Portfolio Review

5/14/2012


Two upgrades and three downgrades

Wells Fargo ($33; WFC) exited the financial crisis as one of the strongest U.S. banks, with a well-capitalized balance sheet that has eased the rebuilding of its dividend. After passing the Federal Reserve's stress test in March, the bank hiked its quarterly payout 83% to $0.22 per share. The low payout ratio of 30% leaves ample room for more dividend growth. Wells Fargo yields 2.7%, and its Quadrix scores have risen in recent months.

Core loan growth remains sluggish, though an uptick in mortgage applications has allowed Wells Fargo to gain market share in home loans. Revenue advanced 4% in the March quarter, marking the first growth since the December 2009 quarter. At 11 times trailing earnings, shares trade 33% below their five-year average and 8% below the median for diversified banks in the S&P 1500 Index; the stock typically traded at a premium to its peers before the recession. Wells Fargo is being added to the Long-Term Buy List. Fellow financial giant J.P. Morgan Chase ($41; JPM) is being added to the Buy List. Read more about J.P. Morgan in Income Spotlight.


DISH Network ($31; DISH) can't seem to get it right. During the March quarter, the company added 104,000 subscribers — about 40,000 more than expected — and monthly churn fell to 1.35%, the lowest in at least five years. Yet the shares fell on the news, overshadowed by lower-than-expected revenue growth. Per-share profits fell 34% to $0.80, topping the consensus, though they would have lagged if not for a gain on the conversion of debt. The satellite operator's Quadrix Overall score has dipped below 80, and both of its sector-specific scores are below 55. DISH Network is being dropped from the Buy List and Long-Term Buy List and dropped from coverage.


We are removing Jabil Circuit ($21; JBL) from our Buy and Long-Term Buy lists. A provider of electronics-manufacturing services, the stock has faced steady selling pressure since the release of disappointing February-quarter results. That pressure might not alleviate in the near term after Cognizant Technology Solutions ($60; CTSH) cut its guidance this week. Jabil's sales growth has dwindled in recent quarters, while operating cash flow plunged in the February quarter. With demand sluggish, consensus profit estimates — calling for at least 12% growth in each of the next two quarters — could be at risk. Jabil Circuit is being dropped from the Monitored List. Cognizant is rated B (average).


Rogers Communications ($36; RCI) is being dropped from the Long-Term Buy List. The Canadian media conglomerate posted weak March-quarter results, and both the shares and profit estimates have declined since the release. Investors had braced for a challenging wireless environment; Canadian regulators' decision to open the wireless market to smaller carriers has stoked new competition and pressured operating profit margins. But cable results were also disappointing, raising doubts about whether Rogers can grow revenue and per-share profits this year. Tepid operating momentum has dragged down Rogers' Overall score, now 74, versus 87 at the start of the year. Rogers should be sold. The stock is now rated B (average).

Earnings update

In the March quarter, DirecTV ($48; DTV) reported per-share profits of $1.07, up 26%, easing past the consensus by a penny. Once again, the satellite-TV company found most of its growth in Latin America, where net subscriber additions climbed 39% to 593,000, while average revenue per subscriber slipped 2%. Growth in the U.S. continued to decelerate, with net subscriber additions falling 56% to 81,000 as average revenue per subscriber rose 4%. Churn, or subscriber defections, declined in both regions. DirecTV is a Focus List Buy and a Long-Term Buy.


Macy's ($40; M) earned $0.43 per share in the April quarter, up 43% and $0.03 above the consensus. Revenue advanced 4% to $6.14 billion. Same-store sales rose 4.4%, powered by a 34% surge in online sales. Management anticipates 3.5% higher same-store sales for the remainder of the fiscal year ending January 2013. But Macy's refrained from raising its full-year profit guidance, which calls for 13% to 15% growth, versus the consensus target of 18%. Macy's is a Focus List Buy and a Long-Term Buy.


Cisco Systems ($19; CSCO) grew per-share profits 14% to $0.48 per share excluding special items in the April quarter, exceeding the consensus by $0.01. Sales rose 7% to $11.59 billion. Cisco described the environment for technology spending as “cautious.” Cisco is a Focus List Buy and a Long-Term Buy.


CF Industries ($183; CF) earned $6.06 per share in the March quarter, excluding a $0.52 loss on natural-gas derivatives, up more than 55% and well above the consensus of $4.83. Buoyed by tight inventory levels and an early spring-planting season, revenue grew 30% to $1.53 billion on higher prices and volumes. Leading up to the report, CF shares rose to an all-time high. While the stock has since pulled back, it remains up 26% for the year. CF Industries is a Focus List Buy and a Long-Term Buy.


Apache ($88; APA) reported March-quarter earnings per share of $3.00, up 3% but $0.09 short of the consensus estimate. Revenue advanced 16% to $4.54 billion, while average daily production of oil and natural gas rose 7%. Management reaffirmed its full-year production-growth target of 7% to 13%. Apache is a Long-Term Buy.

Corporate roundup

Bed Bath & Beyond ($68; BBBY) agreed to acquire Cost Plus ($22; CPWM), a seller of homefurnishings and gourmet food and beverages, for about $494 million in cash. Bed Bath & Beyond will not need to borrow to pay for the purchase. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy.


Intel ($27; INTC) boosted its quarterly dividend 7% to $0.225 per share, payable in the September quarter. This is the third hike in the past 18 months. Intel is a Focus List Buy and a Long-Term Buy.


CSX ($22; CSX) raised its quarterly dividend 17% to $0.14 per share, payable June 15. CSX is a Long-Term Buy.


Abbott Laboratories ($63; ABT) said it will pay $1.6 billion and plead guilty to a criminal misdemeanor in settling a U.S. probe into allegations of improper marketing of antiseizure drug Depakote. In other news, Abbott agreed to pay $110 million for an experimental kidney treatment currently in late-stage trials. Separately, Abbott partnered with an Indian biotechnology company to make nutritional products for women, children, and diabetes sufferers. The company seeks to tap further into India's burgeoning middle class. Abbott, holding the largest share of India's drug market, is a Long-Term Buy.

Rank Changes

J.P. Morgan Chase ($41; JPM) is being added to the Buy List. Wells Fargo ($33; WFC) is being added to the Long-Term Buy List. DISH Network ($31; DISH) and Jabil Circuit ($21; JBL) are being dropped from the Buy List and Long-Term Buy List. Rogers Communications ($36; RCI) is being dropped from the Long-Term Buy List. The Vanguard Short-Term Investment-Grade ($10.77; VFSTX) fund now accounts for 9.9% of the Buy List and 14.6% of the Long-Term Buy List.


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