In its fiscal 2011 third quarter, ended July 31, 2011, Nordion’s revenue rose 39.5%, to $66.8 million from $47.9 million a year earlier (all amounts in U.S. dollars). Isotope sales jumped 79.9%, mainly because the Chalk River nuclear reactor near Ottawa restarted in August 2010 after a 15-month shutdown; this reactor supplies most of Nordion’s isotopes.

The company’s sterilization equipment continues to sell well. Nordion is also seeing strong demand for TheraSphere, a process it developed that treats liver cancer using millions of small glass beads that contain radioactive materials. Regulators in Canada, Europe, the Middle East and parts of Asia have already approved TheraSphere. This treatment will soon begin Phase III clinical trials in the U.S.

Thanks to the higher sales, Nordion earned $6.9 million, or $0.07 a share, in the quarter. That’s a big improvement over the year-earlier loss of $16.6 million, or $0.13 a share.

Stock investing advice: Reliance on Chalk River adds risk

The company bought back $40.5 million of its shares during the quarter. Nordion has now repurchased 63% of the shares under its current buyback authorization, which expires on January 25, 2012. Even after these purchases, Nordion holds cash of $69.0 million. Its long-term debt of $43.1 million is a low 8% of its $564.8-million (Canadian) market cap.

The stock has been trading at a reasonable valuation based on its expected earnings in fiscal 2011. However, its reliance on the aging Chalk River reactor adds risk. The $0.40 U.S. dividend yields 4.6%.

We gave our stock investing advice on Nordion in The Successful Investor Hotline for September 16, 2011, which you can view immediately when you take a 1-month free trial to The Successful Investor. Click here to learn how you can start profiting from The Successful Investor right away.

(Note: If you are a current Successful Investor subscriber, please click here to view Pat’s recommendation. Be sure to log in first.)

The new law will raise these three rating providers’ costs. However, all three have improved the quality of their ratings since the 2007/2008 financial crisis. The stricter requirements will also make it difficult for new competitors to enter the credit-rating field. Moreover, the recent market lull has depressed their share prices and p/e ratios.

MCGRAW-HILL COMPANIES LTD. $30 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 315.5 million; Market cap: $9.5 billion; Price-to-sales ratio: 1.6; Dividend yield: 3.1%; WSSF Rating: Average) gets around 70% of its earnings and 45% of its revenue from its Standard & Poor’s division, which provides financial information, including credit ratings on bonds. The company also publishes textbooks and magazines, and owns nine television stations.

In response to the new regulations for credit-rating providers, the company plans to spend $78 million on its regulatory and compliance systems in 2010. That’s up 23.8%, from $63 million in 2009.

To put this in context, the company’s earnings rose 16.4%, to $191.1 million, or $0.61 a share, in the three months ended June 30, 2010. A year earlier, it earned $164.1 million, or $0.52. Excluding a restructuring charge in the year-earlier quarter, earnings per share rose 5.2%.

Revenue rose 0.6%, to $1.47 billion from $1.46 billion a year earlier. Gains at the education division (up 1.8%) and financial-information division (up 1.6%) offset a 5.1% drop at the media operations.

In Europe, concerns over sovereign debt cut issuances of new bonds by 56.3% from a year earlier. In the U.S., new bond issues fell by 40.0%.

However, Standard & Poor’s continues to benefit from rising investor interest in exchange-traded funds. In the latest quarter, the company managed $230.6 billion of assets in exchange-traded funds linked to S&P indexes, up 21.5% from a year ago. That’s good news for McGraw-Hill, since its management fees rise and fall with the value of these securities.

Several U.S. states are cutting their spending on school textbooks. That will probably weigh on McGraw-Hill’s earnings. However, the stock trades at just 11.5 times the $2.61 a share the company will probably earn in 2010. That’s cheap in light of its strong brands and leading market share.

McGraw-Hill is a buy.

MOODY’S CORP. $23 (New York symbol MCO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 237.0 million; Market cap: $5.5 billion; Price-to-sales ratio: 2.9; Dividend yield: 1.8%; WSSF Rating: Average) provides credit ratings and information on bonds and other securities. It also makes software that helps banks and other lenders manage their credit risk.

Credit ratings account for about 90% of Moody’s revenue, so the credit crisis of 2007/2008 hurt the company more than McGraw-Hill or Dun & Bradstreet (see below). Now that the crisis has passed, businesses have resumed selling new bonds to pay for expansion. That’s pushing up demand for Moody’s credit ratings.

