Portfolio Review

11/26/2012


We prescribe Mylan as a Buy

We are initiating coverage of Mylan Laboratories ($26; MYL), a maker of generic drugs, as a Buy and Long-Term Buy. The stock has a lot to like, including improving cash flow and profit margins, strong profit momentum with positive earnings revisions, and solid Quadrix scores. Mylan boasts a portfolio of more than 1,100 generic drugs, as well as several branded medications. In addition, a subsidiary is one of the world's largest makers of drug ingredients.

Shares have returned 21% this year but still seem unduly cheap considering the company's growth outlook. For 2012, rising analyst estimates target per-share earnings of $2.58, implying 26% growth. For 2013, the consensus is $2.77, up 7%. Yet shares look undervalued at 10 times trailing earnings — a 46% discount to the three-year average. Helped by a Quadrix Value score of 70, the stock's Overall score is 93.

Technology update

Intel ($20; INTC) CEO Paul Otellini, age 62, said he will retire in May. Given Intel's mandatory retirement age of 65, the announcement caught investors by surprise. The new CEO must help Intel navigate the mobile-devices market, an elusive goal under Otellini, who has led the company since 2005.

Until this year, Intel's semiconductors had the reputation of battery hogs. While Intel has placed its newer semiconductors in smartphones in recent months, its customers are primarily smaller manufacturers. Sales of Ultrabooks — sleek notebook personal computers that were a major Intel initiative going into the year — have failed to ignite much consumer enthusiasm. Intel hopes the trend changes in 2013, when a new processor makes the devices lighter and gives them longer battery lives.

The retirement news sent Intel shares to a 14-month low. But plenty of pessimism appears baked into the stock, which trades at eight times trailing earnings, 43% below the five-year average. Intel is a Long-Term Buy.


Hewlett-Packard ($13; HPQ) shares plunged to a 10-year low after the tech titan posted middling October-quarter results and announced yet another massive write-down. H-P said its per-share profits slipped 1% to $1.16 per share excluding special items, easing past the consensus by $0.02. Revenue slumped 7% to $29.96 billion, missing analyst projections, as the printing, personal-computers, services, and servers segments all contracted. Management's guidance for per-share profits in the January quarter fell well short of expectations. CEO Meg Whitman said the company's profits would likely continue to decline in coming quarters.

H-P also said it will take an $8.8 billion charge on Autonomy, a software company it acquired last year for about $11 billion. H-P says most of the charge relates to “serious accounting improprieties, disclosure failures and outright misrepresentations” made by Autonomy before the deal. Last quarter, H-P took $9.2 billion in charges, primarily from its 2008 acquisition of Electronic Data Systems. In the wake of the weak quarter, we are downgrading H-P to C (below average) from B (average).


Heading into the holiday season, Apple ($566; AAPL) hopes its family of iPad tablets holds ground in an increasingly crowded field. The iPad captured a 50% share of the tablet market in the September quarter, according to researcher IDC, down from 60% in the same period last year. But some analysts say Google's ($668; GOOG) Android devices have overtaken Apple in terms of innovation. According to published reports, Google has repeatedly increased the size of its supply orders for the Nexus 7 tablet since June, implying expectations of strong sales. Apple will battle back with new iPhone and iPad models, both reportedly expected in the middle of 2013, and there are fresh rumblings of an Apple television product. Both stocks are rated Focus List Buy and Long-Term Buy.


Cisco Systems ($18; CSCO) pushed further into cloud computing with a pair of acquisitions. Cisco agreed to pay $1.2 billion in cash and retention-based incentives to acquire Meraki, a provider of networking devices and services designed to be managed through the internet. Cisco also said it will pay $125 million in cash and retention-based incentives for Cloupia, a company that automates data-center tasks. The stock is rated Buy and Long-Term Buy.


Qualcomm ($62; QCOM) said it expects to grow sales and per-share profits at an annualized rate of at least 10% over the next five years. The maker of semiconductors for wireless devices sees smartphone shipments climbing at an annual rate of 24% through 2016, while tablet shipments rise at a 41% clip. Qualcomm is a Buy and a Long-Term Buy.

Corporate roundup

For the October quarter, Wal-Mart Stores ($69; WMT) said per-share profits from continuing operations rose 11% to $1.08, exceeding the consensus by a penny. But weak customer traffic pressured total revenue, up just 3% to $113.20 billion and well short of the consensus. Excluding fuel, U.S. same-store sales rose 1.5% at Walmart and 2.7% at Sam's Club. For the January quarter, the retailer sees per-share profits of $1.53 to $1.58, up 6% to 10% and below the consensus of $1.59. In case taxes on dividend distributions rise in the coming year, management moved its dividend payment to Dec. 27 from Jan. 2. Wal-Mart is a Long-Term Buy.


Nike ($96; NKE) announced a two-for-one stock split, payable Dec. 24. The company also hiked its quarterly dividend 17% to $0.21 per share on a postsplit basis, payable Dec. 26. Nike is rated C (below average).

Oil report

Exxon Mobil ($88; XOM) shut down a leaking pipeline off Nigeria's coast that has caused an oil slick at least 20 miles long. Exxon has not disclosed the cause of the accident, its second major spill since August. Exxon is a Buy and a Long-Term Buy.


BP ($41; BP) agreed to pay the U.S. $4.5 billion and plead guilty to multiple felonies, including manslaughter and obstruction of Congress, in connection with the April 2010 explosion aboard the Deepwater Horizon in the Gulf of Mexico. Three former BP workers were also charged with felonies. BP has already paid $23 billion in connection with the spill and set aside an additional $12 billion. But it could still be on the hook for tens of billions of dollars more in civil fines. BP is rated B (average).


Rank Changes

Mylan Laboratories ($26; MYL) is being initiated as a Buy and a Long-Term Buy. The Vanguard Short-Term Investment-Grade ($10.87; VFSTX) bond fund now makes up 9.9% of the Buy List and 13.9% of the Long-Term Buy List.


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