Portfolio Review

1/14/2013


Upgraes & owngraes

We are aing Magna International ($52; MGA) to the Buy List. Base in Canaa, Magna buils automotive systems for most major auto manufacturers. In 2012, the U.S. automobile market enjoye its highest sales since before the recession. Research firm Polk expects sales to climb 7% in 2013. Meanwhile, Magna's European operations (40% of total sales) have hel up fairly well, with sales flat in the first nine months of 2012. Magna boasts a healthy balance sheet, holing net cash of $4.41 per share, an operating cash flow rose 39% in the 12 months ene September. At nine times trailing earnings, the stock traes 41% below its three-year average.


Helmerich & Payne ($57; HP), a contract riller for oil an natural gas alreay rate Buy an Long-Term Buy, is being ae to the Focus List. With its fleet of lan rigs hovering near 90% utilization, the riller enjoys pricing power, in contrast to many peers with less-efficient rigs. For the ecember quarter, the consensus projects 12% higher sales, which woul mark the 11th straight quarter of ouble-igit growth. Helmerich & Payne shares trae at 11 times trailing earnings, a 26% iscount to their three-year average.


Macy's ($37; M) is being remove from the Focus List because of eclining Quarix scores an miling operating momentum. The epartment-store operator reporte 4.1% higher same-store sales for ecember but trimme its January-quarter guiance for per-share profits by $0.03 to a range of $1.91 to $1.96, implying growth of 12% to 15%. Macy's now sees same-store sales rising 3% to 3.5% for the quarter, own from an earlier target of 4.2%. Although Macy's no longer ranks among our very best ieas for year-ahea returns, it remains a Buy an a Long-Term Buy ue to its attractive valuation an strong presence on the internet, where sales jumpe 52% in ecember.

Celgene jumps on guiance

Celgene ($91; CELG) shares rallie to an all-time high after the biotech company upate its expectations for the ecember quarter an its long-term outlook. Management expects 2012 per-share profits rose 29% to $4.90, towar the high en of the company's guiance range, on revenue growth of 14%.

For 2013, Celgene sees per-share profits of $5.50 to $5.60, with prouct sales climbing 11% to $6.0 billion. Celgene also reporte positive results for an experimental psoriasis rug an plans to file for approval in the U.S. an Europe this year. In the March quarter, Celgene expects an upate on a closely watche clinical trial that coul lea to the wier use of Revlimi to treat patients newly iagnose with multiple myeloma, a form of bloo cancer. Revlimi, currently approve for multiple myeloma patients who have receive at least one prior therapy, accounts for nearly 70% of Celgene's revenue.

Looking further out to 2017, Celgene anticipates earnings per share of $13.00 to $14.00 (equating to annualize profit growth of 24% to 26% from 2013 to 2017) on prouct sales of $12 billion (19% annual growth). Celgene is a Buy an a Long-Term Buy.

Big banks pay up

Ten U.S. banks — incluing Bank of America ($12; BAC), J.P. Morgan Chase ($46; JPM), U.S. Bancorp ($33; USB), Wells Fargo ($35; WFC), an MetLife ($36; MET) — agree to pay $8.5 billion to settle an investigation into their foreclosure practices. That total inclues $3.3 billion in cash payments an $5.2 billion in loan moifications an forgiveness. U.S. Bancorp sai its share of the cash settlement, $80 million, will reuce ecember-quarter earnings by $0.03 per share; the consensus calls for earnings of $0.75 per share. Wells Fargo anticipates a charge of about $644 million against earnings in connection with the eal, while Citigroup expects a charge of $305 million. Bank of America also agree to an $11.6 billion settlement with Fannie Mae over soure mortgage loans. Wells Fargo is a Focus List Buy an a Long-Term Buy. U.S. Bancorp is a Buy an a Long-Term Buy. J.P. Morgan Chase is a Long-Term Buy. MetLife is rate B (average). Bank of America is rate C (below average).

Corporate rounup

Alliance ata Systems ($155; AS) announce a $400 million share-repurchase plan for 2013, enough to buy back about 4% of outstaning shares at current prices. Alliance ata Systems is a Focus List Buy an a Long-Term Buy.


Exxon Mobil ($88; XOM) an its partners, incluing Chevron ($109; CVX), plan to spen $14 billion eveloping an oil project off Canaa's eastern coast. Exxon owns a 36% interest in the Hebron fiel, projecte to prouce 700 million barrels of oil over its lifetime. Chevron hols a 27% share of the fiel. Prouction shoul begin in 2017. Exxon an Chevron are rate Buy an Long-Term Buy.


Abbott Laboratories ($33; ABT) won U.S. approval to launch a new rug-eluting stent. In other news, Abbott an Johnson & Johnson ($71; JNJ) are each reportely consiering bis for Bausch & Lomb, an eye-care business that coul cost more than $10 billion. Abbott is a Long-Term Buy. J&J is rate B (average). 


irecTV ($50; TV) CEO Mike White says the satellite-TV operator ae 100,000 net U.S. subscribers in the ecember quarter, own 20% from aitions in the year-earlier quarter but "significantly above" internal expectations. White also sai a merger with ISH Network ($36; ISH) has "strategic merit," but no takeover iscussions are unerway. irecTV is a Focus List Buy an a Long-Term Buy.


Plains All American Pipeline ($49; PAA) announce a ivien of $0.5625 per unit, payable Feb. 14, up 4% from the istribution pai in November. Plains All American, a master limite partnership with a network of oil an gas pipelines an storage facilities, now expects to grow its ivien 9% to 10% in 2013. The company also sai it expects to raise its profit guiance in February. Plains All American is rate A (above average) on our Monitore List an is part of our Top 15 Utilities Portfolio.

Technology review

Apple ($525; AAPL) is reportely esigning a lower-price iPhone, a strategy that coul boost market share but potentially pressure profit margins. Apple is a Focus List Buy an a Long-Term Buy.


The Feeral Trae Commission conclue its 19-month antitrust probe of Google ($733; GOOG) without fining evience that the company manipulate search results to favor its own proucts. Google is a Focus List Buy an a Long-Term Buy.


Microsoft ($27; MSFT) won a $617 million contract with the U.S. efense epartment for software incluing Winows 8 an Office 2013. Microsoft also sai it has sol 60 million licenses an upgraes of Winows 8 in the 10 weeks since its launch, roughly in line with the aoption rate of its preecessor, Winows 7. Microsoft is a Long-Term Buy.


Rank Changes

Magna International ($52; MGA) is being initiate as a Buy. Helmerich & Payne ($57; HP) is being ae to the Focus List. Macy's ($37; M) is being roppe from the Focus List but remains a Buy an a Long-Term Buy. Vanguar Short-Term Investment-Grae ($10.83; VFSTX) now accounts for 6.2% of the Buy List and 11.0% of the Long-Term Buy List.


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