Zacks Investment Ideas feature highlights: Wal-Mart, Apple, Autozone, Varian Medical and Dollar Tree

 Zacks Investment Ideas feature highlights: Wal-Mart, Apple, Autozone, Varian
                           Medical and Dollar Tree

PR Newswire

CHICAGO, Dec. 5, 2012

CHICAGO, Dec. 5, 2012 /PRNewswire/ --Today, Zacks Investment Ideas feature
highlights Features: Wal-Mart (NYSE:WMT), Apple (Nasdaq:AAPL), Autozone Inc
(NYSE:AZO), Varian Medical (NYSE:VAR) and Dollar Tree Inc (Nasdaq:DLTR).

(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)

The Best Businesses to Own

In his Annual Letter to Shareholders in 1992, legendary investor Warren
Buffett stated the following:

"Leaving the question of price aside, the best business to own is one that
over an extended period can employ large amounts of incremental capital at
very high rates of return. The worst business to own is one that must, or
will, do the opposite - that is, consistently employ ever-greater amounts of
capital at very low rates of return."

So how do you know how well a company is employing its capital? Look at its
Return on Invested Capital.

ROIC Defined

Return on Invested Capital (ROIC) is calculated as:

Net Operating Profit After Taxes / Invested Capital

Invested capital is broken down further as Total Assets - Excess Cash -
Non-Interest-Bearing Current Liabilities.

An ROIC of 15% means that for every $1 of capital invested in a business, 15
cents of after-tax income was created during that period. The best companies
generate returns above their weighted average cost of capital (WACC).

The weighted average cost of capital is the minimum return required to satisfy
all investors, including creditors and shareholders.

Companies with ROIC greater than their WACC are creating value for their
owners. They are earning superior risk-adjusted returns for investors and
generating positive economic profits.

On the other hand, companies with ROIC below their cost of capital are
destroying value for shareholders. They are earning returns below what the
market requires for assuming the risk of investing in the company.

EPS Growth Does Not Equal Value Creation

It is important to note that just because a company is growing its earnings
per share doesn't mean that the growth is profitable.

Assume a company dumps $1 billion of capital into a project that generates $50
million of earnings next year. Sure earnings grew, but it produced a return of
just 5%. That $1 billion in capital would have been better used elsewhere.

Conversely, if the company can generate $50 million in earnings from an
investment of, say, $250 million, that's a much better 20% return.

Protect the Castle

If a company or an entire industry is consistently generating returns well
above its cost of capital, you can be sure that this will attract some
competition. Entrepreneurs will seek to enter the industry in an attempt to
capture some of the outsized returns.

In order to fend off this competition and sustain positive economic profits, a
company needs to have some sort of durable competitive advantage, or "moat".

Competitive advantages can come in many different forms, most of which fall
into two different categories: cost advantage and differentiation advantage.

The cost advantage is a company's ability to produce a good or service at a
lower cost than the competition. Think Wal-Mart (NYSE:WMT).

The differentiation advantage is created when a company's products or services
are perceived as superior by customers. Think Apple (Nasdaq:AAPL).

The wider a company's "moat", the more effective it will be at fighting off
competitors.

One of the best ways to determine a company's moat is to measure its Return on
Invested Capital. A true wide moat business will have stable or growing ROIC.

Profitable Growth at a Reasonable Price

The problem for many value investors is that companies with sustainable
competitive advantages often trade at premiums to the market. Nevertheless, if
you look hard enough, there are some good deals out there.

Here are some reasonably priced stocks with superior (and growing) returns on
invested capital:

Autozone Inc (NYSE:AZO)

12-month ROIC: 44.0%

5-year average ROIC: 33.6%

Forward P/E: 13.9

Varian Medical (NYSE:VAR)

12-month ROIC: 29.7%

5-year average ROIC: 28.6%

Forward P/E: 16.8

Dollar Tree Inc (Nasdaq:DLTR)

12-month ROIC: 32.5%

5-year average ROIC: 22.5%

Forward P/E: 16.6

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