Portfolio Review

2/18/2013


New stocks . . .

BlackRock ($239; BLK), one of the world's largest publicly traded investment-management firms, is being upgraded to a Buy and a Long-Term Buy. The stock scores above 80 in five of six Quadrix categories and earns an Overall rank of 96. Assets under management rose 8% last year to $3.79 trillion at the end of December. With a leading position in exchange-traded funds (ETFs), BlackRock should benefit from this year's surge in fund inflows. In January, BlackRock boosted its quarterly dividend 12%. At 17 times trailing earnings, shares don't look especially cheap, though they trade 20% below their five-year average. The consensus projects BlackRock will increase earnings per share 13% in 2013, building on 15% growth last year.


We are adding B/E Aerospace ($54; BEAV) to the Long-Term Buy List. A leading provider of cabin interior products and fasteners, the company serves virtually every airline and aircraft maker. In addition, B/E's growing aftermarket business supports commercial and military fleets. Robust demand from plane makers is driving impressive results. In 2012, per-share earnings surged 26% on a 23% sales gain. On Dec. 31, the order backlog stood at $3.75 billion, up 7% from a year earlier. December-quarter earnings jumped 30% and beat Wall Street expectations for the fourth consecutive quarter. Importantly, management raised its 2013 outlook, saying per-share earnings should approach $3.45, implying at least 22% growth. At 18 times trailing earnings, the shares seem reasonably valued considering the company's robust operating momentum, sizable backlog, and solid Quadrix scores.

. . . & Downgrades

We are removing Aetna ($50; AET) from the Buy and Long-Term Buy lists. The shares have rallied 8% so far in 2013, approaching a five-year high and pushing the trailing P/E ratio to 10, a 7% premium to its five-year average. But Aetna's Quadrix Overall rank has fallen to 74, reflecting weakness in operating momentum and earnings-estimate trends. The insurer posted mildly disappointing results for the December quarter, and execution risks, such as insurance exchanges, loom. First recommended on Dec. 23, 2011 at $43 per share, Aetna should be sold. Aetna is now rated B (average).


Aflac ($49; AFL) was pulled from the Focus List on the Feb. 8 hotline. As expected, the depressed Japanese yen weighed on December-quarter results and management's 2013 outlook. More worrisome, Aflac described a slowdown in its Japan business (80% of 2012 operating income), especially in the bank channel, which has driven recent growth. However, the stock earns a Value rank of 98, trading at less than eight times trailing earnings, a 41% discount to the five-year average. Yielding 2.8%, Aflac remains a Buy and a Long-Term Buy.


Drug and medical-supply distributor McKesson ($105; MCK) delivered somewhat disappointing December-quarter results, and its operating cash flow has declined year-over-year in each of the last three quarters. Despite that erosion of operating momentum, the shares have rallied 13% from December lows and no longer look cheap. McKesson trades at a premium to its five-year average valuation relative to earnings, sales, and operating cash flow, and the shares appear to have limited upside. Subscribers should sell to lock in profits on McKesson, which is now rated B (average).

Earnings

Cisco Systems ($21; CSCO) grew January-quarter earnings per share 9% to $0.51 excluding special items, topping the consensus by $0.03. Sales advanced 5% to $12.10 billion, while cash from operations rose 6%. Product sales increased 3%, while services revenue jumped 10%. Cisco is a Buy and a Long-Term Buy.


Comcast ($39; CMCSa) earned $0.52 per share in the December quarter excluding special items, up 11% and a penny below the consensus. Revenue climbed 6% to $15.94 billion. Comcast said it will buy the remaining 49% equity stake in NBC Universal from General Electric ($23; GE) for about $16.7 billion and pay an additional $1.4 billion for properties where NBC is headquartered. Comcast will fund $11.4 billion of the deal with cash on hand, the rest with bonds and preferred stock. The company also raised its quarterly dividend 20% to $0.195 per share, payable April 24. Comcast is a Long-Term Buy.

Technology update

Long lines greeted the launch of Microsoft's ($28; MSFT) Surface Pro tablet, though some retail locations reportedly had just a couple units to sell. Initial reviews for the device are mixed, with some of the chief complaints involving cost, battery life, and weight. Microsoft is a Long-Term Buy.


Several of Dell's ($14; DELL) largest shareholders plan to vote against the $24.4 billion buyout in hopes of extracting a higher price from CEO and founder Michael Dell and hedge fund Silver Lake Partners. The buyout requires the support of a majority of shares not held by Michael Dell. Dell is rated B (average).


Google's ($781; GOOG) executive chairman, Eric Schmidt, plans to sell up to 3.2 million shares, valued at roughly $2.5 billion, in the coming year. Schmidt held 7.6 million shares of Google — a 2.3% stake in the company — at the end of 2012. Google is a Focus List Buy and a Long-Term Buy.


Hedge Fund manager David Einhorn sued Apple ($468; AAPL) in the hope of forcing the company to release its cash reserves to investors. Specifically, the lawsuit claims Apple violated regulatory laws by combining unrelated matters into one proposal that will come up for a shareholder vote Feb. 27. Among those unrelated matters, Apple has proposed adding a hurdle to the future issuance of preferred shares by requiring yet another shareholder vote. Einhorn hopes to compel Apple to issue "perpetual preferred" stock that yields roughly 4%. Apple currently yields 2.3%. CEO Tim Cook dismissed Einhorn's lawsuit as a "silly sideshow" but added that the company continues to discuss the best way to handle its cash hoard. Apple is a Focus List Buy and a Long-Term Buy.

Corporate roundup

U.S. regulators approved Pomalyst, a new drug made by Celgene ($99; CELG), for multiple-myeloma patients who haven't seen any improvement after trying at least two other treatments for the blood cancer. Analysts say Pomalyst could generate $1 billion of annual sales by 2017. In other news, Chinese regulators cleared Celgene to sell Revlimid to patients with relapsed multiple myeloma. Celgene expects to launch Revlimid in China late in the June quarter. Celgene is a Buy and a Long-Term Buy.


Macy's ($40; M) reported 11.7% higher same-store sales in January, well ahead of the 6.4% consensus estimate. The retailer also raised its January-quarter guidance for earnings per share by $0.03 to a range of $1.94 to $1.99, implying growth of 14% to 17%. Macy's also reiterated that it will no longer announce monthly sales figures as of February. Macy's is a Buy and a Long-Term Buy.


Rank Changes

J.P. Morgan Chase ($49; JPM) and Qualcomm ($66; QCOM) are being added to the Focus List. Aflac ($49; AFL) is being dropped from the Focus List, but remains a Buy and a Long-Term Buy. BlackRock ($239; BLK) is being added to the Buy and Long-Term Buy lists. B/E Aerospace ($54; BEAV) is being added to the Long-Term Buy List. Aetna ($50; AET) is being dropped from the Buy and Long-Term Buy lists. McKesson ($105; MCK) is being dropped from the Long-Term Buy List. Vanguard Short-Term Investment-Grade ($10.82; VFSTX) now accounts for 2.5% of the Buy List and 8.1% of the Long-Term Buy List.


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