Portfolio Review

3/19/2012


Technology roundup

Apple ($590; AAPL) is already reporting a backlog of preorders for its new iPad. Competition for the iPad trademark has also heated up, with a second company, apparently representing a group of Chinese banks, claiming the banks own the naming rights. Proview International was the first company to raise questions over the iPad name.

The new iPad will power growth for some as-yet-unknown components suppliers. Qualcomm ($65; QCOM) made the main wireless semiconductor in Verizon Communications' ($39; VZ) versions of the iPad 2, and one early report identifies Qualcomm as supplying the same type of chip in the new iPad But the biggest components winners won't be known until analysts tear down the new iPad, expected to arrive in stores March 16.

It's unlikely that Intel ($27; INTC) got a piece of the iPad business, but the company is reportedly gaining some ground in the smartphone market. Intel is also developing a TV service that allows media companies to distribute their channels over the Internet. Intel could launch the initiative by the end of the year. Apple, Intel, and Qualcomm are rated Focus List Buy and Long-Term Buy.

Ride rails with caution

So far this year, the S&P 1500 Railroads Index is down, while the air freight, marine, and trucking indexes are up. Railroad stocks have been hurt by weakness in coal shipments.

In the first nine weeks of 2012, North American railroads shipped more than 3.3 million carloads, up 0.2% from the same period last year. But coal shipments, which account for 35% of all carloads, are down more than 5%. To put this into perspective, carloads have risen 3.6% excluding coal.

With the economy continuing to improve, the intermediate-term outlook for railroads is solid. But in the near term, weakness in coal — and to a lesser extent grain, chemicals, and paper — could weigh on the shares of railroad stocks.

Canadian National Railway's ($79; CNI) Quadrix Overall score has declined to 49 in recent months, hurt by a slowdown in operating momentum and weak share-price performance. Canadian National is being downgraded to C (below average).


CSX ($21; CSX), trading at just 12 times trailing earnings, a 24% discount to the peer group and 17% below its own three-year average P/E ratio, remains our top selection in the group. CSX is a Long-Term Buy.

Big banks look a bit better

The Federal Reserve said 15 of the 19 large U.S. financial companies subjected to a stress test have passed. Only four of the companies, including Citigroup ($36; C), did not have sufficient capital to absorb a 21% fall in housing prices, a 50% decline in stock prices, and a rise in the unemployment rate to 13%. The results take into account companies' plans to raise dividends and buy back shares. Following the crisis of 2008, many financial institutions have strengthened their balance sheets, rendering them better able to deal with economic stress. Citigroup must submit a revised capital plan within 30 days.

The mostly favorable Fed report inspired a wave of dividend hikes and share buybacks. J.P. Morgan Chase ($43; JPM), the only bank on our Long-Term Buy List, set the tone in advance of the stress-test results, while several other banks acted after the stress-test news broke. J.P. Morgan raised its quarterly dividend 20% to $0.30 per share, payable April 30. The company also authorized the repurchase of up to $15 billion of its own shares by the end of March 2013, enough to shrink the share count by nearly 10% at current prices.

The economic environment is improving, and rising Quadrix® Earnings Estimates and Performance scores, coupled with consistently high Value scores, have supported an increase in banks' Overall scores. We are upgrading Bank of America ($8; BAC), Bank of New York Mellon ($23; BK), and Citigroup to B (average) from C (below average).

Health-care review

Abbott Laboratories ($59; ABT) received approval from U.S. regulators to market a new glucose-monitoring system and a new stent designed to deal with difficult lesions on arteries in the lower body. Both treatments should boost the medical-products business, still on track to split off from the pharmaceuticals unit by the end of 2012. Abbott sees the split-off as a chance to widen operating profit margins for the diagnostics and nutrition businesses, which will be folded into the medical-products company. 

Management says the total dividend paid by the resulting companies will match that paid by their predecessor, and both of the new entities should maintain investment-grade balance sheets. Abbott plans to release more details about the split in May or June. Abbott is a Long-Term Buy.


A tentative $1 billion offer to settle charges that Johnson & Johnson ($65; JNJ) illegally marketed antipsychotic drug Risperdal was rejected by the U.S. Justice Department, reported The Wall Street Journal. J&J is rated B (average). 

Retail report

AutoZone ($380; AZO) boosted its stock-buyback plan by $750 million, enough to repurchase about 5% of outstanding shares at current prices. Since February 2007, the auto-parts retailer has shaved 44% from its share count. AutoZone is a Buy and a Long-Term Buy.


Wal-Mart Stores ($61; WMT) cleared what may be the final legal hurdle in its $2.4 billion acquisition of African retailer Massmart. A South African court rejected the government's request to review the deal. Wal-Mart also said it is pleased with foot traffic in U.S. stores in the first five weeks of the fiscal year that began in February. But rising fuel costs could undercut that momentum and pinch Wal-Mart's core customers. Wal-Mart Stores is a Long-Term Buy.

Oil giants spend big

Exxon Mobil ($87; XOM) anticipates a 3% decline in production this year, followed by annual growth of 1% to 2% through 2016. Exxon, one of few energy companies to ratchet up capital expenditures during the recession, plans to spend $185 billion through 2016, up 61% from the last five years. Exxon Mobil is a Buy and a Long-Term Buy.


Powered by huge liquefied-natural-gas projects in Australia, Chevron ($111; CVX) maintains its 2017 production target of 3,300 million barrels of oil equivalent per day, compared to 2,738 million barrels last year, representing annualized growth of 3.4%. Chevron plans to boost capital spending 23% to $32.7 billion this year. Chevron is a Focus List Buy and a Long-Term Buy.

Rank Changes

No changes were made this week to the Dow Theory Forecasts buy lists.


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