In the three months ended June 30, 2010, Moody’s revenue rose 6.0%, to $477.8 million from $450.7 million a year earlier. Earnings rose 10.7%, to $121.0 million, or $0.51 a share, from $109.3 million, or $0.46 a share, a year earlier.

The higher results partly reflect lower restructuring charges. When the credit crisis cut new bond issues, the company responded by laying off 10% of its workers over the past two years. It also sold less-profitable businesses. It has now paid many of the resulting costs, including severance payments. If you exclude restructuring costs and other unusual items, the latest earnings would have risen 13.2%.

A judge recently dismissed a class-action lawsuit against the company. This lawsuit accused Moody’s of inflating its ratings on mortgage-backed securities so it didn’t risk losing future fees from clients who issued these securities. The ruling should make it easier for the company to fight similar lawsuits.

Moody’s trades at just 12.8 times its likely 2010 earnings of $1.80 a share.

Moody’s is a buy.

DUN & BRADSTREET CORP. $70 (New York symbol DNB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 50.4 million; Market cap: $3.5 billion; Price-to-sales ratio: 2.2; Dividend yield: 2.0%; WSSF Rating: Average) is the world’s largest provider of credit reports on individual companies. Its database contains information on 150 million businesses in over 200 countries. Companies use these reports to make lending and purchasing decisions, and to cut their credit losses.

The company gets two-thirds of its revenue from credit reports. The rest comes from other information products, including software to help companies manage customer data and Internet sites.

In the three months ended March 31, 2010, Dun & Bradstreet’s earnings fell 7.9%, to $66.2 million from $71.9 million a year earlier. The company is an aggressive buyer of its own shares. Because of fewer shares outstanding, earnings per share fell just 3.0%, to $1.29 from $1.33. The latest earnings excluded a $0.26-a-share charge related to the new U.S. healthcare law. They also exclude other expenses related to a cost-cutting plan.

Revenue rose slightly, to $397.2 million from $397.1 million a year earlier. A 22% revenue jump at its international operations (which supply 23% of total revenue) offset a 5% decline in North America.

The company’s revenue should keep rising as the economy continues to recover. As well, it is spending $120 million over the next two years to make its databases faster. That should encourage more users to switch to electronic products, which would cut Dun & Bradstreet’s delivery costs.

The company should earn $5.59 a share in 2010. The stock trades at just 12.5 times that estimate.

Dun & Bradstreet is a buy.

We think network operators like AT&T and Verizon provide a conservative way to profit from the popularity of wireless devices. That’s because they have wider and steadier revenue sources than device makers.

AT&T INC. $26 (New York symbol T; Income Portfolio, Utilities sector; Shares outstanding: 5.9 billion; Market cap: $153.4 billion; Price-to-sales ratio: 1.3; Dividend yield: 6.5%; WSSF Rating: Average) gets 50% of its revenue by selling traditional telephone services to 45 million customers in 22 states. The company’s wireless division has 87 million customers nationwide, and accounts for 45% of AT&T’s revenue. The remaining 5% comes from selling ads in telephone directories.

AT&T took its present form in November 2005. That’s when SBC Communications Inc. bought the old AT&T Corp. for $16.3 billion. The combined company took the AT&T name.

Thanks to this purchase and strong demand for wireless services, AT&T’s revenue rose 182.8%, from $43.8 billion in 2005 to $124.0 billion in 2008. Its 2009 revenue fell 0.8%, to $123.0 billion, mainly because of weak sales of traditional phone services.

AT&T’s earnings rose 168.8%, from $4.8 billion in 2005 to $12.9 billion in 2008. Earnings per share rose 52.1%, from $1.42 in 2005 to $2.16 in 2008, on more shares outstanding. Earnings fell 1.9% in 2009, to $2.12 a share (or a total of $12.5 billion). Since 2007, AT&T has been the exclusive U.S. carrier of the hugely popular Apple iPhone.

The company added 2.7 million new iPhone subscribers in the first quarter of 2010. About a third of these clients are new to AT&T. That helped drive up its earnings by 12.9%, to $3.5 billion from $3.1 billion a year earlier. Per-share earnings rose 11.3%, to $0.59 from $0.53, on more shares outstanding.

The latest earnings exclude a $995-million, non-cash charge related to the recently passed U.S. healthcare bill. The new rules eliminate a subsidy that companies get when they contribute to their retired employees’ prescription-drug plans. The change does not take effect until 2013, but accounting rules force AT&T to recognize these costs immediately.

