Portfolio Review

9/3/2012


Intel's outlook gets personal

Intel ($25; INTC) shares have slipped nearly 15% from their eight-year high in May, hurt by concerns about a slowdown in operating momentum. So far, Intel has adapted fairly well to a challenging environment plagued by consumer weakness in developed markets. But smartphones and tablets keep nibbling away at personal computers, increasing the risk that the expected October launch of Microsoft's ($31; MSFT) Windows 8 operating system could fail to rejuvenate the industry. In August, researcher IDC slashed its 2012 outlook for PCs, now projecting sales growth of just 1%; in June, IDC had forecasted 5% growth. Semiconductors for personal computers account for about 65% of Intel's sales.

So far, Intel's sales to local manufacturers of generic "white box" PCs and growth from servers (20% of first-half sales) have buttressed results. But Dell ($11; DELL) and Hewlett-Packard ($17; HPQ) offered disappointing guidance after July quarters that saw double-digit declines in PC sales. Emerging markets, once the engine for PC growth, appear to have stalled, with Dell reporting a 15% sales decline in Brazil, Russia, India, and China. H-P and Dell combined to account for 34% of Intel's revenue last year. 

Still, Intel generates a lot of cash, with free cash flow up 5% to $5.22 billion in the 12 months ended June. And it appears devoted to growing the quarterly dividend, raised at annualized rate of 17% over the last three years. Intel, which yields 3.6 %, remains a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy. Both Dell and H-P are rated B (average).

Corporate roundup

A Brazil court upheld a ban preventing Chevron ($112; CVX) from drilling while charges stemming from an offshore oil spill last November proceed through the legal system. Brazil's oil regulator, who usually has prevailing authority in such matters, had in July cleared Chevron to resume work. But the court decided to override that decision, laying some of the blame for the oil spill on the regulator. Chevron is a Buy and a Long-Term Buy.


A panel for the U.S. Food and Drug Administration backed the use of Abbott Laboratories' ($66; ABT) Humira in treating ulcerative colitis, a chronic disease that causes ulcers to form in the colon. Abbott's blockbuster drug is already approved to treat five other conditions besides its original indication, rheumatoid arthritis. Abbott Laboratories is a Long-Term Buy.


The U.S. Federal Communications Commission cleared Verizon Wireless to buy $3.9 billion of unused airwaves from Comcast ($34; CMCSa), Time Warner Cable ($90; TWC), and other cable companies in a deal that includes cross-promotion agreements. Comcast is a Long-Term Buy.


Altria Group ($35; MO) raised its quarterly dividend 7% to $0.44 per share, payable Oct. 10. In the June quarter, Altria's earnings per share and sales topped analyst expectations, as price hikes offset flat cigarette volumes. Buoyed by market-share gains, Altria raised the midpoint of its 2012 profit target to $2.21, implying 8% growth. Altria is rated C (below average).

Apple beats Samsung, Google feels the pain

A U.S. jury awarded Apple ($675; AAPL) $1.05 billion as compensation for Samsung violating six patents used in mobile devices. The award could eventually exceed $3 billion, because the jury also found that Samsung willfully violated the patents. Apple had sought up to $2.75 billion. Serving as the undercard to Apple's heavyweight bout, a South Korean court ordered fines of less than $60,000 after finding that Apple and Samsung violated each other's patents, while a U.S. trade agency rejected claims by Google's ($677; GOOG) Motorola Mobility segment that Apple infringed two wireless patents.

Apple now seeks an injunction to ban the sale of eight Samsung devices in the U.S., threatening to disrupt Google's Android ecosystem. The decision could give Microsoft an opening into the mobile market it so desperately wants to join; its Surface tablet should hit the market this fall. Some experts expect Apple to license its patents to rival smartphone makers. Samsung vows to fight the ban, which does not yet affect its newest products, but is also discussing ways to remove or alter the features in dispute.

Samsung continues to get the better of Apple in China, taking a 19% share of the smartphone market versus Apple's 10% slice. Apple's share fell from 19% in the March quarter as consumers waited for the new iPhone and local manufacturers offered cheaper alternatives. Both Apple and Google are rated Focus List Buy and Long-Term Buy.

Insurer deals slow to hit PBMs

The landscape shifts driven by U.S. health reform have triggered a spate of mergers among medical insurers. Last month, Aetna ($39; AET) agreed to buy Coventry Health Care ($42; CVH) in a $7.3 billion deal. In July, WellPoint ($57; WLP) announced plans to pay $4.46 billion for Amerigroup ($91; AGP). Both deals, expected to close in 2013, should increase the acquirers' Medicaid presence and help control costs. A world with fewer insurers could ultimately pressure profit margins at pharmacy-benefit managers (PBMs). But due to the long-term nature of health contracts, ripples from the mergers will likely take years to reach them.

Aetna signed a 12-year agreement with CVS Caremark ($45; CVS) as its PBM in 2011, while Coventry currently uses Express Scripts ($62; ESRX) for its Medicare and commercial customers. Coventry has about 5.3 million members, representing an estimated $3 billion to $4 billion in annual revenue for Express Scripts (roughly 5% to 6% of total sales). Aetna says it will honor Coventry's existing contracts that run through 2015 and 2016, though CVS would likely have the inside track when the time comes for renewal.

"We'll make sure to get the best pricing available in the market," says Aetna, which could be assuming an indifferent posture to squeeze more concessions from CVS. Amerigroup employs CVS as its PBM, but WellPoint plans to shift members to its own PBM, Express Scripts, when that contract expires.

In other news, for its own $29 billion acquisition of Medco Health Solutions, Express Scripts scored a victory in court when a judge dismissed most of the anticompetitive complaints filed by retail pharmacies. However, the judge focused on the type of relief the plaintiffs sought and did not strike down claims that the deal inhibited competition, opening the door for further challenges. Express Scripts is a Focus List Buy and a Long-Term Buy. Aetna and CVS are rated Buy and Long-Term Buy. WellPoint is rated B (average).


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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