Portfolio Review

12/24/2012


Corporate profit, sales guidance

CVS Caremark ($49; CVS) shares rallied after management announced encouraging guidance and a big dividend hike. For 2013, CVS expects per-share profits to advance 13% to 17%, versus the consensus of 13% at the time of the announcement. CVS says free cash flow should reach $4.8 billion to $5.1 billion next year, versus $2.95 billion in the 12 months ended September. The company boosted its quarterly dividend 38% to $0.225 per share, payable Feb. 4, marking the seventh increase of more than 10% in as many years. CVS also plans to repurchase $4 billion of its stock next year, more than 6% of outstanding shares at current prices. CVS Caremark is a Focus List Buy and a Long-Term Buy.


Excluding one-time items, Aetna ($47; AET) anticipates per-share profits of $5.40 in 2013, implying 6% growth, and revenue of $38.6 billion, up 9%. The insurer's forecast excludes its $5.6 billion acquisition of Coventry Health Care ($45; CVH), expected to close in the middle of next year. The consensus had projected earnings of $5.52 per share on sales of $38.91 billion. Aetna sees medical costs climbing 6.5% in 2013, the same rate as this year. Shares rose on the news, possibly reflecting the fact that other major insurers have also issued outlooks below Wall Street expectations and the belief that Aetna, known for conservative guidance, has left space for upside. In other news, Aetna agreed to pay up to $120 million to settle a lawsuit alleging it systematically underpaid claims for services rendered by out-of-network providers. Aetna is a Buy and a Long-Term Buy.


Cisco Systems ($20; CSCO) reiterated its annual growth target of 5% to 7% higher sales over the next three to five years. Best known for its routers and switches, Cisco expects services (21% of sales) and software (15%) to drive growth in coming years. The company is also eying major acquisitions and reportedly considering the sale of Linksys, a low-margin business that makes routers used in homes. Cisco is a Buy and a Long-Term Buy.

November-quarter earnings

Bed Bath & Beyond ($60; BBBY) grew November-quarter earnings per share 8% to $1.03, easing past the consensus by a penny. Same-store sales grew 1.7%, with Hurricane Sandy lowering the growth rate by an estimated 0.9%. Total revenue advanced 15% to $2.70 billion. For the February quarter, management expects per-share profits to rise 8% to 13%, missing the consensus target of 18% growth at the time of the announcement. The retailer also announced a $2.5 billion share-repurchase plan. The news is somewhat disappointing, but the stock remains a Buy and Long-Term Buy for now.


Oracle's ($33; ORCL) per-share profits climbed 18% to $0.64 excluding special items, exceeding the consensus by $0.03. Revenue crept 3% higher to $9.11 billion, slightly above the consensus. Sales from new software licenses jumped 17%, while the hardware unit saw revenue decline 17%. For the February quarter, Oracle expects per-share profits will rise 3% to 10%, a target range straddling the consensus estimate. Oracle described a favorable pricing environment and said that its hardware products business should begin growing in the May quarter. Oracle is a Long-Term Buy.

Tech update

Apple ($534; AAPL) reported sales of more than 2 million iPhone devices in China in the first three days after its launch. The company is trying to rebuild its share of China's smartphone market, where it ranks sixth with less than a 10% slice. In the U.S., T-Mobile USA will begin selling the iPhone in 2013. T-Mobile, the last of the major U.S. telecoms to offer the iPhone, will not subsidize the cost of the device for customers — but it will let them use the phone without a two-year contract. Apple is a Focus List Buy and a Long-Term Buy.


In related news, Google ($721; GOOG) launched its popular map application for the iPhone 5. Google reports more than 10 million downloads of the application in the first 48 hours. But the company says it has no plans to develop applications for Microsoft ($28; MSFT) Windows devices, citing a dearth of users. Still, one industry researcher estimates the sale of 4.2 million Windows Phones since October. And Microsoft has expanded distribution of its Surface tablet to retailers including Staples ($12; SPLS) and Best Buy ($12; BBY). Microsoft has not revealed sales for the Surface, but it claims to be encouraged by initial demand. Suppliers, though, have hinted at weak sales. Google is a Focus List Buy and a Long-Term Buy. Microsoft is a Long-Term Buy.


Separately, the Federal Trade Commission is reportedly close to finishing its probe of Google's web-search business without issuing a fine or requiring major concessions. Google has already changed some of its procedures to address antitrust regulators' concerns. However, other reports suggest the FTC is likely to extend its investigation into next year. European regulators are also probing the company. In other news, Google received multiple bids for the set-top-box business it inherited via the $12.5 billion acquisition of Motorola Mobility in May. The business could fetch $1.5 billion to $2.5 billion, reported The Wall Street Journal.

Retail review

Retail sales appear to have lost momentum since Thanksgiving weekend, prompting a flurry of sales promotions. Wal-Mart Stores ($70; WMT) slashed prices on certain iPhone 5 models by 33% and slapped 20% discounts on some iPads. Macy's ($39; M) announced extended store hours in the days leading up to Christmas.

India launched a probe into allegations that in 2010 Wal-Mart invested $100 million in a company that controls a supermarket chain. In September, India decided to allow foreign retailers to invest in local supermarkets and set up retail outlets through joint ventures. In 2011, India temporarily adopted a similar stance but relented after criticism. Meanwhile, the retail giant's Mexican unit allegedly bribed local officials to expedite the opening of 19 stores, reported The New York Times. Elsewhere, Wal-Mart is reportedly in talks to acquire an 80% interest in Turkish retailer Migros Ticaret and has bid for assets held by Hostess Brands. Wal-Mart Stores is a Long-Term Buy.

Macy's increased its share-repurchase plan by $1.5 billion to a total of $1.86 billion, or 12% of the share count at current prices. Macy's is a Focus List Buy and a Long-Term Buy.

News roundup

Chevron ($110; CVX) expects to spend $36.7 billion on capital projects in 2013, versus projected spending of $32.7 billion in 2012 and the $26.5 billion spent in 2011. Expenditures will likely stay elevated through 2014 as Chevron continues work on massive liquefied-natural-gas projects. Citing unfavorable currency trends and labor shortages, Chevron said its Gorgon project in Australia will cost $52 billion, well above a 2009 estimate of $37 billion. Chevron holds a 47% stake in the project, now more than half complete. Separately, Chevron appears near a $144 million settlement with Brazil over a 2011 offshore spill. A Brazil prosecutor had originally sought damages of nearly $20 billion. Chevron is a Buy and a Long-Term Buy.


McKesson ($100; MCK) won a contract with the U.S. Defense Department worth up to $2.61 billion to deliver drugs by mail. McKesson is a Long-Term Buy.


Rank Changes

No rank changes were made this week in Dow Theory Forecasts.


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