Revenue rose 0.3%, to $30.65 billion from $30.57 billion a year earlier. A 10.3% rise in wireless revenue helped offset a 12.0% revenue drop at AT&T’s traditional telephone operations.

AT&T set to lose iPhone exclusivity

AT&T will probably lose its exclusive right to the iPhone when its contract with Apple expires later this year. However, the company has been upgrading its wireless networks and adding new smartphones to its lineup. These moves should help it hang onto its current customers and add new ones as more consumers switch to wireless from traditional phones.

The company is also adding new services that are helping it offset lower traditional phone revenues and compete with cable companies. For example, its Uverse service transmits television signals through high-speed Internet networks. U-verse has 2.3 million customers, up 72.7% from a year ago.

AT&T’s long-term debt of $60.0 billion is a reasonable 40% of its market cap. That gives it plenty of room to keep improving its networks. It trades at just 11.6 times its likely 2010 earnings of $2.25 a share.

AT&T is a buy.

VERIZON COMMUNICATIONS INC. $29 (New York symbol VZ, Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.8 billion; Market cap: $81.2 billion; Price-to-sales ratio: 0.8; Dividend yield: 6.6%; WSSF Rating: Average) owns 55% of Verizon Wireless; U.K.-based Vodafone plc owns the other 45%. This business has 92.8 million customers in 50 U.S. states, and accounts for 60% of Verizon’s revenue. The remaining 40% comes from selling traditional telephone services to over 31.8 million customers in 25 states.

Like AT&T, Verizon’s expanding wireless business has cut its reliance on traditional phone services. As part of this expansion, Verizon Wireless bought wireless provider Alltel Corp. for $28.1 billion in January 2009 (Verizon’s share of the cost was $15.5 billion). As a result, Verizon’s revenue rose 55.1%, from $69.5 billion in 2005 to $107.8 billion in 2009.

Strong revenue, uneven earnings

Despite the stronger revenue, Verizon’s earnings have been somewhat erratic. Earnings fell from $2.56 a share (or a total of $7.2 billion) in 2005 to $2.54 a share (or $6.0 billion) in 2006. Earnings rebounded to $6.9 billion in 2007, mainly because AT&T bought long-distance provider MCI, but per-share earnings fell to $2.36 on more shares outstanding. Earnings improved to $2.54 a share (or $7.2 billion) in 2008, but fell to $2.40 a share (or $6.9 billion) in 2009.

In the three months ended March 31, 2010, earnings fell 75.9%, to $0.14 a share (or a total of $409 million) from $0.58 a share (or $1.6 billion) a year earlier. Without unusual charges, earnings would have fallen 3.4%, to $0.56 a share. But revenue rose 1.2%, to $26.9 billion from $26.6 billion, because of 1.5 million new wireless customers.

Verizon’s high-speed Fibre-Optic Service (FiOS) continues to attract new customers. It now has 3.6 million FiOS Internet users, up 30.2% from a year earlier. It also has 3.0 million FiOS TV subscribers, up 36.6% from a year ago.

The company’s long-term debt of $54.4 billion is 67% of its market cap. That’s higher than AT&T’s debt, but still manageable. The stock trades at 12.7 times the $2.29 a share it should earn this year.

Verizon is a buy.

(To show you how our system works, we’d like to share one of the income investing fund buys we recently recommended in Canadian Wealth Advisor. Please read on for full details.)

Rating mutual funds is more complex than rating individual companies. When we judge a company’s investment quality, we take nine key factors into account.

These are: a record of profit; a record of dividends; an influential industry position; balance-sheet strength; geographical diversification; freedom from business cycles; freedom from excess regulation or insider abuse; ability to profit from lasting secular trends (such as global economic liberalization); and the ability to cash in on habitual customer behaviour.

Look beyond performance to find the top funds for income investing and capital gains

Mutual funds are a step removed from these factors. Before we award our fund ratings in Canadian Wealth Advisor, we assess a fund’s strengths and weaknesses in several key areas.

We start by looking at the quality of the fund’s holdings, based on our nine key factors. Then we look at the degree to which these are spread out across the five main economic sectors (Manufacturing & Industry, Resources, Consumer, Finance and Utilities).

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Funds that focus on narrow segments are more risky or aggressive than those that diversify, even if they focus on a conservative area, such as Utilities.

