Portfolio Review

7/30/2012


June-quarter earnings

Alliance Data Systems’ ($127; ADS) core per-share earnings jumped 22% to $2.13 in the June quarter, easily surpassing the consensus estimate of $1.91. The company reported sales of $866 million, up 17% and ahead of the consensus. Alliance targets earnings per share of $2.18 in the September quarter, below the consensus of $2.33 at the time of the announcement, citing an expected higher share count due to phantom shares. Phantom shares related to convertible bonds are on the books, but ADS has hedged away this exposure and says it has no obligation to actually issue the shares. Alliance Data Systems is a Focus List Buy and a Long-Term Buy.


Apple ($601; AAPL) reported per-share earnings of $9.32 in the June quarter, up 20% but below the consensus estimate of $10.37. Sales grew 23% to $35.02 billion but fell about $2 billion short of analysts’ targets. iPhone sales growth slowed to 28% — down from an 85% gain in the March quarter — partly due to consumer anticipation of a new model this fall. Known for its conservative guidance, Apple projects September-quarter earnings of $7.65 per share on $34 billion in sales, versus consensus estimates of $10.22 per share and $38 billion. In other news, Apple officially declared its expected quarterly dividend of $2.65 per share, payable Aug. 16. Apple is a Focus List Buy and a Long-Term Buy.


Wyndham Worldwide ($48; WYN) grew earnings per share 36% to $0.87 in the June quarter on revenue of $1.14 billion, up 4%. The consensus had targeted profits of $0.84 per share and sales of $1.16 billion. A 23% jump in lodging drove sales growth, while share repurchases augmented per-share profits. Wyndham is a Focus List Buy and a Long-Term Buy.


Aflac ($42; AFL) earned $1.61 per share in the June quarter, up 4%, matching the consensus estimate. Results excluded after-tax realized investment losses of $0.58 per share, down from $0.96 in the year-ago quarter. Revenue, climbing 16% to $5.90 billion, missed the consensus of $6.28 billion. U.S. sales rose 5%, while the Japan unit grew about 20% in U.S. dollars. Aflac targets September-quarter earnings of $1.64 to $1.69, compared to the consensus of $1.63 at the time of the announcement. Aflac is a Buy and a Long-Term Buy.


EMC ($25; EMC) reported June-quarter earnings per share (up 11%) and sales (up 10%) consistent with results preannounced earlier this month. EMC also said 2012 cash provided by operations should rise 9% to $6.2 billion. In other news, 79%-owned VMWare ($89; VMW) agreed to spend $1.05 billion in cash to acquire Nicira, a maker of virtual-networking software. Nicira creates networks that don’t require as much of the the physical equipment made by firms like Cisco Systems ($15; CSCO), which fell on the news. EMC is a Buy and a Long-Term Buy.


Google ($608; GOOG) grew June-quarter earnings per share 16% to $10.12, topping the consensus by $0.08. Helped by the May acquisition of Motorola Mobility Holdings, sales surged 35% to $12.21 billion; excluding the deal, Google’s revenue rose 21% on brisk growth in online advertising. Separately, Google’s online store has apparently sold out of the Nexus 7 tablet model with a larger hard drive. Early reviews of the device have been positive. In other news, the European Union, probing Google for anticompetitive practices, seems happy with concessions offered by the Internet giant. The deal is far from done, but if Google can satisfy regulators, it may be able to forestall a drawn-out antitrust battle. Google is a Long-Term Buy.


Microsoft ($29; MSFT) earned $0.73 per share in the June quarter, up 6% excluding deferred revenue and a goodwill impairment. The consensus had projected earnings of $0.62 per share. Sales rose 4%, as a 13% decline from the Windows business was more than offset by growth at the other four units. Hoping to breathe new life into its Windows franchise, Microsoft plans to launch Windows 8 on Oct. 26; the operating system will run on both personal computers and tablets. Microsoft is a Buy and a Long-Term Buy.


UnitedHealth Group ($55; UNH) said June-quarter earnings per share increased 9% to $1.27, exceeding the consensus by $0.08. Revenue advanced 8% to $27.27 billion as enrollment grew to 35.9 million members, up 1% from the end of March and 5% from a year earlier. The insurer’s medical-loss ratio ticked down to 81%, though management said profit margins are being squeezed by meager increases to reimbursement rates for Medicare and Medicaid. Shares fell on the company’s results, then again four days later after rival WellPoint ($61; WLP) missed its quarterly targets and lowered its 2012 forecast. WellPoint said medical costs are trending toward the upper end of its forecast, while competition with other insurers has pressured enrollment. Shares of Aetna ($37; AET) also fell on WellPoint’s news. Aetna and UnitedHealth Group retain their Buy and Long-Term Buy ratings. WellPoint is rated B (average).


Visa ($123; V) reported June-quarter earnings per share of $1.56 excluding special items, up 25% and $0.11 above the consensus. Sales advanced 10% to $2.57 billion. Visa processed 13.1 billion transactions, up 1%. The company also set aside an additional $150 million for the proposed swipe-fee agreement; Visa has agreed to pay $4.4 billion of the $7.25 billion settlement. Visa is a Buy and a Long-Term Buy.

Deal update

DirecTV ($47; DTV) and Viacom finally ended their bitter feud over programming fees. The satellite-TV company will reportedly pay Viacom more than $600 million annually over the next seven years, an increase of at least 20% from their prior contract. Viacom had originally demanded a 30% hike, DirecTV said. DirecTV is a Focus List Buy and a Long-Term Buy.


Express Scripts ($57; ESRX) struck a multiyear agreement to allow its members to fill drug prescriptions at Walgreen ($34; WAG), resolving a seven-month dispute. Express Scripts is a Buy and a Long-Term Buy. Walgreen is rated B (average).


Wal-Mart Stores ($72; WMT) opposes the proposed $7.25 billion agreement over swipe fees that was reached between a group of retailers and payment networks Visa ($123; V) and MasterCard ($410; MA). Target ($61; TGT) and a coalition of convenience stores also object to the agreement. A U.S. judge is expected to rule on the settlement in the next few months. Visa is a Buy and a Long-Term Buy. Wal-Mart Stores is a Long-Term Buy. Target is rated A (above average). MasterCard is rated B.

Corporate roundup

Brazil’s oil regulator fined Chevron ($106; CVX) about $25 million and admonished the oil giant for failing to follow its own safety procedures. More importantly, the regulator said Chevron could resume production in the country, which has massive oil reserves in the deep waters off its coast. These actions could undercut massive lawsuits filed against Chevron. Separately, Iraq banned Chevron from pursuing new oil deals after the company signed a contract with the semiautonomous region of Kurdistan. Chevron is a Buy and a Long-Term Buy.


Cisco Systems ($15; CSCO) plans to slash 1,300 jobs, roughly 2% of its work force, as part of efforts to reduce annual expenses by $1 billion. In other news, the European Union cleared Cisco’s $5 billion purchase of NDS, a developer of TV software. Cisco is a Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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