Portfolio Review

3/26/2012


Jabil, Oracle post solid results

In the February quarter, Jabil Circuit ($26; JBL) earned $0.58 per share excluding stock-based compensation and amortization charges, up 7% excluding special items in the year-earlier period. Revenue rose 8% to $4.24 billion, nearly 4% above the consensus. Revenue from the diversified manufacturing unit, which designs parts and manages production for other companies, jumped 33%. That solid growth inspires optimism about overall technology spending.

Jabil expects per-share profits of $0.60 to $0.70 in the May quarter, straddling the $0.65 consensus. The consensus projects profit growth of 10% in the fiscal year ending in August, followed by 13% growth in fiscal 2013, and estimates for both periods have risen slightly over the last month. Jabil has hooked up with some big hitters, generating 13% of its revenue making products for Cisco Systems ($21; CSCO) while Apple ($606; AAPL) reportedly accounts for at least 10% of Jabil's sales. Aggressive expansion at both of those big customers boosts our confidence in Jabil's growth potential.

The shares have risen 35% so far this year but still trade at just 11 times trailing earnings, a 33% discount to the median contract manufacturer in the S&P 1500 Index and 35% below its own three-year average price/earnings ratio. Jabil is a Buy and a Long-Term Buy.


Oracle ($30; ORCL) grew per-share earnings 15% to $0.62 excluding special items in the February quarter, exceeding the consensus by $0.06. Revenue advanced 3% to $9.04 billion as 7% higher sales for new software licenses and an 8% gain in sales of license updates and support more than offset a 16% decline in hardware sales. Operating profit margins expanded for a fifth straight quarter.

Prior to the report, Oracle shares had lagged the S&P 500 Index by 12% over the last year. The stock was battered by concerns over Oracle's struggles to improve Sun Microsystems' hardware business, slower growth for its Exadata machine, and clients shifting toward cloud-based applications offered by competitors who don't require long-term service agreements.

Oracle's results didn't drive away all those fears, but they did reassure investors that the disappointing November quarter was probably a blip, not the start of a new trend. Oracle targets per-share profits of $0.78 to $0.83 for the May quarter, implying 4% to 11% growth and ahead of the $0.76 consensus at the time of the announcement. Oracle remains a Long-Term Buy.

Technology review

Apple ($606; AAPL) finally answered investors' $98 billion question, announcing a quarterly dividend of $2.65 per share starting in the September quarter and the repurchase of up to $10 billion in shares over a three-year period starting Sept. 30. Apple plans to distribute about $45 billion to shareholders over the next three years. The company holds nearly $98 billion of cash and securities, and free cash flow doubled to $40.94 billion in the 12 months ended December.

Some might have hoped for a larger distribution, but the move represents another strategic change by CEO Tim Cook, who is edging further off the path laid by larger-than-life predecessor Steve Jobs. The dividend implies a yield of 1.7%, below the 2.1% average for dividend-paying technology stocks in the S&P 500 Index but well above the initial yields of Microsoft's ($32; MSFT) first dividend in 2003 and Cisco Systems' ($21; CSCO) first dividend last year.

In other news, Apple said it sold more than 3 million new iPads during the device's opening weekend, roughly triple the estimated 1 million units sold in the first three days after iPad 2's release. The new iPad sells at the same price as the iPad 2 but is more expensive to manufacture, with costs reportedly up 9% for the version with fourth-generation wireless connectivity. Apple is a Focus List Buy and Long-Term Buy. Cisco and Microsoft are rated Buy and Long-Term Buy.


Cisco Systems agreed to purchase video-software maker NDS in a $5 billion deal that includes the assumption of about $1 billion of debt. Seeking to push into online-video services and security software, Cisco will dip into its overseas cash hoard to acquire NDS, based in England. Cisco CEO John Chambers envisions NDS software being used to stream live television directly to computing devices such as Apple's iPad, according to Barron's.


Qualcomm ($67; QCOM) shares hit a 10-year high following reports that it supplies components that connect the new iPad to fourth-generation networks. One analyst estimated that each new iPad contains more than $15 of Qualcomm components, versus an estimated $10 to $15 for the previous model. Of course, Apple sometimes uses more than one supplier for a part, and not all iPads feature 4G connectivity. But the report does highlight the benefits of Qualcomm pumping more than 20% of sales into research and development during the last six fiscal years. Qualcomm is a Focus List Buy and a Long-Term Buy.

Big oil's misadventures

Balls of oil have surfaced in waters off Brazil's coast, near the area where Chevron ($109; CVX) reported a leak in November. Chevron plans to stop pumping from the new field, which holds up to 300 million barrels of recoverable oil. The original leak amounted to less than 0.1% of the BP ($46; BP) spill in the Gulf of Mexico. Oil is leaking from the sea floor at the rate of less than a barrel a day, according to Chevron. The company's chemical analysis suggests the new leak is not related to the November spill.

Federal prosecutors in Brazil have filed an $11 billion environmental lawsuit against Chevron and indicted both the company and several of its executives. Chevron continues to reiterate its long-term plans to invest in the country, though Brazil's hard-line stance is certainly making oil companies think twice. Chevron is a Focus List Buy and a Long-Term Buy. BP is rated B (average).


Iraqi officials said they received a letter from Exxon Mobil ($87; XOM) claiming it had stopped drilling in Kurdistan. In November, the oil giant signed exploration contracts with regional authorities from Kurdistan in northern Iraq, a move the central government says will jeopardize Exxon's eligibility to bid on a new round of oil contracts in Iraq. However, Kurdish officials later said they think Exxon is continuing its work in the region. Exxon is a Buy and a Long-Term Buy.

Corporate roundup

CSX ($22; CSX) said the mild winter and low prices for natural gas reduced its coal shipments to utilities by 25% to 30% in the March quarter. But growth in other areas of its business leads management to expect record earnings per share in the March quarter. The consensus estimate for the current quarter has dipped 7% over the past 60 days to $0.39 per share, still up from last year's $0.35 per share, currently the record for the period. CSX's comments sparked a rally in railroad shares. CSX is a Long-Term Buy.


UnitedHealth Group ($55; UNH) won a contract worth an estimated $1.4 billion over five years to provide health insurance to military members and their families in 21 states. One analyst expects the contract to increase UnitedHealth's annual earnings by up to $0.06 per share. The stock is rated a 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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