Portfolio Review

1/9/2012


Retailers celebrate the holidays

Mild weather and big discounts produced a green Christmas on Americans' front lawns and in retailers' registers. For December, same-store sales for chain stores are projected to climb 4.3%, building on last year's 3.1%, according to a survey conducted by Thomson Reuters. The strongest growth is expected to come from luxury retailers and discounters.

Official data on December chain-store sales was slated for release Jan. 5. Those numbers exclude Wal-Mart Stores ($60; WMT), which accounts for about 11% of total U.S. sales but does not release monthly data.

The holiday sales growth probably came at the cost of lower profit margins. Shoppers, trained to wait for big sales during the downturn, balked at paying full price. In the days leading up to Christmas, procrastinators were rewarded with low prices.

Web sales started strong and stayed strong. U.S. Internet retail sales between Nov. 1 and Dec. 26 rose 15% to $35.3 billion, said comScore. In that period, all U.S. retail sales climbed 3.8%.

Not until the official numbers hit the street will we get a taste of the week following Christmas, which tends to be the busiest time of the year for gift-card redemptions. An estimated 80% of U.S. consumers bought gift cards, said the National Retail Federation, up from 77% a year earlier. Spending totaled $27.8 billion, or $43.23 per card. Retailers generally wait to book gift-card sales until after redemption. Sales growth coincided with improved consumer sentiment in December, as reported by the University of Michigan. However, unemployment remains high and paychecks aren't rising as quickly as spending, casting doubt on the sustainability of the retail-sales growth.

The Forecasts currently recommends Wal-Mart and three other retailers, two of which don't rely on holiday spending binges. Auto-parts sellers Advance Auto Parts ($69; AAP) and AutoZone ($320; AZO) are in a seasonally slow period. In contrast, homefurnishing and housewares retailer Bed Bath & Beyond ($58; BBBY) normally benefits from an end-of-the-year boost. The consensus projects per-share-profit growth of 18% in the February quarter on 6% higher sales, and estimates are on the rise.

In other news, AutoZone's largest investor slashed its stake to 13% from 22% in late December. ESL Partners, headed by billionaire investor Edward Lampert, sold the stock to meet investor redemptions for hedge funds. AutoZone shares still trade within 7% of a 52-week high set Dec. 6. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy. Advance Auto and AutoZone are rated Buy and Long-Term Buy. Wal-Mart Stores is a Long-Term Buy.

Energy update

• Consensus estimates see oil prices trading between $100 a barrel and $120 a barrel this year as global demand, especially in emerging markets, offsets weakness in the U.S. and Europe. Last year oil peaked at $114 a barrel in the spring. In the opening days of 2012, oil prices crept up to $103 per barrel, with Iran threatening to cut off 20% of the global supply.

Meanwhile, natural gas prices sunk to their lowest price in more than two years. That weakness stems in large part from an inventory glut, caused by the development of new shale fields throughout the U.S. Diversified giants Chevron ($110; CVX) and Exxon Mobil ($86; XOM) seem capable of riding out the slump and could be positioned to scoop up smaller competitors' production assets on the cheap.

• Exxon won a $908 million ruling against Venezuela, which seized some of the oil giant's assets in 2007 — far short of the $10 billion that Exxon had originally sought and even less than the $1 billion settlement the country offered in September.

• An appeals court in Ecuador rejected Chevron's attempt to overturn a ruling made last February that ordered the energy company to pay $18 billion for environmental damages that allegedly occurred almost two decades ago. Chevron dismissed the latest decision as unenforceable and has called for a criminal investigation into the presiding judge and the plaintiffs' lawyers. Following the announcement, Chevron shares moved in line with the S&P 500 Index.

• In other news, Apache ($96; APA) paid Exxon $1.25 billion for assets located in the North Sea, at least $250 million less than it had anticipated when the deal was announced in September. Both Chevron and Exxon are rated Focus List Buy and Long-Term Buy. Apache is a Long-Term Buy.

Corporate roundup

CF Industries' ($154; CF) stock price has sprouted 10% since the end of November, reaping a rich harvest for investors despite some high-profile bad news. Shares fell briefly after rival Mosaic ($53; MOS), citing weak prices and surplus supplies, said it plans to trim its phosphate production in the next three months. However, Mosaic also said it anticipates strong demand in 2012, and solid prospects for this year should continue to support CF shares, which gained back the lost ground and more in the three days after Mosaic's announcement. CF Industries is a Focus List Buy and a Long-Term Buy.


Walgreen ($33; WAG) plans to cut costs in an effort to offset lost revenue from a contract it failed to renew with pharmacy-benefits manager Express Scripts ($47; ESRX). Walgreen is offering coupons and other perks in the hopes of keeping Express Scripts customers away from rival pharmacies. Express Scripts had accounted for about 11% of Walgreen's prescriptions and 7% of revenue. Walgreen and Express Scripts are rated B (average).

Good news from Caterpillar

While some industrial and technology companies have reported weakening demand, construction- and agricultural-equipment giant Caterpillar ($94; CAT) remains optimistic. Caterpillar's results are a widely followed indicator of global economic health, and the company's machine sales rose at least 30% in September, October, and November. Strength in North America and Europe in November was particularly encouraging. The company expects sales growth of 10% to 20% next year, roughly in line with the consensus, reflecting a slowdown from the torrid pace of last year but still indicative of solid demand. The consensus projects profit growth of 28% next year.

Caterpillar backs up its optimistic words with its wallet. The company has invested aggressively in recent quarters, particularly overseas. In the 12 months ended September, Caterpillar spent $3.5 billion on capital projects, up 49% from a year earlier. This month the company announced plans to expand its research & development center in China, the world's largest market for construction equipment. Caterpillar is not cheap relative to its peers, and the shares are not among our very top selections in the industrial sector. But Caterpillar does earn an A (above average) rating.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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