Portfolio Review

5/7/2012


Earnings roll call

Health care

In the March quarter, Aetna ($44; AET) grew per-share profits 18% to $1.34 excluding special items, missing the consensus by $0.06. The insurer reported sales of $8.86 billion, up 6%, the strongest growth in nine quarters. Aetna shares slumped more than 8% as investors worried that the volume of health claims could be increasing. One sign of such trouble, Aetna's medical-benefits ratio, climbed more than two percentage points to 81.5%. That ratio measures the percentage of premiums paid out for patient medical costs. However, Aetna generates 75% of its premiums from clients with commercial insurance, which tends to pay higher reimbursements than Medicare or Medicaid, giving the company an edge over its peers when it comes to maintaining profitability in a higher-usage environment. Aetna retains its Focus List Buy and Long-Term Buy ratings.


Universal Health Services ($43; UHS) earned $1.13 per share in the March quarter excluding special items, down 2% and $0.04 short of the consensus. Revenue advanced 4% to $1.83 billion, with its behavioral-health facilities producing 5% growth and acute-care hospitals less than 1%. Admissions rose 1.6% at acute-care hospitals and 9.2% at behavioral-treatment locations, partially offset by a decline in revenue per admission. Management stands by its 2012 profit guidance, which calls for 9% to 13% growth. Trading at 10 times estimated year-ahead earnings, a 12% discount to the median health-care facilities stock, Universal Health Services remains a Buy.

Energy

Chevron's ($108; CVX) per-share earnings advanced 6% to $3.27 per share in the March quarter, a penny above the consensus. The results included gains on asset sales in Spain, and profits would have missed estimates without that gain. Earnings rose 3% at the upstream business and 29% at the refining unit. Revenue increased 1% to $60.71 billion, even as total production slipped 5%. Production fell in part because of declines at older fields, highlighting the importance of several huge projects slated to ramp up over the next couple years. Chevron is a Buy and a Long-Term Buy.


Exxon Mobil ($87; XOM) reported March-quarter earnings per share of $2.00, down 7% and $0.09 below the consensus estimate. Upstream earnings fell 10% and chemicals 54%, partly offset by a 44% gain in refining profits. Results were hurt by a 5% production decline. In other news, Exxon shut off a pipeline after 1,900 barrels of oil leaked into a rural area in Louisiana. Exxon Mobil is a Buy and a Long-Term Buy.

Credit cards

MasterCard ($456; MA) earned $5.36 per share in the March quarter, up 25% and $0.06 above the consensus estimate. Revenue rose 17%. Worldwide spending on the company's branded cards advanced 18% to $849 billion excluding currency exchange. Although results were solid, the shares slipped, perhaps a sign that investors had grown accustomed to larger surprises; MasterCard had topped consensus profit estimates by more than 3% in eight straight quarters. Still up 22% on the year, MasterCard is a Buy and a Long-Term Buy.


Visa ($123; V) grew March-quarter earnings per share 30% to $1.60 excluding a deferred tax adjustment to top the consensus by $0.09. Sales grew 15% to $2.58 billion. Processed transactions increased 8%, while payments volume jumped 11% to $956 billion. Visa's profit guidance for the fiscal year ending September 2012 is roughly in line with the consensus, which targets 20% growth. Visa is a Buy and a Long-Term Buy.

Other reports

AGCO ($49; AGCO) shares surged after the agricultural-equipment maker reported a 49% jump in earnings per share to $1.21 for the March quarter, easily exceeding the consensus of $0.86. Powered by a 58% surge in North America, revenue jumped 26% to $2.27 billion, also ahead of the consensus. Raising its 2012 outlook, AGCO now expects per-share profits of $5.50, implying 23% growth and topping the consensus estimate of $5.07 at the time of the announcement. AGCO is a Focus List Buy.


In the March quarter, Comcast ($31; CMCSa) grew per-share profits to $0.45, up 25% excluding costs related to the NBC Universal transaction and topping the consensus by $0.03. Sales also topped analyst estimates, rising 10%. Comcast shed 37,000 net video subscribers (versus 39,000 lost in the year-ago quarter), but reported net additions of 439,000 for Internet (up from 418,000) and 164,000 for phone (down from 260,000). The stock is rated Long-Term Buy.


KLA-Tencor ($52; KLAC) said March-quarter earnings per share slipped 3% to $1.27 excluding special items but topped the consensus by $0.17. Sales crept 1% higher to $841 million, and bookings were lighter than expected due to a temporarily delayed order. The stock pulled back from the four-year high set immediately preceding the report. Shares had risen after Taiwan Semiconductor Manufacturing ($16; TSM), a major customer for KLA, said it will raise capital spending 11% to 16% this year; it had previously projected a decline. KLA, which provided above-market profit guidance, is a Buy.

Corporate roundup

Diversifying its push into the mobile market, Microsoft ($32; MSFT) agreed to invest $605 million in Barnes & Noble ($19; BKS). Microsoft will pay $300 million for an 18% stake in a new subsidiary that will house Barnes & Noble's college-bookstore and digital-book businesses, which include the Nook e-reader device.

The deal puts Microsoft in competition with the likes of Amazon.com ($230; AMZN), Apple ($582; AAPL), and Google ($604; GOOG); Barnes & Noble has a 27% share of U.S. e-book sales, versus Amazon's 60% slice. The deal also includes $305 million in future guarantees to Barnes & Noble.

In other news, a German court ruled that Microsoft violated patents held by Motorola Mobility Holdings ($39; MMI). However, the sale of Xbox 360 and Windows 7 will continue in Germany because of a U.S. injunction that prevents enforcement of any German order. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy. Amazon.com is rated C (below average).


While a jury deliberates over a patent trial at which Oracle ($30; ORCL) seeks $1 billion in damages from Google, other lawsuits against the Internet company could be brewing. The Federal Trade Commission may have signaled its direction by hiring a prosecutor as it investigates whether Google manipulated search results and improperly collected personal data. South Korea and Argentina have also announced antitrust probes. Oracle and Google are Long-Term Buys.


ConocoPhillips ($57; COP) spun off its refining unit, now called Phillips 66 ($33; PSX). Shareholders received one share of Phillips 66 common stock for every two shares of ConocoPhillips held. The new ConocoPhillips, with a stock-market value of more than $70 billion, is the fourth-largest U.S. energy producer. Phillips 66, with a market value of roughly $20 billion, is the largest U.S.-traded refining and marketing pure play. ConocoPhillips retains its name and its A (above average) rating. Phillips 66 is being added to the Monitored List but does not as yet have a rating.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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