Investing: Searching for the perfect company

Finding the elusive golden company may be easier than you think.

In the 16th century, conquistador Francisco de Orellana searched the jungles of South America for El Dorado, the legendary city of gold. Like many other European explorers before and after him, he never did quite find it (though he did manage to sail the length of the Amazon). For investors today, a new kind of El Dorado beckons–and it's a good deal easier to find.

The “corporate El Dorado,” described by University of Pennsylvania finance professor Jeremy Siegel in his latest book, The Future for Investors, is a company blessed with well-known brands, an average dividend yield and higher-than-average long-term earnings growth. According to Siegel, author of the 1994 books Stocks for the Long Run, reasonably priced firms that bear such gifts outperformed the S&P 500 index between 1957 and 2003.

But where are today's corporate El Dorados? To find out, we started in the States–home to many of the world's strongest brand-making companies–and searched the S&P 500 for companies that conform to Siegel's insights. In the end, we found seven, listed in the table (following page).

In the stock market, there is no guarantee anyone will reap untold riches, but these companies show promise. Take Avon Products (NYSE: AVP). The New York-based direct seller of beauty products seems to be knocking on all the right doors. Over the past two years, European sales have jumped by more than 70%; in 2004, Asia-Pacific revenues surpassed US$1 billion. Perhaps more impressive, the firm has grown sales profitably. Avon has steadily increased operating margins and net income for three consecutive years. Analysts polled by Thomson First Call expect its earnings per share to increase by 14% per annum over the next five years. By comparison, the average S&P 500 company is expected to improve EPS by just 6% a year over the same period.

There are some wildcard factors, however. Avon's Brazilian operations are doing well, but Brazil, while lucrative, is also highly competitive. Profits from any of Avon's emerging markets could be volatile, in part because of currency changes. Over the long run, Avon's failure to jump-start its sluggish U.S. business could prevent the stock from moving higher. Still, its ranking among the world's top brands (according to Interbrand's annual survey) and management's knack for beating earnings estimates make it attractive.

Another possible corporate El Dorado could be the king of beer brewers, Anheuser-Busch Cos. (NYSE: BUD). The St. Louis, Mo.-based firm boasts two of the world's biggest beer brands, Budweiser and Bud Light, and it has a mighty U.S. presence, where it commands a roughly 50% market share. In China, the world's largest and fastest-growing beer market, Anheuser-Busch and its partners have a 19% share. As well, the firm owns a 50% stake in Grupo Modelo, Mexico's largest beer company, which markets the Corona brand. Trouble, however, seems to be brewing at home. Over the past few years, as drinkers have switched to spirits and wines, growth in the U.S. beer industry has slowed–a trend that's taking the fizz out of Anheuser-Busch's sales. In its most recent quarter, its U.S. beer volume declined 2.7%. The management team believes EPS will increase in the low single-digits in 2005, but return to its target of double-digit growth in the long term.

To regain momentum, Anheuser-Busch plans to use a combination of new products, packaging and marketing programs. The new Budweiser Select brand, a low-carb beer, has shown encouraging results in the U.S. so far. Analysts, however, seem skeptical about the near future; most rate it a Hold. One noteworthy investor, though, appears to have faith: Warren Buffett's Berkshire Hathaway recently became a significant Anheuser-Busch shareholder.

Finally, Procter & Gamble (NYSE: PG) has a shot at achieving El Dorado status. It has history on its side: as Siegel points out, the Cincinnati-based packaged-goods giant was among those that outperformed the S&P 500 index between 1957 and 2003. Today, P&G ranks No. 1 in both global sales and market share in four household categories. More important, the future looks bright. Net sales, gross profit margins and net earnings are trending upward. Its Pampers, Ariel and Downy brands are pulling in sales of more than US$1 billion per year and growing at rates above industry averages. The company continues to boost revenues in developing markets like China and Russia. In the long term, P&G's success will depend on its making the most of the expected merger with Boston-based Gillette, a deal announced back in January. The combined company would be bigger, with a total of 21 brands that bring in more than US$1 billion each in sales per year. But bigger, of course, is not always better. Numerous studies show most large mergers tend to destroy rather than create shareholder value. P&G, however, could be the exception to the rule. After all, it boasts one of the most talented management teams in the business.

Although all of the companies on our list deserve a closer look, investors may uncover other El Dorados buried among U.S. companies, or perhaps on an exchange closer to home. Unlike those long-ago expeditions to find the city of gold, such a quest might actually prove to be worth the trouble.