Portfolio Review

3/18/2013


Keep running with Foot Locker

Foot Locker ($33; FL) said January-quarter earnings per share rose 33% to $0.73 excluding asset impairments, meeting the consensus. An extra week in the quarter boosted earnings by $0.09 per share. Total revenue climbed 14% to $1.71 billion, while same-store sales advanced 7.9%. Basketball footwear drove growth, while running footwear posted modest gains despite sluggish industrywide sales. Gross profit margins expanded for the apparel categories, a trend that could continue this year.

For fiscal 2014 ending January, Foot Locker expects per-share earnings to rise by double digits — below the consensus target of 15% growth at the time of the announcement. Management says same-store sales, initially hampered by tax-refund delays, gained momentum in the second half of February and early March and are projected to rise at a mid-single-digit rate this year. Business in Europe is also beginning to rebound.

Shares slumped on the report, reflecting the slightly disappointing outlook. Also, Foot Locker had topped the profit consensus by at least 7% in 11 straight quarters, so the January quarter's in-line results disappointed some. But the retailer maintains its course of cautious expansion while continuing to improve productivity at existing stores. The company holds more than $5 in net cash per share, equaling 16% of the stock price. Shares trade at 13 times trailing earnings, a 34% discount to their three-year average and 15% below the median S&P 1500 apparel retailer. Excluding net cash, the P/E ratio is just 11. Foot Locker remains a Focus List Buy and a Long-Term Buy.

Smartphone wars

Samsung was expected to launch its latest assault on Apple's ($428; AAPL) iPhone with the unveiling of a new high-end smartphone March 14, after the Forecasts went to press. In recent months, Apple has expanded its U.S. lead on Samsung Electronics ($1,500; SSNLF), a trend often lost in the waves of negative press. Apple's share of the U.S. smartphone market reached 38% for the three months ended January, versus 34% for the three months ended October, according to comScore. Samsung's slice rose nearly two percentage points to 21%.

Meanwhile, rumors of Apple's next crop of mobile devices continue to simmer. Apple could be considering the use of Qualcomm ($67; QCOM) semiconductors in a low-end iPhone. Apple also seems intent on reducing its reliance on Samsung for the semiconductors that power its devices. According to DigiTimes, Intel ($22; INTC) could potentially take a 10% share of the orders for one of Apple's key processors. Apple and Qualcomm are rated Focus List Buy and Long-Term Buy. Intel is a Long-Term Buy.


Google ($828; GOOG) plans to slash 1,200 more jobs at Motorola Mobility, as it continues efforts to turn around the unprofitable business. Motorola's share of the U.S. smartphone market slipped below 9% for the January quarter, down more than a percentage point from the October quarter. Google is a Focus List Buy and a Long-Term Buy.

Health-care update

UnitedHealth Group ($55; UNH) and other health insurers have challenged the assumptions underpinning a proposed reduction in 2014 reimbursement rates for Medicare Advantage. Specifically, the proposed 2.2% cut to Medicare Advantage assumes Congress will allow a 25% pay cut to doctors, which was originally included in a budget deal from 1997 but has been overridden by lawmakers every year since 2002. The final rate is expected to be announced April 1. UnitedHealth is a Long-Term Buy.


In the first of nearly 11,000 lawsuits over Johnson & Johnson's ($79; JNJ) metal hip implants, a jury ordered the company to pay $8.3 million in damages caused by the device's defective design. J&J is rated B (average). 

Banks ace stress tests

The Federal Reserve found capital levels at most large U.S. banks should keep them from getting capsized by a severe recession. Conditions of the stress tests assumed 12.1% unemployment, a 50% plunge in the stock market, and a decline of more than 20% in home prices. Among the 18 banks tested, only Ally Financial, once the financing arm of General Motors ($28; GM), failed.

The Fed was set to announce its decision for banks' capital-allocation plans March 14, after our deadline. Citigroup ($47; C) says it requested permission to repurchase $1.2 billion of stock, less than 1% of outstanding shares, but refrained from seeking a dividend hike. Citigroup and General Motors are rated B (average).

Corporate roundup

Still unable to identify the cause of a fire that broke out aboard a Boeing ($84; BA) Dreamliner jet, U.S. investigators have turned their focus to the planes' internal batteries. Boeing reportedly gained approval from regulators to test a newly designed battery and could begin installing it in planes by late April. The news suggests the Dreamliner, grounded since the middle of January, does not face a structural problem that would cause prolonged production delays — good news for supplier B/E Aerospace ($58; BEAV). B/E Aerospace is a Focus List Buy and a Long-Term Buy. Boeing is rated A (above average).


Chevron ($118; CVX) says ongoing projects in Australia and the Gulf of Mexico should help boost daily production more than 20% by 2017. The oil giant also expects to deliver $50 billion in cash from operations this year, versus $38.81 billion in 2012. In other news, Chevron said pressures that caused costs for its Australian projects to soar in late 2012 have begun to ease. Chevron is a Buy and a Long-Term Buy.


Bed Bath & Beyond ($61; BBBY) shares bounced after Barron's touted the retailer as a takeover candidate. Citing steady growth (annual sales have risen by more than 6% in nine of the past 10 years), a strong balance sheet (net cash of $3.46 per share), and a low valuation relative to peers (a P/E ratio of 14 lags the median of 17 for the S&P 1500 consumer-discretionary sector), Barron's suggests the retailer could attract a nearly 40% premium from potential suitors. Bed Bath & Beyond, which tends to report February-quarter results in early April, is a Buy and a Long-Term Buy.


EMC ($24; EMC) shares rose after management said it will form a new company called Pivotal to house data-analytics and cloud-application businesses currently owned by EMC and VMware ($81; VMW). VMware also issued strong sales guidance, another potential catalyst for EMC's price action. EMC will initially hold a 69% stake in Pivotal, with VMware controlling the remaining 31% interest. EMC ultimately plans to spin off Pivotal to the public, echoing its 2007 public offering of VMware, in which EMC still holds an 80% stake. EMC added that it expects to grow revenue at an annual rate of 9% through 2016, outpacing projected growth of 3% for the broader technology market. EMC is a Buy and a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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