Portfolio Review

3/5/2012


Newmont downgraded

Excluding a $1.6 billion impairment for a Canadian mine, Newmont Mining ($62; NEM) earned $1.17 per share in the December quarter, up 1% but $0.10 below the consensus on 9% revenue growth. Gold production fell 7% and copper production 35% in the quarter, and Newmont expects flat to slightly lower gold production and at least 17% lower copper production in 2012. However, Newmont projects gold production of at least 7 million ounces by 2017, equating to annualized growth of nearly 20%. The back-loaded projection requires that a lot of things go right in an industry known for production delays.

Newmont didn't offer profit guidance for 2012, just targets for higher costs, lower production, and gold prices 10% below those realized in the December quarter. Not surprisingly, the profit consensus is on the decline, down 20% over the last month and now calling for just 2% growth. Barring a substantial rise in gold prices from today's historically high levels, we are no longer confident in even those lower expectations for the company. At 14 times trailing earnings, Newmont isn't particularly expensive, but neither is it cheap enough to fully reflect the risks. Newmont is being dropped from the Long-Term Buy List.

Corporate roundup

Apple ($535; AAPL) is expected to unveil its newest device, the iPad 3, on March 7. News sent the shares to an all-time high. The launch comes as Apple's claim on the iPad name has been cast into doubt. Proview Electronics filed a lawsuit against Apple in the U.S., expanding its dispute over the iPad trademark. Through a special-purpose entity called IP Application Development Limited, Apple bought the iPad naming rights from Proview in 2009 for $55,000. But Proview says it was told the motive behind the deal was to secure the abbreviation of company's title, and that Apple's future products wouldn't compete with Proview, which makes computer displays and other components. In other news, Apple gave shareholders a stronger voice in selecting its board but made no decision on initiating a dividend. Apple shares, up more than 30% this year, still trade at just 15 times trailing earnings, 20% below their three-year average and just 4% above the median for computer-hardware stocks in the S&P 1500 Index. Apple is a Focus List Buy and a Long-Term Buy.


Abbott Laboratories ($57; ABT) agreed to pay up to $1.35 billion for a rheumatoid arthritis pill being developed by Galapagos ($13; GLPGF) of Belgium. The deal was reportedly the largest ever for a drug in midstage trials, and the pill could reach the market by 2017. Abbott Labs is a Long-Term Buy.


Exxon Mobil ($87; XOM) targets annual capital expenditures of $37 billion for the foreseeable future, up from a record $30.98 billion spent in 2011. Exxon is a Buy and a Long-Term Buy.


BP ($48; BP) is reportedly near a settlement with individuals and businesses harmed by the 2010 oil spill in the Gulf of Mexico that would pay out a total of $14 billion. BP is rated B (average).


Warren Buffett, 81, said he has decided on his successor as CEO of Berkshire Hathaway ($79; BRKb) but declined to identify the heir apparent. The disclosure is a positive step but will only partially address longstanding concerns about the future of the giant insurance company better known as the investment vehicle of a financial icon. Berkshire is rated B (average).

Dividend and share news

Aetna ($47; AET) boosted its share-repurchase program by $750 million to more than $1 billion, roughly 6% of the share count at current prices. Aetna is a Focus List Buy and a Long-Term Buy.


St. Jude Medical ($43; STJ) raised its quarterly dividend 10% to $0.23 per share, payable April 30. St. Jude is a Long-Term Buy.

Smartphone review

Apple's iPhone narrowed the lead of Google's ($618; GOOG) Android in U.S. market share in December, capturing nearly 45% of new smartphone sales versus 47% for Android. In October, iPhones accounted for just 25% of U.S. sales, versus nearly 62% for Android devices. Apple owes its success in part to the favorable terms it negotiated with U.S. carriers, which pay an estimated $400 for each iPhone purchased with a two-year contract. But Android-based phones continue to dominate the iPhone in southern Europe, where carriers don't offer subsidies and customers must pay full price for smartphones.

Other companies are trying to capitalize on that environment. Qualcomm ($62; QCOM), Spanish telecom Telefonica ($17; TEF), and Mozilla Foundation, maker of the Firefox web browser, are building a free platform for cheaper, more power-efficient smartphones that could undercut operating systems designed by Apple, Google, and Microsoft ($32; MSFT).

Scrambling to gain a foothold in the mobile market, Intel ($27; INTC) partnered with France Telecom ($16; FTE) to supply semiconductors for a forthcoming Android smartphone. Intel will also power mobile devices made by Motorola Mobility Holdings ($40; MMI), Hong Kong-based Lenovo Group ($18; LNVGY), and two other Asian companies. Apple, Intel, and Qualcomm are rated Focus List Buy and Long-Term Buy. Microsoft is a Buy and a Long-Term Buy. Google is a Long-Term Buy.

DISH ready to switch channels

DISH Network ($29; DISH) grew earnings per share 25% to $0.70 in the December quarter, $0.09 above the consensus on 13% sales growth. DISH added 22,000 net subscribers in the quarter while average revenue per user (ARPU) rose 4%. Looking ahead, DISH expects to grow both subscriber count and ARPU in 2012, without relying on a rate hike to offset higher programming costs. DISH also plans to shutter more than 500 Blockbuster stores, about one-third of existing locations.

Shares wavered on the strong results as jittery investors handicapped the likelihood of DISH building out a wireless network. DISH has applied for a waiver to convert its spectrum for mobile-phone use, and the Federal Communications Commission is expected to rule on the matter by March 12. Chairman Charlie Ergen gives DISH an 80% chance of succeeding in the wireless market. Controlling a 53% equity stake in DISH and 90% of the voting power, Ergen appears intent on packaging DISH's home video with wireless services. However, investors shouldn't ignore the possibility that Ergen, once a professional poker player, might be bluffing.

Though management appears confident about clearing the regulatory hurdles, DISH says it will consider writing down or selling the spectrum should the FCC delay approval. However, it's worth noting that in making its case to the FCC, DISH argued that the waiver would reduce the concentration of spectrum in the wireless industry — and regulators could use that same reasoning to block any potential deal between DISH and AT&T ($31; T) or any of the other telecoms. DISH is a Buy and a Long-Term Buy. AT&T is rated C (below average).

Rank Changes

Newmont Mining ($62; NEM) is being dropped from the Long-Term Buy List.


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