Portfolio Review

1/23/2012


Newmont downgraded

Newmont Mining ($61; NEM) is being removed from the Buy list but will remain a Long-Term Buy. The stock still gives investors exposure to precious metals and a decent yield but no longer qualifies as one of our top picks for 12-month gains.

Newmont's Quadrix Overall rank, currently 77, has been declining since August. And escalating production costs threaten to cut into profitability in 2012. Newmont sees gold production flat to down 4% in the year ahead and copper production slipping 17% to 27% as extraction costs for both metals rise. Based on preliminary results for the December quarter, gold production slipped 7%, while copper fell 35%.

Newmont linked its quarterly dividend to the miner's three-month average realized gold price, effectively raising the quarterly distribution from $0.15 per share paid in March to $0.35 in December. Newmont realized an average gold price of $1,670 per ounce in the December quarter, implying a March-quarter dividend of $0.35. Of course, the new policy also introduces more downside volatility to Newmont's dividend. Individual analysts' gold projections are diverging, and gold has slumped 13% from the record close of $1,900 per ounce in September.

Wall Street anticipates per-share-profits of $1.30, up 12% when Newmont reports December-quarter results on Feb. 24. The consensus projects profit growth of 32% in 2012.

Financial update

J.P. Morgan Chase ($35; JPM) earned $0.90 per share in the December quarter, down 20% but meeting Wall Street estimates. Citing the strength of J.P. Morgan's balance sheet, CEO Jamie Dimon said the bank could swallow a $5 billion loss on its $15 billion exposure to Portugal, Ireland, Italy, Greece, and Spain (the infamous PIIGS countries). Revenue slid 17% to $22.20 billion, missing the consensus, as investment-banking revenue plunged 30%, short of a company target set last month. Commercial-banking revenue rose 5%, one of few bright spots, as business-loan growth improved.

J.P. Morgan's credit-card revenue and income fell, but sales volume rose 9%, which could bode well for MasterCard ($346; MA) and Visa ($103; V), operators of electronic payment networks. In other news, the European Union is reportedly exploring legislation to cap the interchange fees charged to retailers when customers use credit or debit cards.

Neither MasterCard nor Visa collect interchange fees, which are generally paid to cardholders' banks. But lower interchange fees could put pressure on the fees MasterCard and Visa charge. Europe represented 30% of MasterCard's gross dollar volume in 2010 but just 2% of Visa's operating revenue in fiscal 2011 ended September. MasterCard is a Focus List Buy and a Long-Term Buy. J.P. Morgan Chase is a Long-Term Buy. Visa, already a Long-Term Buy, is being added to the Buy List — see Analysts' Choice for a more detailed review.

Technology report

The iPhone 4S, initially panned as a lackluster upgrade from previous models, has shrugged off early criticism and revitalized Apple's ($425; AAPL) position in the smartphone market. Nearly 45% of smartphone buyers selected an iPhone in December, up from 25% in October, according to a survey conducted by Nielsen. The survey says Google's ($629; GOOG) Android operating system captured 47% of smartphone sales in December, down from 62% in October. Apple and Google are rated Focus List Buy and Long-Term Buy.


Seeking to censor offensive Internet content, India's government officially sanctioned 21 companies, including Google and Facebook, making them vulnerable to criminal prosecution. The next hearing is scheduled for March. India passed legislation last year that holds companies responsible for material posted to their websites, including user-generated content. Google has petitioned to revoke the law, claiming it cannot possibly monitor and pass judgment on every bit of copy on its sites. China already blocks entire websites displaying material deemed inappropriate. The Internet is still an emerging presence in India, where less than 10% of the population has access. In other news, the Federal Trade Commission is reportedly investigating a complaint stemming from Google's decision to allow its search engine to include content from its social network Google+.

Corporate roundup

Agilent Technologies ($40; A) initiated a quarterly dividend of $0.10 per share, payable April 25. Agilent, which makes instruments and measurement products for electronics and life sciences, has delivered free-cash-flow growth in eight consecutive quarters. The company now holds $1.34 billion, or $3.82 per share, in net cash. Agilent Technologies is a Focus List Buy and a Long-Term Buy.


Chevron ($107; CVX) said a drilling rig off Nigeria's coast caught fire, and two of the 154 workers on the rig are still missing. The cause of the fire is uncertain, though Chevron said initial indications point to a possible failure of the surface equipment. Chevron owns a 40% stake in the well. In other news, Bulgaria canceled a permit held by Chevron to search for natural gas. Citing environmental concerns, the country has outlawed a drilling technique known as hydraulic fracking, or the forcing of water, sand, and chemicals into shale formations to find oil or natural gas. Chevron is a Focus List Buy and a Long-Term Buy.


Citing production problems, Walter Energy ($60; WLT) warned that December-quarter results would miss the guidance it had already lowered in November. The coal miner had projected per-share earnings of $1.91 to $2.39. Walter also lowered its 2012 production outlook for metallurgical coal but still sees growth of 32% to 49%. For now, Walter Energy, trading at just nine times the lowest analyst profit estimate for 2012, remains a Buy.


U.S. prices for used farm equipment rose in the December quarter, said industry researcher Machinery Pete. The report provides yet another signal of favorable conditions in the farming industry, implying strong demand for the new equipment sold by AGCO ($50; AGCO), Caterpillar ($103; CAT), and Deere ($85; DE). AGCO is a Focus List Buy. Caterpillar and Deere are rated A (above average).

Telecom and TV review

AT&T ($30; T) is weighing alternatives following a failed $39 billion deal for T-Mobile USA. The telecom giant acquired $1.93 billion of wireless spectrum from Qualcomm ($57; QCOM) earlier this month but still may not have enough to equip its network for faster wireless speeds. At least one analyst has said AT&T could be interested in purchasing DISH Network ($29; DISH), which snapped up spectrum in two separate deals last year. DISH CEO Joe Clayton, never shy about stoking merger speculation, said, "We're open to all possibilities."

AT&T and DISH have limited business overlap, unlike the T-Mobile combination that collapsed under antitrust concerns. Some investors have suggested DISH could pursue the larger T-Mobile USA, but such a deal would severely stretch a balance sheet already heavy on debt. Meanwhile, DISH rival DirecTV ($44; DTV) said it plans to raise subscribers' monthly bills by roughly 4% starting Feb. 9. DirecTV is a Focus List Buy and a Long-Term Buy. DISH and Qualcomm are rated Buy and Long-Term Buy. AT&T is rated C (below average).

Rank Changes

Visa ($103; V) is being added to the Buy List. Newmont Mining ($61; NEM) is being dropped from the Buy List, though it remains a Long-Term Buy.


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