Portfolio Review

1/28/2013


Industrials' high confirms bull trend

Helped by a decent start to December-quarter earnings season, the Dow Industrials closed above their October high of 13,610.15, confirming a similar move in the Dow Transports and reconfirming the market's bullish primary trend. With the Dow Theory squarely in the bullish camp, our mostly invested posture remains appropriate. In fact, we will be looking to boost our stock-market exposure as opportunities develop in individual stocks.

With more than two-thirds of S&P 500 Index companies yet to report, profit news will continue to dominate near-term trading. Negative share-price reactions for companies that disappoint have been larger than the upward moves of those delivering positive surprises, and we will be quick to sell stocks that no longer rank among our favorites.

Earnings update

As it previously announced, American Express ($59; AXP) grew earnings per share 8% excluding special items in the December quarter on a 5% gain in revenue net of interest expense. Operating expenses surged 19%, the biggest jump since the June 2011 quarter. But management blamed most of that increase on one-time events, including restructuring charges and settlement of a shareholder lawsuit. Excluding those items, costs rose 3%. The company expects operating costs to creep up less than 3% in both 2013 and 2014.

Management declined to predict whether rising taxes would dent its business, though it noted that the last large U.S. tax hike, in 1993, didn't hurt volumes. But Amex said sales growth could fall short of its internal target of 8% if the U.S. economy remains sluggish; the consensus projects 6% growth this year. At less than 14 times trailing earnings, Amex shares trade 24% below their five-year average P/E. Amex is a Focus List Buy and a Long-Term Buy.


Apple's ($505; AAPL) per-share earnings held virtually flat at $13.81 in the December quarter, $0.37 ahead of the consensus estimate. Revenue grew 18% to $54.51 billion, slightly below the average analyst estimate. Apple said it sold 29% more iPhones than it did in the year-ago quarter and 48% more iPads, though the number of Macintosh computers sold fell 22%.

Gross profit margins declined in the December quarter, a trend Apple expects to continue as less-profitable iPads comprise a larger portion of sales. Apple sees revenue of $41 billion to $43 billion (up 5% to 10%) in the March quarter, trailing the consensus of $45.63 billion (up 16%). Apple remains a Focus List Buy and a Long-Term Buy.


UnitedHealth Group ($56; UNH) said December-quarter earnings per share increased 3% to $1.20, meeting the consensus estimate. Revenue advanced 11% to $28.77 billion as medical membership rose 18% to 40.9 million, with a Brazilian acquisition accounting for two-thirds of the growth. The medical loss ratio crept up to 80.5%.

UnitedHealth says it has already priced about 70% of its 2013 business, and trends so far have been more favorable than in 2012. The insurer also said it plans to participate in only a few of the state health exchanges, set to open for enrollment in October with coverage beginning in 2014. As of yet, nobody knows how these exchanges, directed at individuals and small businesses, will work. The company's exposure appears small, with only about 10% of its profits coming from the groups that will use the exchanges. The stock rose on the results and remains a Focus List Buy and a Long-Term Buy.


Google ($742; GOOG) shares surged after the company announced December-quarter profit growth of 12% to $10.65, topping the consensus estimate by $0.23. Revenue soared 36% to $14.42 billion, about $2 billion ahead of the consensus. The Motorola acquisition boosted sales, but Google's core advertising and internet units delivered growth of nearly 20%. Total paid advertising clicks jumped 24% from the year-earlier period, while average cost per click — the price Google charges advertisers — declined 6%, better than analysts had expected after a 15% drop in the September quarter. The Motorola smartphone unit lost money and may keep doing so in coming quarters as Google restructures. Results excluded the Motorola TV set-top business, which Google agreed to sell for $2.35 billion. Google is a Focus List Buy and a Long-Term Buy.


BB&T ($31; BBT) earned $0.71 per share in the December quarter, up 29% and a penny above the consensus. Total revenue climbed 5% to $2.53 billion. Total loans and leases climbed 7% on a 19% surge in residential mortgages, while total deposits increased 8% to more than $131 billion; acquisitions contributed to the growth. Like many of its peers, BB&T saw lower net interest margin, which measures the difference between what a bank pays on deposits and what it charges for loans. Management expects that trend to continue in the March quarter. Shares rallied on the results. BB&T, which raised its quarterly dividend 15% to $0.23 per share, payable March 1, is a Long-Term Buy.


Intel ($21; INTC) shares slumped after the semiconductor maker reported middling December-quarter results, gave mixed guidance for the current quarter, and outlined an aggressive spending plan for the year ahead. Per-share profits fell 25% to $0.48 per share, $0.03 above the consensus. Sales slipped 3% to $13.48 billion, slightly lagging expectations, with 4% growth in the data-center segment failing to offset a 6% decline for semiconductors used in personal computers. For the March quarter, Intel sees profitability above analyst expectations, though the sales target range's midpoint of $12.7 billion fell short of the $12.9 billion consensus. Intel is a Long-Term Buy.


The former Abbott Laboratories earned $1.51 per share from ongoing operations in the December quarter, up 4% and easing a penny above the consensus. Revenue, which reflects results from businesses comprising both the new Abbott Laboratories ($33; ABT) and the AbbVie ($36; ABBV) branded-drug unit spun off at the start of this year, rose 4% to $10.84 billion. The new Abbott's stand-alone businesses grew sales an estimated 2% to about $5.7 billion. Abbott sees 2013 per-share profits of $1.98 to $2.04, above the consensus of $1.95 at the time of the announcement. The drug business now called AbbVie delivered 7% revenue growth, driven by a 15% rise in the sales of blockbuster Humira. Abbott Laboratories is a Long-Term Buy. AbbVie is rated B (average).

Corporate roundup

Boeing ($74; BA) has suspended delivery of its 787 Dreamliner, and airlines and regulators around the world have grounded the plane while safety investigators examine problems with its lithium-ion battery. So far this month, one Dreamliner's battery caught fire, and a second jet was forced to make an emergency landing. Boeing is rated A (above average).


DirecTV's ($53; DTV) path to acquiring Brazilian telecom firm GVT cleared a bit, after one potential suitor dropped out of the bidding. The owner of GVT, French conglomerate Vivendi ($22; VIVHY), could seek $9 billion for GVT, which has 351,000 pay-TV customers and about 10% of Brazil's broadband-internet market. DirecTV is a Focus List Buy and a Long-Term Buy.


Microsoft ($27; MSFT) has reportedly offered to finance up to $3 billion of a private-equity group's takeover of Dell ($13; DELL). In exchange, Microsoft could receive an equity stake and influence over Dell's future strategy. A Dell takeover could ultimately cost more than $22 billion. Microsoft is a Long-Term Buy. Dell is rated B (average).


Rank Changes

Magna International ($53; MGA), already a Buy, is being added to the Long-Term Buy List. The Vanguard Short-Term Investment-Grade ($10.84; VFSTX) fund now accounts for 6.2% of the Buy List and 8.8% of the Long-Term Buy List.


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