Morningstar Advisor - June/July 2009 - 65

positives. Tossing out any company that fails to make an arbitrary cut-off on one of the traditional financial leverage ratios tends to (at least in my experience) eliminate too many solid companies; there’s often a financial ratio that a company will look poor on (financial leverage, say, because the company has bought back a lot of shares, depressing its book equity), even if it’s actually quite strong on closer inspection. The financial health grade, in my opinion, does a good job across a variety of different types of firms. It ignores book equity (using market capitalization instead), and only relies on the book value of liabilities from the balance sheet. And even if liabilities are understated on the books, the market capitalization will often reflect the off-balance-sheet liabilities, keeping the financial health grade honest. Here are five stocks that pass the screen and also have a 5-star Morningstar Rating for stocks. Tyco International TYC Market cap: $10.5 billion Moat: Narrow Fair value estimate: $40 Uncertainty: Medium Hubbell HUB.B Market cap: $1.6 billion Moat: Narrow Fair value estimate: $44 Uncertainty: Medium Hubbell’s strength as an efficient operator has bolstered its profitability and allowed the firm to maintain margins in the presence of a downward-turning market. Although the domestic construction markets will likely face a challenging 2008 and 2009, Hubbell has positioned itself to generate economic profits over the long run. Snap-on SNA Market cap: $1.7 billion Moat: Narrow Fair value estimate: $50 Uncertainty: Medium An unparalleled ability to leverage its reputation for quality products and service has allowed Snap-on to establish itself as a premier tool supplier. Although complacency has stymied performance in recent years, operating improvements are starting to provide substantial upside opportunities. The electrical products industry is dominated by a few very large firms that often compete directly with one another. Hubbell’s efficiency led to superior returns and allowed it to be the low-cost producer in the industry. The gap is narrowing quickly, though, as Thomas & Betts TNB and Cooper Industries CBE have spent the last couple of years retooling their businesses. However, these firms have their hearts set on international markets, which enable Hubbell to dictate its own course in the United States. Rockwell Automation ROK Market cap: $4.3 billion Moat: Narrow Fair value estimate: $47 Uncertainty: Medium Snap-on is one of the industry’s largest manufacturers and marketers of high-end hand and power tools for professionals. Snap-on’s strong dealer network has been the cornerstone of the company’s marketing prowess over its 88-year history. Its dealers are franchise operators that provide sales, service, and financing to customers at their place of business. A service-focused distribution strategy, superior product quality, and brand cachet have allowed Snap-on to capture an estimated 50% of the professional tool market. Pitney Bowes PBI Market cap: $5.2 billion Moat: Narrow Fair value estimate: $38 Uncertainty: Medium Since Pitney Bowes began operations in 1920 as the first postage meter company, it has dominated the business. Today the company has an 80% share of the domestic postage meter market and a 65% share internationally. Because postage meters essentially print currency, they are highly regulated by the governments of their respective countries. This is a huge barrier to entry and allows Pitney Bowes to operate with little competition. It has also allowed the company to develop deep relationships with governments and customers that perpetuate its competitive advantage and enhance its brand recognition. Haywood Kelly, CFA, is vice president of equity research at Morningstar. Tyco International is the worldwide leader in many of its markets. This lead, combined with substantial recurring revenue, gives the company a solid advantage and the protection of a narrow economic moat. Being the biggest is an important advantage in markets where cost structures exhibit a material proportion of fixed costs, and where overall growth is sufficiently slow so as to inhibit competitors from reaching similar scale. Tyco’s largest and most well-known business, ADT, holds such a position. Its $8 billion in global revenue is more than 10% of the total market, with the nearest competitor less than half its size. A large swath of the market is made up of mom-and-pop competitors that can’t match the advantages of ADT. This narrow-moat firm has a history of returning cash to shareholders and has benefited mightily from efforts to diversify across geographies and end markets. Rockwell’s decision to concentrate on factory automation and controls has helped improve corporate margins and returns on invested capital. Going head to head with industrial giants Siemens SI, Emerson EMR, and ABB ABB, Rockwell has captured market share and expanded into the growing machine-safety markets. Rockwell has used a lead in technology and partnered that with a strong distribution force to hold market-leading positions globally. MorningstarAdvisor.com 65
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Morningstar Advisor - June/July 2009

