Portfolio Review

1/16/2012


Smartphone review

Motorola deflates Google

Motorola Mobility Holdings ($38; MMI), the object of Google's ($623; GOOG) pending $12.5 billion acquisition, said December-quarter results would fall short of Wall Street's expectations. Google will acquire a trove of wireless patents with the acquisition, but the warning sparks concern that Google could also get saddled with a smartphone maker whose business is deteriorating.

Android, Google's mobile operating system, holds a 47% share of the U.S. smartphone market, up from 26% last year. Apple ($423; AAPL) is also gaining share, albeit at a slower pace, reaching 29% from 25% a year ago. However, analysts are raising their December-quarter sales estimates for Apple's iPhone following bullish comments from AT&T ($30; T) and Verizon Communications ($39; VZ). Both Apple and Google are rated Focus List Buy and Long-Term Buy. Both AT&T and Verizon are rated C (below average).

Microsoft, Intel to go mobile

Microsoft ($28; MSFT) has been waiting a long time for this kind of buzz. The shares hit a 52-week high early this month, up 16% from November lows, lifted by enthusiasm about new products.

Over the last five years, Microsoft spent more than $44 billion on research and development, more than any other U.S. technology company. But after a series of flops, the software giant has failed to do much in mobile devices. Despite positive reviews regarding its design and ease of use, the company's Windows Phone operating system powers less than 2% of the world's smartphones.

However, excitement picked up heading into the annual Consumer Electronics Show, which began Jan. 9. Microsoft's Windows 8 operating system will go on sale sometime this year, partnering with longtime collaborator Intel's ($26; INTC) hardware to give both companies their first legitimate shot at the tablet-computing market. Intel's difficulties breaking into mobile computing have weighed on shares of the semiconductor giant.

A viable Wintel tablet-computer option could appeal to users who seek security features and seamless interface with both desktop and server computers that use Microsoft operating systems. We've heard similar songs before, and Microsoft in particular has a lot to prove. But a Microsoft/Intel partnership would bring unprecedented research and marketing heft to a tablet environment still dominated by Apple's iPad.

On the phone side, AT&T and T-Mobile announced plans to sell Nokia's ($5; NOK) Lumia smartphones, devices not only powered by Windows Phone, but designed specifically to use the software. And Motorola Mobility and Lenovo ($15; LNVGY) will start selling smartphones with Intel chips this year.

If Microsoft can muscle its way into the tablet and smartphone markets, projections for per-share-profit growth of 2% this year and less than 10% annually over the next five years should prove conservative. Intel has bounced 25% from October lows but still looks cheap, trading at 10 times trailing earnings, a discount of 36% to its five-year median.

In other news, Microsoft said global shipments for personal computers probably contracted by more than the consensus estimate of a 1% decline in the December quarter because of flooding in Thailand. That slowdown could affect Microsoft, Intel, and many other tech companies, though we won't know the impact until quarterly results start flowing in. Microsoft is a Buy and a Long-Term Buy. Intel is a Focus List Buy and a Long-Term Buy.

Agriculture report

Last summer's droughts hammered the U.S. seed crop, shrinking production by an estimated 25% to 50% and causing some smaller seed companies to warn of shortages for the upcoming planting season. Some Great Plains states are already seeing shortages. But the seed subsidiaries of Monsanto ($79; MON) and DuPont ($47; DD) both anticipate that their supplies will be sufficient to meet demand. Seed sales are an important factor in the price of fertilizer, and thus important to CF Industries ($166; CF).

Monsanto said early seed orders are exceeding last year's pace, as U.S. farmers, encouraged by high crop prices, groom more fields for planting. Such news offers reason for optimism about CF. CF's profit estimates are on the rise, but the 2012 consensus projects earnings growth of just 2% on 1% sales growth. The wide range of per-share-profit estimates (a low of $19.65 and a high of $30.19 versus the consensus of $23.11) reflect widely different opinions about CF. We see the consensus as unduly conservative. The ability to exceed expectations, coupled with a valuation of just seven times the 2012 consensus and a Quadrix® Overall score of 100, point to a lot of potential upside. CF Industries is a Focus List Buy and a Long-Term Buy. DuPont is rated A (above average). Monsanto is rated B (average).


AGCO ($50; AGCO) CEO Martin Richenhagen said 2012 revenue should rise to $10 billion in 2012, up 14% and slightly above the consensus, according to a German newspaper. Richenhagen also said that AGCO, with a market value of $4.8 billion, could benefit operationally from a takeover by Caterpillar ($100; CAT), valued at $66.6 billion. While AGCO makes sense as a potential target for the acquisitive Caterpillar, the executive said nothing about a potential deal, or even about negotiations.

Caterpillar has not commented about AGCO, and at the moment we are inclined to treat Richenhagen's statement as nothing more than a candid answer to a journalist's question — and an indication that AGCO would listen to a merger proposal. AGCO has risen 13% over the last week, in part because of Richenhagen's comments, but also because of a rally in grain prices in response to unusually hot weather in South America. Even after the rally, AGCO trades at just 10 times the 2012 profit estimate, 8% below the peer-group median. AGCO is a Focus List Buy. Caterpillar is rated A (above average).

Corporate update

DISH Network ($29; DISH) is launching a broadband satellite service in February, aimed at the roughly eight million American households living in rural areas with limited Internet options, and "millions more left with slower broadband alternatives." In other news, DISH secured a distribution deal with Univision Communications to air Spanish-language programs. DISH is a Buy and a Long-Term Buy.


Venezuela said it would reject any ruling made by a World Bank tribunal. In February, the tribunal is expected to begin weighing Exxon Mobil's ($86; XOM) compensation for assets nationalized in 2007. Earlier this month, International Chamber of Commerce arbitrators awarded Exxon $908 million for profits lost by the takeover, though Venezuela said it would only pay $255 million. Exxon had sought $12 billion in that case. Exxon Mobil is a Focus List Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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