Portfolio Review

4/30/2012


Bribery scandal weighs on Wal-Mart

Wal-Mart Stores ($58; WMT) has relied on its international business to drive sales gains in recent years, but a report by The New York Times questions the retailer's conduct in obtaining that growth. According to The Times, Wal-Mart quashed an internal probe into widespread bribery occurring in its Mexican business in 2005, failed to alert government officials of the alleged illegal activity, and underplayed the severity of the matter to investors when it announced a second investigation in December.

The bribes reportedly sliced through the red tape of local bureaucracy — accelerating zoning approvals and clearing environmental hurdles — to help drive the Mexico unit's growth. About one-fifth of all Wal-Mart stores are located in Mexico.

According to The Times, the cover-up implicates several members of senior management, including CEO Michael Duke. U.S. officials have reportedly launched a criminal investigation, which could result in hundreds of millions of dollars in fines and years of tighter regulatory scrutiny. Wal-Mart shares have tumbled more than 7% since the news broke, but the company does not expect the fallout to have a material effect on sales or profits. The stock remains a Long-Term Buy.

Managed-care update

Will the U.S. Supreme Court reject President Obama's health-care law that forces most Americans to carry health insurance? While the court's final decision probably won't be issued until late June or July, the potential for policy changes could set the tone for shares of Aetna ($49; AET) and UnitedHealth Group ($59; UNH) in coming weeks.

Uncertainty regarding the law's future appears priced into the stocks. Both Aetna and UnitedHealth trade at 25% discounts to their 10-year average P/E ratios. Both stocks earn solid Quadrix Value scores, with Aetna at 87 and UnitedHealth at 68.

Aetna was scheduled to report March-quarter earnings April 26, the day after this issue went to press. The consensus projects a 3% profit decline, but Aetna has topped market expectations by at least 21% in three of the last four quarters.

In the March quarter, UnitedHealth Group earned $1.31 per share, up 7% and $0.14 above the consensus. Revenue increased 7% to $27.28 billion as the health insurer added a million new members during the quarter. UnitedHealth raised its 2012 per-share-profit outlook to $4.80 to $4.95, versus $4.84 at the time of the announcement. Aetna is a Focus List Buy and a Long-Term Buy. UnitedHealth is a Buy and a Long-Term Buy.

Technology profit reports

Apple's ($610; AAPL) earnings per share soared 92% to $12.30 in the March quarter, crushing the consensus by $2.28. Revenue shot up 59% to $39.19 billion. Apple sold 35.1 million iPhones, up 88%; 11.8 million iPads, up 151%; and four million Macintosh computers, up 7%. Management projected per-share-profit growth of 11% in the June quarter, well short of Wall Street expectations for 27% growth. Shares of Apple, known for its conservative guidance, surged on the earnings news. Apple is a Focus List Buy and a Long-Term Buy.


Microsoft ($32; MSFT) shares rallied when the company reported solid March-quarter growth ahead of the Windows 8 launch expected later this year. Microsoft earned $0.60 per share, up 7% excluding special items and $0.02 above the consensus. Sales advanced 6% to $17.41 billion, powered by 14% growth from servers and tools and a 9% gain at the business division, which sells the Office software suite. After seeing revenue slip 2% in the last six months of 2011, the Windows unit recovered, gaining 4%. Microsoft is a Buy and a Long-Term Buy.


In the March quarter, EMC's ($28; EMC) earnings per share climbed 20% to $0.37 excluding special items, a penny above the consensus. Revenue increased 11% to $5.09 billion, as the storage unit (72% of quarterly sales) managed 7% growth. Sales jumped 25% at VMware ($103; VMW). EMC holds an 80% stake in the cloud-computing software maker, which accounted for 21% of its revenue in the quarter. Shares dipped on the strong report, perhaps because EMC did not raise its 2012 outlook, which lingers below the consensus estimate. EMC is a Buy and a Long-Term Buy.

March-quarter earnings

In the March quarter, Wyndham Worldwide ($47; WYN) grew earnings per share 36% to $0.60 excluding special charges, beating the consensus by a nickel. Sales rose 9% to $1.04 billion on growth of 11% for vacation ownership and 24% for lodging. Wyndham raised its 2012 guidance for per-share earnings to a range of $3.00 to $3.15, above the consensus of $2.98 at the time of the announcement. Wyndham is a Focus List Buy and a Long-Term Buy.


Aflac ($42; AFL) earned $1.74 per share from operations in the March quarter, up 7% and $0.09 above the consensus. Operating results exclude $0.06 in net realized investment losses, versus $0.79 in the year-ago quarter, suggesting Aflac's investment portfolio is stabilizing. Revenue surged 22% to $6.24 billion. Aflac now expects 2012 sales in Japan to increase 10%, versus its prior guidance of a decline. Aflac, which raised its 2012 profit guidance, is a Buy and a Long-Term Buy.


Rogers Communications ($39; RCI) said March-quarter earnings per share slid 12% to C$0.67 excluding special items, missing the consensus by more than 10%. Sales dipped 1%, as the media unit's 4% growth failed to offset declines of 3% for cable and 1% for wireless. As expected, iPhone subsidies weighed on results. But surprisingly, the company's base of cable customers shrank. For now, Rogers remains a Long-Term Buy.

Corporate roundup

A Brazilian judge moved the environmental lawsuit against Chevron ($103; CVX) to a new court, removing Eduardo Santos de Oliveira, the outspoken prosecutor, from the case. The new prosecutor also says he seeks to suspend Chevron from operating in the country. Separately, Chevron increased its quarterly dividend 11% to $0.90 per share, payable June 11. Chevron is a Buy and a Long-Term Buy.


Making good on a previous threat, Iraq excluded Exxon Mobil ($86; XOM) from a licensing auction for energy-exploration rights in response to the company's drilling pact with the Kurdistan region. In other news, Exxon raised its quarterly dividend 21% to $0.57, payable June 11. Exxon Mobil is a Buy and a Long-Term Buy.


IBM ($200; IBM) hiked its quarterly dividend 13% to $0.85 per share, payable June 9. IBM also approved $7 billion for buybacks, raising its repurchase authorization to $12.7 billion. IBM is a Long-Term Buy.


Pfizer ($23; PFE) agreed to sell its baby-food business to Nestle ($61; NSRGY) for $11.85 billion. Pfizer is rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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