Portfolio Review

1/30/2012


Apple blows us away again

Apple ($448; AAPL) shares jumped after the company said it grew per-share earnings 116% to $13.87 in the December quarter, crushing the consensus estimate of $10.08. Sales soared 73% to $46.33 billion, $7.5 billion above the consensus. Cash provided by operations jumped 80% to $17.55 billion. Apple sold 37.0 million iPhones, up 128%, and 15.4 million iPads, up 111%. Hoping to get the iPad into even more hands, Apple unveiled its plan to expand into digital textbooks. The books, likely to be purchased directly through Apple, will incorporate interactive features accessible to iPad users.

Looking ahead to the March quarter, management's guidance exceeded consensus projections for both sales and earnings per share. Apple expects 32% sales growth and 33% per-share-profit growth for the quarter. Despite the impressive operating momentum and recent run-up, Apple still looks reasonably valued at less than 13 times the consensus profit estimate of $35.48 per share, a target likely to rise in the wake of the December-quarter surprise and strong guidance. Apple is a Focus List Buy and a Long-Term Buy.

St. Jude tops target, tries to calm fears

St. Jude Medical ($39; STJ) grew earnings per share 15% to $0.86 excluding special items in the December quarter, topping the consensus by $0.02. Revenue grew 4% to $1.41 billion. The cardiac-rhythm-management (CRM) unit, which accounts for about half of St. Jude's revenue, posted a 4% sales decline. Offsetting that weakness were double-digit gains at each of St. Jude's three smaller units. The company guided to per-share profits of $3.43 to $3.48 in 2012, implying growth of 5% to 6%. However, management considers its outlook conservative. The consensus was $3.52 per share at the time of the announcement.

St. Jude released preliminary results in early January, seeking to calm investors' concerns that the discontinued Riata lead for defibrillators could cripple its reputation and erode market share. Data is still being collected to gauge the severity of the problem. But it appears the defective leads are primarily found in the oldest versions of the implants — about 2,000 of the 79,000 active Riata leads in the U.S. Moreover, St. Jude, with a little help from its rich pipeline, expects to gain share in the CRM market this year. It has secured more than 150 contracts for its new Quadripolar technology that helps doctors adjust electrical impulses for implantable-heart devices. St. Jude is a Long-Term Buy.

December-quarter earnings roll call

Technology

Intel ($27; INTC) said earnings per share surged 21% to $0.68 in the December quarter excluding acquisition-related items, exceeding the consensus by $0.07. Sales jumped 21% to $13.89 billion, also ahead of the consensus. Revenue for semiconductors that power personal computers climbed 17%, while microchips destined for data centers grew 8%. Bolstered by the McAfee acquisition, sales for software and services jumped nearly 700%. Shares rallied on the results. Intel is a Focus List Buy and a Long-Term Buy.


In the December quarter, IBM ($192; IBM) grew per-share profits 11% to $4.71 excluding special items, surpassing the consensus of $4.62. Revenue crept 2% higher to $29.49 billion. For 2012, management expects earnings per share to rise 10% to $14.85, slightly ahead of the consensus at the time of the announcement. IBM's Quadrix Overall score has fallen to 68, and the stock is no longer a bargain. But the results, and the shares' positive reaction to them, are encouraging signs. IBM retains its Buy and Long-Term Buy ratings.


Microsoft ($29; MSFT) earned $0.78 per share in the December quarter, up 1% and $0.02 above the consensus. Sales for the flagship Windows business slipped 6% to $4.74 billion, hurt by supply disruptions caused by the Thailand flood and competition from tablet computers. But total revenue climbed 5% to $20.89 billion on growth at all other units, including an 11% jump at servers and tools and a 15% gain at entertainment and devices. Investors viewed the results with relief and pushed Microsoft shares to an 18-month high in the days following the report. Microsoft is a Buy and a Long-Term Buy.

Health care

UnitedHealth Group ($51; UNH) grew December-quarter earnings per share 24% to $1.17, well ahead of the consensus of $1.03. Sales advanced 8% to $25.92 billion, easing past the consensus projection. Membership increased 5% to 34.6 million. Management said March-quarter profits will likely lag December-quarter levels. At the time of the announcement, the consensus projected March-quarter earnings of $1.20 per share, $0.03 above the December-quarter number. UnitedHealth also reaffirmed its 2012 per-share-profit guidance of $4.55 to $4.75, below the $4.79 consensus. UnitedHealth Group is a Buy and a Long-Term Buy.


In the December quarter, Abbott Laboratories ($56; ABT) reported per-share profits of $1.45 excluding special items, up 12% and exceeding the consensus by a penny. Revenue increased 4% to $10.38 billion, slightly below the consensus. Sales of Humira surged 16%, and the nutritionals unit grew sales 9%. For 2012, Abbott expects per-share profits of $4.95 to $5.05, versus the consensus of $5.02 at the time of the announcement. Abbott is a Long-Term Buy.

Industrials

CSX ($22; CSX) earned $0.43 per share in the December quarter, up 13% but a penny below the consensus. Despite one fewer week in the 2011 December quarter than the year-earlier period, revenue rolled 5% higher to $2.95 billion, also slightly short of analysts' projections. The railroad's volume slipped 4% on declines of 8% for coal (23% of total volume) and 5% for intermodal shipments (36%). CSX also replaced its chief operating officer, who left the company for unspecified reasons. CSX stressed that his departure was "unrelated to CSX's financial condition, business performance, or outlook." CSX is a Long-Term Buy.


Dover ($60; DOV) grew December-quarter earnings from continuing operations 19% to $1.07 per share excluding tax benefits, exceeding the consensus by $0.04. Sales jumped 15% to $2.00 billion. Dover expects per-share profits to rise 10% to 17% in 2012, versus the consensus estimate of 9%. Dover is a Long-Term Buy.

Corporate roundup

Chevron ($107; CVX) filed an appeal with Ecuador's National Court of Justice to review an $18 billion judgment against the oil giant for environmental damages that occurred more than a decade ago. Chevron has accused the plaintiffs of "extensive fraud and corruption." A U.S. appeals court has rejected Chevron's bid to block Ecuador from enforcing the $18 billion ruling, but the matter could end up in the hands of an international arbitration tribunal. Chevron is a Focus List Buy and a Long-Term Buy.


Research In Motion ($15; RIMM) co-CEOs Jim Balsillie and Mike Lazaridis resigned, ending a tumultuous reign during which they oversaw the company's ascent and demise in the smartphone market. Yet RIM shares plunged, suggesting investors are unsatisfied with replacement Thorsten Heins, who has worked at the company since 2007 and plans to avoid making drastic changes. RIM's smartphone market share has slipped below 10%. RIM is rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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