

If we can say that manufacturing still is a worthwhile investment, can we also say which companies are worth a look? IndustryWeek asked several security analysts and money managers which of the firms on the 1998 IW 1000 (the 1,000 largest, publicly held manufacturing companies from around the world) might make good investments and why. Of course, even investment professionals cover in-depth no more than a handful of stocks. Therefore, these picks aren't representative of the whole list and can't be considered an investment portfolio. However, they should provide some food for thought. (Note: All revenue figures are in U.S. dollars.) The U.S.: "In this kind of market, stick with the industry leaders," says Eli Lustgarten, managing director, Schroder & Co., New York. He gives thumbs-up to Ingersoll-Rand Co., the Woodcliff Lake, N.J., industrial-equipment manufacturer, for its overall management and aggressive pursuit of acquisitions. He also likes Parker Hannifin Corp., Cleveland, and AlliedSignal Inc., Morristown, N.J. Walter Liptak, vice president, McDonald & Co., Cleveland, calls Illinois Tool Works Inc., Glenview, Ill., "a tremendous company with a unique operating philosophy." He lauds its ability to wring costs from cyclical companies. Molex Inc., the $1.5 billion manufacturer of electronic connections located in Lisle, Ill., and Solectron Corp., the Milpitas, Calif., contract manufacturer, are high on the list of Jerry Labowitz, first vice president, Merrill Lynch & Co. Inc., New York, because of their growth rates. Mark Simpson, equity strategist with A.G. Edwards Inc., St. Louis, likes the consumer nondurables and health-care sectors, both of which he predicts will continue to show consistent earnings growth, even if overall growth slows. Within the consumer nondurable sector, Simpson chooses Coca-Cola Co., Gillette Co., and PepsiCo Inc. Among health-care companies, he likes Schering-Plough Corp., Pfizer Inc., and Warner-Lambert Co. Europe: Defensive stocks, or those that should do well even in a downturn, top the lists of portfolio managers who are looking abroad. Paul Blankenhagen, a portfolio strategist with Invista Capital Management Inc., which manages the equity investments of Principal Financial Group, Des Moines, likes Philips Electronics NV of the Netherlands. "They're refocusing and selling noncore businesses," he says of the $38 billion electronic and electronic equipment manufacturer. Unilever Group, the UK food company, makes Blankenhagen's list because of the mammoth size of its product portfolio (50,000 products at last count) and management's efforts to refocus on higher-value-added brands. Blankenhagen also likes Novartis AG, the Swiss pharmaceutical company. "They have a very good drug pipeline." He acknowledges that the company's ag-chem business is not performing at its best at the moment, but predicts that it will improve as the industry becomes more biotech in nature. Rahim Kassim-Lakha, an investment analyst with U.S. Global Investors, San Antonio, is bullish on food-and-beverage stocks, noting that they tend to be the first to rebound after a downturn in the market. Nestl SA and Unilever top his list. "Both are two of the larger producers around, and market share is important in staying competitive because it lets them introduce new brands more easily." Kassim-Lakha picked Swiss-based Nestl for its relatively low price-to-earnings ratio. The average p/e ratio for food-and-beverage companies hovers around 1.1, says Kassim-Lakha, while Nestl comes in a bit cheaper, at about 1.03. In Unilever's favor, says Kassim-Lakha, is a strong cash flow and leading positions in many of its markets. Australia: Rosalie James and Andrew McGann, Melbourne-based analysts for Japan's Daiwa Securities Co. Ltd., recommend Foster's Brewing Group Ltd., Amcor Ltd., and WMC Ltd. Foster's globally recognized brand name and extensive distribution capabilities prompt James' bullishness on the stock. "Foster's Brewing Group meets the current investment criteria for Australian stock picks -- earnings reliability, liquidity, strong franchises in defensive sectors, low debt, and stable management." Amcor, with $4.1 billion in revenues, is one of the 10 largest packaging groups in the world, says James. Lower costs and growth outside Australia are boosting profit, a trend that James says management expects to continue. McGann picks WMC, the world's third-largest nickel-concentrate producer and Australia's second-largest producer of copper and gold, because of expected new projects and cost-cutting initiatives. Asia:Takashi Mulakami, a Daiwa Securities senior analyst in Tokyo, likes Sony Corp. because of its dominance in such markets as personal-computer monitors. He is bullish on autos and notes that the widespread adoption of the kanban system of component replenishment by such companies as Honda Motor Co. Ltd., Nissan Motor Co. Ltd., and Toyota Motor Corp. helps to keep costs down. In South Korea, Jae H. Lee, a Seoul-based Daiwa analyst, says, "Samsung Electronics [Co. Ltd.] earnings will rebound strongly because of the company's cost-competitive production processes." Lee notes that stabilized prices for DRAM (dynamic random-access memory) semiconductors have allowed the company to more fully utilize its fabricating plants. Lee also likes Pohang Iron & Steel Co. Ltd., a $6.5 billion steelmaker. He predicts strong earnings growth resulting from a larger volume of exports, a decrease in foreign exchange losses, and the sell-off of unprofitable affiliated companies.

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