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Consistent Appreciation

By Janet Levaux

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Research Total Return Leaders

Based on compounded annual price appreciation and dividends for the 10-year period ending Nov. 13, 2008, for stocks trading at or above $2 a share:

- Alberto Culver Co. (+14.7%)

- Corporate Office Properties Trust Inc. (+20.3%)

- Cubist Pharmaceuticals Inc. (+26.4%)

- Varian Medical Systems Inc. (+24.6%)

Source: S&P Compustat

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S&P Compustat

Standard & Poor’s Compustat data is used by institutional money managers and analysts around the world. With fundamental and market data on 88,000 global securities, Compustat provides vital company, index and industry information that supports financial models and proprietary company and industry analysis. See CompustatResources.com.

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When the markets get tough, the best performers get even tougher.

That’s the lesson offered by some of the best companies measured by S&P Compustat for their price appreciation and dividends.

Some high-growth companies are able to join the ranks of total return leaders through stock-price appreciation alone, while more reasoned firms are able to be members of this elite group via a combination of stock-price appreciation and dividend growth. And regardless of how firms achieve their total returns, consistency in performance is a hallmark of successful investments that create wealth over time, experts note.

Investments That Count

Companies can come through for investors by consistently making products and services with stable demand and seeking out new growth avenues.

One such firm is Lexington, Mass.-based Cubist Pharmaceuticals, a biopharmaceutical company focused on developing and commercializing anti-infective therapies for the acute-care environment. How has Cubist produced 10-year total returns of 26.4 percent? It comes down to making the write investments and executing on those investments.

“In 1997, Cubist in-licensed the compound that we then developed and commercialized, following FDA approval, in 2003 as the IV antibiotic Cubicin (daptomycin for injection),” says CFO David McGirr. “Cubicin has become a very important therapy in the war against the ‘super bug’ MRSA (methicillin resistant Staphylococcus aureus), which is a bacteria that causes serious, sometimes life-threatening infections.

“On the strength of the continued revenue growth of Cubicin (up 45 percent vs. year-ago U.S. net revenue in our most recently reported quarter), Cubist now has been GAAP profitable for nine consecutive quarters,” McGirr adds.

Elisha Finney, corporate senior vice president and chief financial officer, Varian Medical Systems, says that the company’s technology cycles have produced its total returns. “We are really a high-tech company, and six percent of sales has gone to R&D in the past nine years. We’ve done a lot of our research on software, which improves both our gross and operating margins. And we’ve grown our R&D dollars even in recessions.”

Varian Medical Systems, based in Palo Alto, Calif., makes medical devices and software used to treat cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy and brachytherapy. In addition, it makes informatics software for managing comprehensive cancer clinics, radiotherapy centers and medical oncology practices, and the company produces tubes and digital detectors for X-ray imaging as well as specialized imaging products for cargo screening and non-destructive testing.

“We have taken our pre-tax margin from 11 percent to 20 percent with more software and higher sales and by making sure we get plenty of leverage on our corporate expenses. This allows us to grow the bottom line,” explains Finney. “We also have very good asset management and low working-capital requirements. This is in part because we get significant down payments from clients, about 10 percent per order. Last year, we averaged about $90 million a quarter in cash flow from operations.”

Plus, the company can grow its business without huge investments in bricks and mortar, the CFO says. “One factory that used to make 50 devices, now produces 550 a year. We get these high inventory turns consistently and with a minimal investment in our capital expenditures,” she explains.

Furthermore, Varian has put its cash to work in a share repurchase program, which started in the 2001 fiscal year.

Winning Formulas

“We have been a very consistent performer. We’ve led the REIT sector for all 113 equity REITS in total shareholder return for 10 years,” says Randall M. Griffin, president and chief executive officer, Corporate Office Properties Trust Inc. of Columbia, Md., “And we are the number one office-sector REIT in total shareholder return for this year to date.”

For Corporate Office Properties, this goes back to establishing a very focused strategy, which is built on relationships, according to Griffin. “Over the years, we have built repeat relationships with the U.S. government, defense information-technology contractors servicing the government, and data-center operators.”

The company’s office buildings are primarily in four states: Colorado, Maryland, Texas and Virginia. “We’re usually located near government-demand drivers and are the largest offices owners in the park,” Griffin says. “And we also have office parks adjacent to government buildings or government corridors.”

With 110,000 people in its buildings each day, the company is really “running a city,” according to the CFO. “We’ve tried to do this via one relationship at a time,” the CFO adds. Plus, the REIT emphasizes customer service.

All of these factors results in strong total returns. “We are a strong financial performer and are considered one of the leaders in service, as well as in green buildings,” Griffin says.” We also hire outstanding people, treat them well, motivate them and make them owners. It’s a formula that has worked very well for us.”

For consumer-products manufacturer Albert Culver of Melrose Park, Ill., “Success stems from a few things, with a focus on brands, markets and categories,” says Doug Carney, director, corporate development and investor relations.

“We are pretty disciplined in terms of allocating resources to key brands. About eight years ago, we decided not to spread ourselves too thin and to put our biggest eggs in one basket to help us with the greatest opportunities. We have done so over the years and hope to do so in the future,” Carney explains.

Hair- and skin-care products represent the company’s “concentrated portfolio,” and it has key brands in each category. “We’ve taken the brands and expanded them outside the U.S,” he says.” For instance, we’ve taken TRESemm? into several worldwide markets and still feel that we have only scratched the surface. There are 10 markets in the world’s top 15 that we aren’t yet in with some products.’

Future Focus

How do total return leaders plan to maintain their strength?

“The success of Cubicin allows us to continue to focus on growing EPS while also investing in our advancing clinical pipeline of acute-care therapies, with the objective of creating additional longer-term value for CBST shareholders,” CFO McGirr explains.

“In 2009, we expect to have two additional antibiotics for serious infections in Phase 1 clinical trials, in addition to our Phase 2 clinical stage product candidate, ecallantide, which is in development as a much-needed agent to reduce bleeding during on pump cardio-thoracic surgery,” he says.

As for Varian Medical Systems, “We are looking for 10 percent to 15 percent top-line growth in the long term, 90 percent of which is organic,” CFO Finney says. “Most of our opportunities are in front of us with existing technology. The world is under-equipped to treat cancer. Thus, it’s a strong growth platform.”

Corporate Office Properties says its future is closely tied to that of its clients, who view the company as partners. “Our core mission is creating environments that inspire success,” CFO Griffin shares.

As for its current condition, “We have liquidity and all our development projects are financed. We have a strong positive cash flow. We build for the government and defense sectors, which are still in good shape,” he explains.

“It’s business as usual. We raised the dividend I 10 percent in September for the 11th year in a row and have very healthy payout ratios. We are where we want to be.”

For Alberto Culver, “We are well positioned in downturns and upturns,” Doug Carney shares. “We have a portfolio of products for all segments … so we span the gambit. We can get consumers who are trading up and down; our portfolio is balanced.”

Going forward, further geographic expansion is one growth path for the company, while innovation and acquisitions are others, the Alberto Culver executive says.