Portfolio Review

2/13/2012


Earnings report

In the December quarter, AGCO ($52; AGCO) grew per-share profits 66% to $1.44 excluding special items, topping the consensus by $0.11. AGCO, a maker of farm equipment, grew sales 16% to $2.52 billion, helped by a 29% gain in North America. With a favorable farm outlook likely to keep global equipment demand strong, AGCO expects 2012 earnings per share of roughly $5.00, implying growth of 12%. Shares pulled back on the results, possibly because the company didn't raise 2012 guidance, but remain up 22% for the year. The stock is rated Focus List Buy.

Wyndham Worldwide ($41; WYN) shares rallied after the company said December-quarter earnings per share rose 2% to $0.47 excluding special items, exceeding the consensus by $0.03. Revenue advanced 7% to $1.0 billion on growth at all three business segments. Wyndham's 2012 target ranges have midpoints of $4.5 billion for revenue, implying 6% growth, and $2.93 per share for earnings, implying 18% growth. Both targets topped consensus estimates. The company also hiked its quarterly dividend 53% to $0.23 per share. Wyndham is a Focus List Buy and a Long-Term Buy.

Credit-card roundup

MasterCard ($393; MA) shares rallied after the company said it earned $4.03 per share excluding litigation charges of $495 million in the December quarter, up 28% and $0.12 above the consensus. Revenue grew 20% to $1.73 billion. Global spending on the company's branded cards rose 16% to $863 billion excluding currency exchange, while processed transactions jumped 23%. The company also doubled its quarterly dividend to $0.30 per share, payable May 9. MasterCard is a Focus List Buy and a Long-Term Buy.

Visa ($107; V) earned $1.49 per share in the December quarter, up 21% and $0.04 above the consensus. Operating revenue climbed 14% to $2.55 billion, also topping the consensus. Payment volume grew 11% and processed transactions increased 8%. Visa expects free cash flow for fiscal 2012 ending September to exceed $4 billion, implying at least 29% growth. The company also approved $500 million in share repurchases. Visa is a Buy and a Long-Term Buy.

Alliance Data Systems ($116; ADS) reported core earnings per share of $1.70, up 9% and easily surpassing the consensus of $1.49. Alliance Data, which administers marketing and loyalty programs and issues private-label credit cards for retailers, said sales advanced 12% to $848 million. The company raised its 2012 profit outlook to $8.45 per share, implying 11% growth on 9% higher revenue. The stock is a Focus List Buy and a Long-Term Buy.

Sector updates

Health care

Medical-device makers tentatively agreed to more than double their funding of the U.S. Food and Drug Administration to $595 million over five years to expand the agency's staff and accelerate product reviews. Under terms of the new deal, the FDA will have stricter deadlines for approving devices, while the larger staff will hopefully reduce the number of recalls. It is difficult to determine whether this is a net positive or negative for medical-device stocks.

St. Jude Medical ($43; STJ) sees sales growing 4% to 7% this year, well above the consensus target of 2%. The company expects to take share in a shrinking market for cardiac rhythm management, while new products from its pipeline appear poised to let St. Jude increase its presence in faster-growing segments of the cardiac-care market. With shares up 27% this year but still trading 26% below their five-year average trailing P/E ratio, St. Jude Medical is a Long-Term Buy.

Express Scripts' ($51; ESRX) $29.1 billion bid to acquire Medco Health Solutions ($61; MHS) has come under pressure from U.S. antitrust regulators. In addition, a trade group representing 1,250 grocery-store operators (a total of 26,000 stores) claims the deal would reduce stores' ability to offer cheap prescriptions. Medco is rated A (above average). Express Scripts is rated B (average).

Technology

Apple ($469; AAPL) resumed online sales of its devices in Germany after a brief disruption from an injunction won by Motorola Mobility Holdings ($39; MMI). The two companies have struggled to agree on a licensing fee for patents used in certain Apple devices. In other news, Apple has reportedly struck a deal to distribute the iPhone 4S through China Telecom ($56; CHA), the country's third-largest telecom carrier. Apple is a Focus List Buy and a Long-Term Buy.

European regulators asked Google ($607; GOOG) to postpone a new privacy policy until after they investigate whether the policy protects users' personal data. Among other changes, Google's policy calls for including photographs and posts taken from Google+, its social networking site, in its search-engine results. Congress has also questioned how the company will disclose its use of personal data. Google is a Buy and a Long-Term Buy.

Consumer discretionary

U.S. lawmakers plan to review a pair of spectrum deals, including a $3.6 billion agreement made by Comcast ($27; CMCSa) and Time Warner Cable ($75; TWC) to sell their airwaves to Verizon Wireless. The deal also includes a marketing agreement between the companies that critics claim could potentially stifle competition. Comcast is a Long-Term Buy.

DISH Network ($29; DISH) asked U.S. regulators to turn down AT&T's ($30; T) request that would force the pay-TV company to build out its network quickly to address surging demand for wireless devices. DISH called AT&T's proposed schedule unrealistic. DISH is a Buy and a Long-Term Buy. AT&T is rated C (below average).

Aflac has bounced back

Aflac ($49; AFL) hit an eight-month high this month, suggesting Forecasts editors are not the only ones who believe the insurer is moving beyond its troubles. Aflac sparked concerns by projecting a 2% to 5% decline in Japan new annualized premium sales this year. But the guidance probably hasn't changed much from the company's earlier targets — it just sounds bad in the wake of an unexpectedly strong 31% increase in the December quarter. Aflac shares are up 14% since the end of the year and 57% from September lows. Despite that strong performance, Aflac still earns a Quadrix Value score of 95.

The company's European bank- and sovereign-debt holdings still have some investors worried. At the end of September, the company held $2.4 billion in debt issued by banks or governments in the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries, down 46% since the end of 2010. The company plans to continue aggressively reducing its exposure to the PIIGS in 2012.

Consensus profit estimates project 5% growth this year and 7% next year, targets that seem overly conservative. Aflac expects its U.S. business to grow premium sales 3% to 8% this year. And the new sales channels that drove growth in Japan last year could surprise to the upside in 2012. Aflac is a Buy and a Long-Term Buy. 

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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