We then look at where the fund invests. Canada, the U.S., Japan and parts of Europe offer conservative opportunities and income investing possibilities. Many investments in other parts of the world involve extra risk. We also look at the fund’s trading frequency and use of derivatives or leverage; both of these cut quality and raise risk.

Most other fund-rating systems make the mistake of focusing too heavily on performance. The problem here is that low-quality funds can be great performers for long periods. But when the winning streak ends, horrendous losses can follow.

Our goal is to keep you out of these “time bomb” funds and help you focus on the high-quality funds that will likely lead to long-term investment success.

A top mutual fund buy for income investing

Here’s how our fund ratings work for one of our mutual-fund recommendations in Canadian Wealth Advisor:

Guardian Monthly High Income II Fund (CWA Rating: Income) (GGOF Guardian Group of Funds, Commerce Court West, Suite 4100, P.O. Box 201, Toronto, Ontario M5L 1E8. 1-800-668-5613; Web site: www.ggof.com. Available from brokers) is a good example of a fund we rate as Income.

Guardian Monthly High Income II continues to emphasize more stable real estate investment trusts (REITs) and high-quality, long-lived resource trusts that pay out a low percentage of cash flow as distributions. This should help the fund keep distributions high even after Ottawa’s tax changes in 2011.

Guardian Monthly High Income II pays a $0.06 monthly distribution, for a 6.8% yield. The fund has an MER of 2.30%.

The $574.3-million fund’s top holdings are Crescent Point Energy Trust, RioCan REIT, ARC Energy, Bonavista Energy Trust, Cominar REIT, IESI-BFC, Vermilion Energy Trust, CML Healthcare Income Fund, Canadian REIT and Enerplus Resources Fund.

If you’d like more of this type of safety-conscious investment advice, you should subscribe to Canadian Wealth Advisor. Click here to learn how you can get one month free when you subscribe today.

Guardian Monthly High Income II pays a $0.06 monthly distribution, for a 6.8% yield. The fund has an MER of 2.30%.

The $574.3-million fund’s top holdings are Crescent Point Energy Trust, RioCan REIT, ARC Energy, Bonavista Energy Trust, Cominar REIT, IESI-BFC, Vermilion Energy Trust, CML Healthcare Income Fund, Canadian REIT and Enerplus Resources Fund.

Guardian Monthly High Income II is a buy.

McKesson’s revenue rose 32.4%, from $80.5 billion in 2005 to $106.6 billion in 2009 (its fiscal year ends March 31). Earnings rose 82.8%, from $653.3 million in 2005 to $1.2 billion in 2009. McKesson aggressively buys back shares, so earnings per share rose 96.3%, from $2.18 in 2005 to $4.28 in 2009.

New payment system cuts risk

A large part of these gains came from a change in the way McKesson buys drugs from pharmaceutical companies. Under the old method, which ended in 2006, it would have to buy more drugs than it needed and hope to sell them at a high price later. Speculating on drug prices exposed it to a great deal of risk.

Drugmakers now sign long-term contracts, and McKesson charges them a handling fee. This lowers the company’s inventory costs, and gives it steady and predictable revenue streams.

McKesson has also gained from increased use of generic drugs. It makes higher profit margins from these than it does from brand-name drugs. Many topselling pharmaceuticals, such as Lipitor (high cholesterol) and Plavix (stroke) will lose their patent protection over the next two years. This should help lift McKesson’s profits. As well, the Obama administration’s health-care proposals call for greater use of generics to control costs.

Big profits from small division

Besides distributing drugs, McKesson is developing a second business that helps pharmacies and clinics better manage their drug inventories, patient records and other data. This operation supplies just 3% of the company’s revenue, but 22% of its profits. Automating this information helps McKesson’s customers reduce medical errors and speed up insurance claims.

The recession has prompted hospitals and doctors to put off spending on new computers and software. However, like generic drugs, computerizing patient records is a key part of all current plans to cut healthcare costs. Whatever the outcome of the health-care debate, McKesson will likely gain from these trends.

Focus on small acquisitions

McKesson likes to use acquisitions to expand. This is particularly true of its medical-information-management business. But it cuts the risk of this approach by focusing on small firms and assets that it can easily absorb. McKesson’s $2.3-billion long-term debt is a low 15% of its market cap, so it has plenty of room to make more purchases. It holds cash of $2.6 billion, or $9.94 a share.

The company’s fiscal 2010 earnings will probably slip to $4.24 a share, and the stock trades at just 13.4 times that estimate. The $0.48 dividend yields 0.8%.

McKesson is a buy.