Portfolio Review

2/9/2009


Qualcomm, Manitowoc downgraded
In the wake of a weak December quarter and disappointing guidance, Qualcomm ($34; QCOM) is being dropped from the Focus List and Buy List. Qualcomm’s profits fell 40% to $0.31 per share excluding special charges in the quarter, missing consensus estimates by $0.16. Revenue rose 3% to $2.51 billion, but the investment portfolio suffered $1.1 billion in net unrealized losses. The company lowered profit targets for the second time since October.

In other news, Qualcomm’s mobile-television business is — for now — in limbo, as the U.S. Congress has voted to allow broadcasters to delay their move to all-digital transmission. Qualcomm, which plans to use the vacated spectrum, said a delay could cost “tens of millions of dollars.” Qualcomm has been dropped from the Focus List and Buy List because the next six to 12 months could be rough. However, Qualcomm still has a strong position in attractive markets. The stock remains a Long-Term Buy because it has solid prospects for 2010 and beyond.


Just three weeks after lowering its earnings guidance, Manitowoc ($5; MTW) managed to fall short of its lowered expectations for the December quarter. Per-share profits were $0.51 excluding special items, down 31% and $0.06 below consensus expectations. Crane sales were roughly flat last year, but the company anticipates 2009 crane sales of $3.2 billion, down more than 17%. Manitowoc also plans to slash the crane work force by 22%. Projected 2009 per-share profits of $1.35 to $1.60 represent a drop of at least 48%, and the company’s seemingly poor handle on its results suggests another shortfall would not be surprising.

In addition, poor outlooks from Caterpillar ($30; CAT) and other companies dependent on construction spending raise questions about Manitowoc’s ability to meet its lowered profit guidance. Recent share-price action has been discouraging, with the stock down 25% since earnings were announced. Continued weaker-than-predicted results could cause Manitowoc to violate a debt covenant later this year, which in turn would require the company to refinance its debt, most likely at higher interest rates. While the stock has some appeal as a speculative rebound play, the uncertainty seems too high to justify new buying. Manitowoc is being downgraded to Neutral. Subscribers should sell the shares.

December-quarter earnings
Harris’ ($43; HRS) profits rose 24% to $1.08 per share excluding special charges, topping the consensus by $0.06. Revenue increased 16% to $1.52 billion, driven by 23% growth in radio-frequency communications. Harris trimmed its fiscal 2009 profit guidance range by $0.12 per share but still projects growth of at least 17%. Harris is a Focus List Buy and a Long-Term Buy . . . Airgas ($37; ARG) earned $0.76 per share, up 13% and a penny better than the consensus. Revenue rose 7% to $1.08 billion. Same-store sales grew 1%, with acquisitions driving most of the 7% top-line growth. For fiscal 2009 ending in March, Airgas projects per-share profits of at least $3.16, higher than the consensus and implying minimum growth of 18%. Airgas is a Focus List Buy . . . Exxon Mobil ($78; XOM) earned $1.55 per share, down 27% but $0.10 better than Wall Street anticipated. Sharp declines in oil prices fueled a 31% decline in profits from upstream operations. Refining income rose 6%, despite lower volumes and $570 million in hurricane-related repair costs. For the year, Exxon Mobil earned $45.22 billion, a U.S. record. Exxon Mobil is a Long-Term Buy . . . Chevron ($72; CVX) profits fell 8% to $2.14 per share, beating the consensus by $0.33. Income from downstream operations (up 920% to $2.08 billion) partially offset the effect of crashing oil prices on the upstream business (down 35% to $3.15 billion). Sales fell 28% to $43.15 billion. Chevron is a Buy and a Long-Term Buy . . . Ford Motor ($2; F) lost $1.37 per share excluding special items on a 36% decline in sales as the automaker burned though $5.3 billion in operating cash. Insisting it doesn’t need a bailout, Ford is tapping $10.1 billion in credit lines. Ford is an Underperform . . . Aflac ($23; AFL) earned $0.98 per share from continuing operations, up 26% but short of the consensus by $0.02. Revenue rose 6% to $4.26 billion on 8% higher U.S. sales. The insurer realized investment losses of $262 million, or $0.56 per share. Aflac forecasts per-share operating earnings will increase 13% to 15% in 2009, below the consensus estimate of 17% growth. Aflac is a Long-Term Buy . . . Motorola ($4; MOT) lost $0.01 per share excluding special items, down from a profit of $0.04 in the year-earlier period. Motorola suspended the quarterly dividend and expects to lose at least $0.10 per share in the March quarter. Motorola is an Underperform . . . Wells Fargo ($19; WFC) lost $0.79 per share versus a $0.41 profit in the year-earlier period, missing consensus estimates by $1.11. Revenue fell 4% to $9.82 billion. Wells Fargo took $37.2 billion in write-downs for $93.9 billion of high-risk loans in the portfolio of recently acquired Wachovia. Wells Fargo is rated Neutral.

News roundup
Swiss drugmaker Roche lowered its takeover offer for Genentech ($83; DNA) to $86.50 per share and plans to take the hostile bid directly to shareholders. In July, Genentech’s board rejected an offer of $89 per share from Roche, which already owns 55.8% of the company. This latest gambit appears to have strained relations between the two firms, though it could also reinvigorate negotiations that had lost momentum. Genentech is a Long-Term Buy . . . American International Group ($1; AIG) has asked for a federal backstop for its troubled assets, similar to guarantees granted to other financial firms. An agreement could ease pressure on AIG to sell assets at a time when both buyers and credit are scarce. The government has already given AIG a bailout package worth $150 billion in exchange for an 80% stake in the troubled company. AIG is rated Neutral . . . Citigroup ($3; C) disclosed plans to spend $36.5 billion of taxpayer money to issue mortgages, buy mortgage-backed securities, and extend credit lines. The bank received $45 billion in federal aid last year. Citigroup might also sell its Japanese banking business, Nikko Cordial, worth up to $3.4 billion. Citigroup is rated Neutral . . . Citing disappointing results, Pfizer ($15; PFE) will halt late-stage trials of a drug designed to treat pancreatic cancer. Pfizer is rated Neutral.


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