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2009

Morningstar Advisr - June/July 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
Is SRI a Relevant Investment Strategy?
A Head for Numbers
Building a Business on SRI
Investment Briefs
The Liquidity Premium
Navigating the SRI Patchwork
Profit and Progress
How the Fed Contributes to Crises
Holding Steady
Appleseed Adds Value to SRI Formula
Four Picks for the Present
Long-Term Investors Can Find Value among Industrials
Higher Yields, Hold the Risk
Bargains in U.S. Industrials
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
Talkin’ ‘bout a Revolution
Morningstar Advisor - June/July 2009 - 47
Morningstar Advisor - June/July 2009 - Morningstar Advisr - June/July 2009
Morningstar Advisor - June/July 2009 - Cover2
Morningstar Advisor - June/July 2009 - Contents
Morningstar Advisor - June/July 2009 - 2
Morningstar Advisor - June/July 2009 - 3
Morningstar Advisor - June/July 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - June/July 2009 - 5
Morningstar Advisor - June/July 2009 - 6
Morningstar Advisor - June/July 2009 - Letter from the Editor
Morningstar Advisor - June/July 2009 - Contributors
Morningstar Advisor - June/July 2009 - 9
Morningstar Advisor - June/July 2009 - Is SRI a Relevant Investment Strategy?
Morningstar Advisor - June/July 2009 - 11
Morningstar Advisor - June/July 2009 - A Head for Numbers
Morningstar Advisor - June/July 2009 - 13
Morningstar Advisor - June/July 2009 - 14
Morningstar Advisor - June/July 2009 - Building a Business on SRI
Morningstar Advisor - June/July 2009 - 16
Morningstar Advisor - June/July 2009 - 17
Morningstar Advisor - June/July 2009 - Investment Briefs
Morningstar Advisor - June/July 2009 - 19
Morningstar Advisor - June/July 2009 - 20
Morningstar Advisor - June/July 2009 - 21
Morningstar Advisor - June/July 2009 - 22
Morningstar Advisor - June/July 2009 - The Liquidity Premium
Morningstar Advisor - June/July 2009 - 24
Morningstar Advisor - June/July 2009 - 25
Morningstar Advisor - June/July 2009 - 26
Morningstar Advisor - June/July 2009 - 27
Morningstar Advisor - June/July 2009 - 28
Morningstar Advisor - June/July 2009 - 29
Morningstar Advisor - June/July 2009 - Navigating the SRI Patchwork
Morningstar Advisor - June/July 2009 - 31
Morningstar Advisor - June/July 2009 - 32
Morningstar Advisor - June/July 2009 - 33
Morningstar Advisor - June/July 2009 - 34
Morningstar Advisor - June/July 2009 - Profit and Progress
Morningstar Advisor - June/July 2009 - 36
Morningstar Advisor - June/July 2009 - 37
Morningstar Advisor - June/July 2009 - 38
Morningstar Advisor - June/July 2009 - 39
Morningstar Advisor - June/July 2009 - How the Fed Contributes to Crises
Morningstar Advisor - June/July 2009 - 41
Morningstar Advisor - June/July 2009 - 42
Morningstar Advisor - June/July 2009 - 43
Morningstar Advisor - June/July 2009 - 44
Morningstar Advisor - June/July 2009 - 45
Morningstar Advisor - June/July 2009 - 46
Morningstar Advisor - June/July 2009 - 47
Morningstar Advisor - June/July 2009 - Holding Steady
Morningstar Advisor - June/July 2009 - 49
Morningstar Advisor - June/July 2009 - 50
Morningstar Advisor - June/July 2009 - 51
Morningstar Advisor - June/July 2009 - Appleseed Adds Value to SRI Formula
Morningstar Advisor - June/July 2009 - 53
Morningstar Advisor - June/July 2009 - 54
Morningstar Advisor - June/July 2009 - 55
Morningstar Advisor - June/July 2009 - Four Picks for the Present
Morningstar Advisor - June/July 2009 - 57
Morningstar Advisor - June/July 2009 - Long-Term Investors Can Find Value among Industrials
Morningstar Advisor - June/July 2009 - 59
Morningstar Advisor - June/July 2009 - 60
Morningstar Advisor - June/July 2009 - 61
Morningstar Advisor - June/July 2009 - Higher Yields, Hold the Risk
Morningstar Advisor - June/July 2009 - 63
Morningstar Advisor - June/July 2009 - Bargains in U.S. Industrials
Morningstar Advisor - June/July 2009 - 65
Morningstar Advisor - June/July 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - June/July 2009 - 67
Morningstar Advisor - June/July 2009 - 68
Morningstar Advisor - June/July 2009 - 69
Morningstar Advisor - June/July 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - June/July 2009 - 71
Morningstar Advisor - June/July 2009 - Undervalued Stocks
Morningstar Advisor - June/July 2009 - 73
Morningstar Advisor - June/July 2009 - 74
Morningstar Advisor - June/July 2009 - 75
Morningstar Advisor - June/July 2009 - Most Popular Variable Annuities
Morningstar Advisor - June/July 2009 - 77
Morningstar Advisor - June/July 2009 - 78
Morningstar Advisor - June/July 2009 - New at Morningstar
Morningstar Advisor - June/July 2009 - Talkin’ ‘bout a Revolution
Morningstar Advisor - June/July 2009 - Cover3
Morningstar Advisor - June/July 2009 - Cover4
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