The Checkup

Drink up. In the January 2010 issue, Eric Cinnamond, manager of Intrepid Small Cap (ICMAX), recommended several stocks he deemed worthy of a second look by investors. Here’s how two of his picks have fared in the past year.

With a bevy of high-powered brands such as Robert Mondavi, Clos du Bois, Corona, Constellation Brands (NYSE: STZ) is a leading global producer of wine, beer and spirits.

Constellation last year divested several of its UK and Australia business lines. The firm used the proceeds to pay down $600 million worth of debt and accelerate its stock buyback program. During this same period, the firm also generated $530 million of free cash flow from operations.

Technology upgrades have enabled the company to contain costs and improve efficiency.  Meanwhile, improvements to the company’s distribution program will help increase organic sales growth.

The stock has returned 43 percent since Cinnamond’s recommendation.

PetsMart (NSDQ: PETM) is the largest specialty retailer of pet-related products and services in Canada and the US. The firm also serves pet lovers via its online retail website and catalog supply business.

The company ended 2010 with $353 million in cash on the balance sheet, after distributing $53 million in dividends and repurchasing $263 million worth of common stock. PetsMart also sports a five-year dividend growth rate of 33 percent.

The company’s full year earnings rose 26 percent to $2.01 per share. Store traffic increased 2 percent and comparable store sales increased by more than 4 percent.

The lackluster US economy presents a challenge to PetsMart’s future growth. Nonetheless, the company plans to open at least 45 new stores and eight new PetsHotels in 2011.

Since Cinnamond’s recommendation, the stock has returned 61 percent, evidence that despite the rough economy, consumers are still spending on Fido.

Surprise! Surprise!

New Record. Construction equipment manufacturer Caterpillar (NYSE: CAT) in April shocked the Street with record earnings. Caterpillar’s first-quarter earnings per share jumped by more than 400 percent to an all-time quarterly high of $1.84. Revenue in the period exceeded $12.9 billion, up 57 percent year over year.

Earnings were driven by continued global economic growth and increased demand for its earth-moving machines. Higher sales drove 87 percent of the company’s $4.7 billion increase in revenue. Management raised its 2011 revenue outlook to $52 to $54 billion from $50 billion. Caterpillar has forecasted a record annual profit of $6.25 to $6.75 per share, up from $6.

Caterpillar’s powerful brand, pricing power and global dealer network have allowed the firm to take advantage of a global build out of infrastructure.  The company plans to open new facilities and expand existing operations this year, with a focus on emerging markets.  Meanwhile, three savvy acquisitions in 2010 have put Caterpillar on track to be the No. 1 mining equipment manufacturer in the US.

There are lingering concerns over the company’s increased debt and interest burden, weakness in residential construction markets and rising raw materials costs Although Caterpillar’s facilities weren’t damaged by the March 11 earthquake and tsunami in Japan, many of its suppliers were affected.  The company has suffered sporadic disruptions to production and its margins will be tested as material and freight costs continue to rise.

Who’s Buying What

High Gear.  Shares of General Motors (NYSE: GM) climbed more than 2.5 percent on May 3 after UBS analyst Colin Langan upgraded the company’s stock to “Buy” from “Neutral.” On the day of the upgrade, the firm’s stock price hovered around GM’s November 2010 IPO-price of $33, before closing at $32.99.

Langan said the earthquake in Japan could clear a path for the Detroit auto giant, noting that the tragic event provided “the catalyst we’ve been looking for to carry GM through its weak launch period.”

Although every automaker has slowed production due to post-earthquake disruptions to the supply chain, Japanese firms have endured the worst of the slowdown. Langan said GM could gain 110 basis points of additional market share this year, which he estimated would boost the company’s operating income by $1 billion and its earnings per share by $0.60.

The company’s emphasis on fuel-efficient vehicles has paid off, as higher oil prices drove consumers from their once-beloved gas guzzlers. General Motors reported a 27 percent year-over-year increase in sales of fuel-efficient vehicles in April. Passenger-car demand rose 49 percent year over year while demand for crossover vehicles jumped 28 percent. Retail sales have climbed 35 percent year-to-date.

This performance has catapulted GM to pole position in its home market as the leading US car brand as measured by sales.