Did your company’s earnings grow through the recession?

Sept. 21 (Bloomberg) John Dorfman

No? Mine didn’t either.

There are some businesses that managed the trick, however. Last week I screened the 2,660 U.S. publicly traded stocks with a market value of $250 million or more. I looked for ones with these attributes: earnings growth of 10 percent or more in their latest quarter over the same period last year, a compound annual earnings growth rate of at least 10 percent in the past five years, a stock price less than 15 times per-share earnings and debt less than stockholders’ equity.

To my surprise, 71 companies, or about 3 percent of the total, passed all four tests. From those, I selected five to recommend.

One is much-scorned Bristol-Myers Squibb Co., a New York- based drugmaker with a market value of $45 billion.

Clearly, the big pharmaceutical companies no longer have the powerful earnings growth they did in decades past. Yet they are still very profitable. Bristol-Myers, for example, had an operating profit margin of 21 percent in 2008, a recession year.

I believe we are coming out of this nasty contraction. If we lapse back into one, though, drugmakers like Bristol-Myers are a good bet to sustain only moderate damage.

Since the end of 2000, Bristol-Myers’ stock price has dropped to about $23 from $70. Its revenue and earnings have grown modestly during that stretch. The company’s shares now command only 12 times earnings, compared with 37 times earnings in 2000.

Ride the Rails

Burlington Northern Santa Fe Corp., the largest U.S. railroad company by sales, has also rolled right through the recession. The Fort Worth, Texas, company posted a profit of $404 million in the second quarter, up from $350 million in the same period one year earlier. Earnings have been growing at about 28 percent a year for the past five years.

Berkshire Hathaway Inc., the multi-industry company controlled by Warren Buffett, owns almost 23 percent of Burlington’s shares. Give me that old-time religion: If it’s good enough for Buffett, it’s good enough for me.

Railroads are an energy-efficient way to move freight. That, I believe, will be increasingly significant in the next 10 years. That’s why Burlington Northern looks like a bargain to me at 14 times earnings.

Raytheon Co., the world’s largest missile maker, hasn’t had a decline in quarterly earnings (on a year-over-year basis) since the third quarter of 2004. Its annual earnings rose 23 percent last year, to $4.06 a share, and are estimated to rise to a record $4.78 this year.

Exaggerated Concerns

Why does the Waltham, Massachusetts, company sell for only 11 times earnings? Probably because investors anticipate U.S. withdrawal from Iraq, regard President Barack Obama as a defense dove and view a Democratic Congress as likely to hack defense spending. In my view the latter two points are exaggerated. The first is true, but Iraq is only one of many hot spots in the world.

Chief Executive Officer William Swanson was probably right when he said at a conference earlier this month that Raytheon is not totally dependent on the U.S. Department of Defense. The company’s emphasis on homeland security and cyber-security should give it some business with other federal agencies. And its small slice of revenue abroad is growing.

Humana Inc., based in Louisville, Kentucky, is the second- largest provider of health-care benefits backed by the U.S. Medicare program. The company experienced a slight slowdown in 2008, as earnings eased to $4.29 a share from $4.66. According to analysts, it is likely to bounce back this year to a record $6.14.

Humana Benefits

That’s pretty good, considering that we live in an era of tighter government budgets for health-care spending.

The stock seems quite cheap to me at seven times earnings and 0.2 times revenue. The low valuation, I believe, is based on investors’ fears about government interference and possible price controls in the health-care field.

It seems to me, however, that a major thrust of the Obama administration’s proposals is to increase the number of people with health-care coverage. That could actually be good for Humana.

Powell Industries Inc., based in Houston, makes equipment to transmit and control electricity. Its products are used mainly by energy companies, refineries and other large industrial customers.

In the fiscal year that ended Sept. 30, 2008, Powell had its best year yet, earning $26 million, or $2.26 a share, on revenue of $639 million. This fiscal year, analysts estimate the company will earn $3.21 a share. Powell’s balance sheet is almost debt-free, and the stock sells for 12 times earnings.

Disclosure note: Personally and for clients, I own shares in Powell Industries. For many clients I own Humana. I currently have no long or short positions in the other stocks discussed in this week’s column.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)