Portfolio Review

4/23/2012


Apple active before earnings

Apple ($610; AAPL) shares closed lower for five straight days starting April 10, when the company hit an all-time intraday high of $644 before losing ground late. The stock, which bounced 4% April 17 and is up nearly 51% for the year, now trades 5% below that record high. Some investors worry that wireless carriers will pressure Apple to cut iPhone subsidies. Verizon Wireless plans to charge customers $30 for upgrading to the new iPhone.

Regardless of the tussle with wireless carries, Apple's March-quarter results, due out April 24, will probably determine the stock's near-term trajectory. Analysts keep ratcheting estimates higher, with the consensus for March-quarter profits climbing 25% in the past 90 days and 4% in the past month. Apple is projected to earn $9.93 per share, implying 55% growth. Trading at 17 times trailing earnings, 28% below its five-year average P/E ratio, Apple is a Focus List Buy and a Long-Term Buy.

New bond fund

In our recommended Growth and Conservative fund portfolios, Vanguard High-Yield Corporate ($6; VWEHX) is taking the place of T. Rowe Price High-Yield ($7; PRHYX), which plans to close to new investors April 30. Vanguard High-Yield invests in medium- and lower-quality corporate bonds, also called junk bonds. The fund, which yields 5.7%, holds nearly 400 bonds with an average credit quality of BB. Vanguard High-Yield sports a fund score of 95 and has an expense ratio of only 0.25%.

Earnings news and other notes

Financials

J.P. Morgan Chase ($44; JPM) earned $1.31 per share in the March quarter, up 2% and $0.13 above the consensus. A reduction in funds set aside for loan losses boosted quarterly profits by $1.8 billion. Revenue advanced 6% to $27.42 billion. Signaling a rebound in consumer and small-business activity, retail revenue rose 40%, more than enough to offset lingering weakness in investment banking, down 11%.

Mortgage lawsuits remain a drag, with J.P. Morgan setting aside $2.5 billion for litigation expenses, up from $528 million in the December quarter. The bank's credit-card volume jumped 12%, which bodes well for MasterCard ($438; MA) and Visa ($122; V), both slated to report results May 2. J.P. Morgan Chase is a Long-Term Buy. MasterCard and Visa are rated Buy and Long-Term Buy.

Health care

For the March quarter, Abbott Laboratories ($60; ABT) said earnings per share climbed 13% to $1.03 excluding special items, easing past the consensus estimate of $1.00. Sales advanced 5% to $9.46 billion, powered by 17% growth for Humira and a 10% gain at the nutritionals segment. Abbott raised its full-year profit guidance, with per-share earnings now forecasted at $5.00 to $5.10, implying at least 7% growth. The consensus calls for profits of $5.01 per share. Abbott Laboratories is a Long-Term Buy.


St. Jude Medical ($39; STJ) earned $0.86 per share excluding special items in the March quarter, up 8% and $0.03 above the consensus. Revenue crept up 1% to $1.40 billion. The cardiac rhythm management unit (53% of revenue) posted 4% lower sales despite what it estimates as a 1% increase in its share of the market. The smaller atrial-fibrillation and neuromodulation units picked up the slack with double-digit growth. St. Jude forecasts June-quarter per-share earnings of $0.86 to $0.88, below the consensus of $0.89 at the time of the announcement, though it boosted the full-year target range slightly. St. Jude's results were somewhat discouraging, but the stock looks very cheap and boasts a solid product pipeline. For now, the stock retains its Long-Term Buy rating.


Universal Health Services ($43; UHS) said it expects to receive a $35 million payment to settle a longstanding dispute that U.S. hospitals were underpaid by Medicare. Universal Health Services is a Buy.

Industrials

CSX ($22; CSX) grew per-share profits 23% to $0.43 in the March quarter, topping the consensus by a nickel. Revenue climbed 6% to $2.97 billion. Volumes crept up 1% as higher merchandise and intermodal cargo offset weakness in coal and fertilizer. Revenue per unit rose 5%. CSX expects coal demand to weaken further in the June quarter but remains optimistic about companywide prospects for the full year. CSX's quarterly operating ratio, or operating expenses divided by revenues, fell more than 140 basis points to a record 71.1%. CSX is a Long-Term Buy.


Dover ($62; DOV) said March-quarter earnings per share from continuing operations rose 14% to $1.05, exceeding the consensus by $0.03. Excluding tax benefits in the year-earlier period, earnings jumped 19%. Sales grew 14% to $2.06 billion, with just over a third of the growth coming from acquisitions. The backlog increased 12% to $1.70 billion. Dover raised its 2012 revenue guidance, projecting 10% to 12% growth, versus the 9% consensus. The company expects per-share-profit growth of 7% to 12%, roughly in line with the consensus of just under 10%. Dover is a Long-Term Buy.

Technology

Google's ($610; GOOG) earnings per share jumped 25% to $10.08 excluding special items in the March quarter, ahead of the $9.65 consensus. Sales grew 24% to $10.65 billion, while cash provided by operations rose 16%. Advertising search rates slipped 12%, but the number of paid clicks on related ads rose 39%.

Google also announced a two-for-one stock split that will give investors one share of a new class of nonvoting stock for each share currently held. The move adds a third tier of Google shares without diluting the 67% of voting power controlled by cofounders Larry Page and Sergey Brin and Chairman Eric Schmidt. It is unclear whether the lack of voting power will limit the new shares' value. Some worry that the new Class C shares, which are identical to Class A shares aside from the votes, will be excluded from major indexes, possibly triggering a selloff as index funds dump Class C to buy more Class A.

Meanwhile, Google and Oracle ($29; ORCL) are squaring off in a trial to resolve a patent dispute. Oracle alleges that the Android mobile operating system infringes on patents related to Java, the programming language Oracle acquired through the 2010 purchase of Sun Microsystems. Oracle seeks about $1 billion in damages. Both Google and Oracle are Long-Term Buys.


For the March quarter, Intel ($28; INTC) reported earnings per share of $0.56 excluding special items, down 3% but $0.06 above the consensus. Revenue was roughly flat at $12.91 billion but still exceeded the consensus. For the June quarter, Intel expects revenue of $13.6 billion, ahead of the consensus of $13.43 billion at the time of the announcement. Shares dipped on the news, though they hit a six-year high April 17, right before the earnings announcement, and remain up 17% for the year. Intel is a Focus List Buy and a Long-Term Buy.


IBM ($207; IBM) earned $2.78 per share excluding special items in the March quarter, up 15% and above the consensus estimate of $2.65. Sales rose less than 1% to $24.67 billion. Powered by its analytics business, software revenue grew nearly 6%, while revenue from services rose 1% and hardware slumped 7%. For 2012, the company raised its guidance for earnings per share to at least $15.00, above its former target of $14.85 and the consensus of $14.93. IBM is a Long-Term Buy.


Qualcomm ($67; QCOM) grew March-quarter earnings per share 17% to $1.01 excluding special items, a nickel above the consensus. Sales also exceeded the consensus, surging 28% to $4.94 billion, while operating cash flow climbed 7% to $1.89 billion. June-quarter guidance appeared light, with the midpoints of Qualcomm's per-share earnings and revenue target ranges missing consensus forecasts, though both still imply double-digit growth. Qualcomm, which boasts impressive growth potential, remains a Focus List Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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