Portfolio Review

10/1/2012


DirecTV broadcasts strong Buy signal

Few large-capitalization stocks combine the growth and value appeal of DirecTV ($53; DTV). Shares trade at 12 times estimated current-year profits and only 10 times projected earnings for 2013. Relative to 2013 estimates, DirecTV trades at a 32% discount to the industry median. Yet per-share profits are expected to jump at least 22% this year and next. Encouraging share-price action, robust cash flow, and strong Quadrix scores suggest superior capital-gains potential in the year ahead — even with the shares up 24% so far in 2012. DirecTV hit an all-time high Sept. 25.

But not everyone loves the stock. Skeptics point to DirecTV's lack of meaningful broadband exposure, as the company typically partners with telephone operators to offer Internet service to subscribers. Higher programming costs are weighing on U.S. profit margins at time when DirecTV is struggling to attract subscribers, with viewers migrating to on-demand services offered by Amazon.com ($252; AMZN), Netflix ($55; NFLX), and Hulu. In the June quarter, the domestic business reported a net subscriber loss for the first time ever. Also, higher subscriber-related costs and foreign currency pressures are eating into profit margins in Latin America — the main growth engine. 

DirectTV CEO Michael White said he will consider acquisitions in Latin America, addressing published reports that the company could bid on Vivendi's Brazilian phone business GVT, potentially worth $6.4 billion. The possible acquisition isn't the only news out of Brazil, where state finance secretaries are considering a raise in the tax on pay-TV services to 25% from 10%. The Brazilian federal government has vowed to lobby against the proposed hike. Brazil accounts for 12% of sales for DirecTV, which holds a 30% share of the country's pay-TV market. DirecTV believes it is unlikely that state officials will pass a tax opposed by the federal government.

The stock's modest valuation seems to discount any concerns about profit margins or regulatory troubles, and growth in Latin America should remain robust. DirecTV had roughly 9.1 million subscribers in the region on June 30, a 36% jump from a year earlier. Sales in Latin America rose 20% in the June quarter. In the U.S., better pricing should sustain growth in revenue per user next year, while customer growth is expected to turn positive. DirecTV, which retired more than 7% of its outstanding shares in the first half of 2012, is a Focus List Buy and a Long-Term Buy.

Technology report

Supply constraints limited Apple ($674; AAPL) to selling about 5 million iPhone 5 smartphones in its opening weekend, up 25% from the iPhone 4S debut but short of analyst expectations. Components for the new base-model iPhone cost an estimated $199, according to researcher IHS iSuppli, up 6% from the prior model. Included is a $34 wireless networking system made by Qualcomm ($63; QCOM).

On the iPhone 5, Apple replaced Google's ($749; GOOG) popular map application with its own mapping software, but users have complained about wildly inaccurate results and a lack of features. While Google has not made any public statements about a new mapping app for Apple, The New York Times reported the company is developing one that could be ready by the end of the year.

Separately, Apple is seeking an additional $707 million and the permanent ban of 26 Samsung smartphones and tablets (mostly older devices) in the U.S. A jury awarded Apple $1.05 billion in damages in August. Apple is a Focus List Buy and a Long-Term Buy. Qualcomm is a Buy and a Long-Term Buy.


Google shares surged to an all-time high in late September, buoyed by a prediction that it will overtake Facebook ($20; FB) in online display advertisements. Research firm eMarketer projects Google sales from display ads — graphic banners that feature pictures, video, or animation — will soar 67% to $2.31 billion this year, capturing a 15% slice of the U.S. market. Facebook is expected to command a 14% share. Google already holds a market-leading share of online ads for web search and mobile devices. However, Google's alleged misuse of its market power has raised the ire of regulators.

The European Union seeks more concessions from Google in an antitrust probe examining complaints that the company improperly favors its own services in web searches. In the U.S., regulators expect to complete their own investigation into Google's web-search practices by the end of 2012. Up 18% since the end of July, Google is a Focus List Buy and a Long-Term Buy.


Intel ($23; INTC) CEO Paul Otellini reportedly told his employees that when Microsoft ($30; MSFT) releases Windows 8 on Oct. 26, the operating system will still have bugs to fix. While bugs aren't unusual — Apple's mapping software is the most recent example — the number of flaws has sparked concern among some analysts. However, Otellini said releasing the software on schedule makes sense, as Microsoft can correct problems later. The operating system's big leap in innovation could cause traditional Windows buyers to wait to see how the new version fares in the consumer market. Microsoft is a Buy and a Long-Term Buy. Intel is a Long-Term Buy.


Cisco Systems ($19; CSCO) CEO John Chambers said customers are reluctant to pursue capital investment, faced with the looming U.S. fiscal cliff of expiring tax breaks and automatic budget cuts. At Cisco's helm since 1995, the 63-year-old Chambers said he will probably retire within the next four years. Chambers hinted that his successor would come from within the company but did not rule out an outside hire; regardless, he allowed plenty of time to arrange a smooth succession. Cisco is a Buy and a Long-Term Buy.

Corporate roundup

In the August quarter, Oracle ($31; ORCL) earned $0.53 per share, up 11%, matching the consensus estimate. Revenue slipped 2% to $8.18 billion, hurt by a 24% slump in hardware sales — worse than management's projected decline of 7% to 17% — and currency fluctuations. Excluding currency effects, revenue rose 3%. Sales of new software licenses and cloud subscriptions rose 6% to $1.59 billion. For the November quarter, Oracle sees hardware sales falling 8% to 18% and new license sales climbing 5% to 15%. Oracle is a Long-Term Buy.


Cyber attacks temporarily brought down the websites of several banks, including U.S. Bancorp ($34; USB) Sept. 26 and Wells Fargo ($35; WFC) Sept. 25. At this point, no customer information appears to have been stolen. U.S. Bancorp is a Buy and a Long-Term Buy. Wells Fargo is a Focus List Buy and a Long-Term Buy.


CVS Caremark ($48; CVS) said it will repurchase up to $6.0 billion of stock, nearly 10% of outstanding shares at current prices. The company also announced the accelerated repurchase of $1.2 billion shares, with $1 billion coming from the new buyback plan and $200 million from an earlier program. CVS Caremark is a Buy and a Long-Term Buy.


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No changes were made this week in Dow Theory Forecasts.


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