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Value & Growth: Deere, Foot Locker, Priceline

 February 17, 2012 02:59 PM

by J. Royden Ward, editor Cabot Benjamin Graham Value Letter

In this Special Feature, I screened our Ben Graham database for companies whose sales and earnings are growing very rapidly.

Three of our favorites are Deere & Co. (DE), Foot Locker (FL) and Priceline.com (PCLN). I believe each stock price will also grow very rapidly during the next six to 12 months, offering excellent appreciation potential with moderate risk.

Deere & Co. is the world's largest manufacturer of farm tractors and combines, and a leading producer of construction and forestry equipment. The company also sells used equipment, which makes up 30% of Deere's U.S. revenues.

Sales increased 28% and EPS (earnings per share) soared 52% in 2011, boosted by modest global economic growth that included increased need for food in third-world countries.

In addition, the pro? ts from high crop prices enabled farmers to replace old equipment with new Deere equipment.

Finally, demand for used equipment remained robust in 2011. Used equipment sales are highly pro?table.

Continuing higher requirements for food, especially in faster growing countries, will drive higher sales of farm equipment in 2012 and 2013.

Deere recently increased prices for some of its farm machinery, which will lead to 13% higher pro?ts in 2012.

Sales growth will likely exceed 9% as well. International sales, 41% of total sales, could drive growth noticeably further than expected if global economic conditions improve more than a little.

At 11.6 times my 2012 EPS forecast of 7.60 and with a dividend yield of 1.9%, DE shares are undervalued. DE is low risk.

Foot Locker, founded as the F.W. Woolworth Co. in 1879, has morphed into one of the leading global retailers of athletic footwear and apparel for a wide variety of activities including playing basketball, running and training.

The company's 1,911 stores are located in 21 countries under various formats, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and CCS.

The long-term trend to lose weight and increase ? tness exists throughout the world. Foot Locker's sales expanded 10% and EPS soared 60% in 2011, buoyed by better product selection and by an expanded line-up of products.

In 2012, management will increase its marketing expenditures to expand apparel sales. Emphasis will also be placed on increasing Internet sales. I expect sales to increase 4% or more and EPS to advance 15% in 2012.

The return of NBA basketball and the upcoming Olympics in August 2012 could push results even higher. At 13.3 times my 2012 EPS forecast of 2.01, FL shares are undervalued. FL is medium risk and offers a dividend yield of 2.5%.

Priceline.com offers airline tickets, hotel reservations, car rentals, vacation packages and cruise reservations via its Internet site. The company operates in 99 countries and derives 69% of revenues from international bookings.

Priceline's "Name Your Own Price" service, which allows customers to negotiate prices for travel services, has become very popular.

Recent acquisitions have made the company a leading travel provider in Europe. Another purchase in Asia will allow Priceline to expand rapidly into Asia as well.

Thrifty travelers are booking more of their travel reservations on the Internet, providing added growth for Priceline. PCLN shares are volatile, but the company's balance sheet is strong with no debt and lots of cash.

Sales and earnings have soared during the past ?ve years, and Priceline is well-positioned to produce rapid growth in future years. Sales will rise 22% and EPS will advance 25% in 2012.

The price-to-earnings ratio based on my 2012 EPS estimate of 28.35 is 19.0, which is low for a company growing at a 25% clip. PCLN pays no dividend and is low risk.


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