Portfolio Review

3/25/2013


Stick with H&P

Helmerich & Payne ($61; HP) shares slumped following cautious comments from its executives and rivals at an energy conference. H&P stood by its March-quarter outlook, though it didn't specify a target. The consensus projects per-share-profit growth of 13% on 7% revenue growth in the quarter. However, H&P also noted rivals have slashed prices on U.S. land rigs in an attempt to regain market share, putting pressure on H&P's pricing.

As of March 15, the company operated 242 active U.S. land rigs, up 1% from the end of December. Meanwhile, Paal Kibsgaard, CEO of oilfield-services giant Schlumberger ($74; SLB), expressed disappointment in North American activity during the March quarter, with fewer rigs reactivated than expected. Despite the pullback, H&P shares are up 9% for the year. Helmerich & Payne remains a Focus List Buy and a Long-Term Buy. Schlumberger is rated B (average).

DirecTV says no deal

DirecTV ($55; DTV) shares rallied after the satellite-TV company dropped out of the bidding for GVT, a Brazilian telecom operator. Vivendi ($20; VIVHY), GVT's owner, had sought at least $9 billion, far more than DirecTV's bid of $7.79 billion. A deal would likely have constrained DirecTV's stock repurchases, which have lowered the share count by 48% in the past five years.

The passing of the Brazil deal revived speculation of a potential merger with DISH Network ($35; DISH). The CEOs of both companies appear willing to consider a deal, though regulatory scrutiny could present a high hurdle. DirecTV is a Focus List Buy and a Long-Term Buy.

Microsoft tablets still struggle

Microsoft ($28; MSFT) has sold about 1.5 million Surface RT and Pro tablets, reported Bloomberg. The software giant reportedly ordered about 3 million Surface RT devices.

To compound Microsoft's problems, weakness in personal computers may prove worse than previously thought. Researcher IDC now sees PC shipments falling by double digits in the March quarter, versus its prior projection of an 8% decline. Microsoft, yielding 3.3%, is a Long-Term Buy.

Earnings review

Oracle ($36; ORCL) earned $0.65 per share excluding unusual items in the February quarter, up 5% but a penny below the consensus. Sales fell 1%, while the consensus called for 3.5% growth. Software revenue rose 4%, hurt by a 2% decline in new licenses and cloud-software subscriptions, while hardware revenue fell 23%. The results are disappointing, but for now Oracle remains a Long-Term Buy.


FedEx ($99; FDX) earned $1.23 per share excluding special items in the February quarter, down 21% and $0.15 below the consensus. The shipping titan cited weakness in international air freight and lower yields sparked by overcapacity and consumers selecting cheaper options. FedEx lowered profit guidance for the May quarter, and we're downgrading the stock to B (average).


Walgreen ($45; WAG) earned $0.96 per share excluding special items in the February quarter, up 9% and $0.02 above the consensus. In other news, Walgreen signed a 10-year deal with drug distributor AmerisourceBergen ($50; ABC) and Swiss retailer and drug wholesaler Alliance Boots, giving the store chains more pricing leverage with drugmakers and greater international-expansion possibilities. Walgreen and AmerisourceBergen are rated A (above average).

Corporate roundup

The banks that own Visa Europe are reportedly considering exercising a put option that would force Visa ($156; V) to buy the European business for $3 billion or more. Visa has shown interest in controlling Visa Europe, the largest card network in the European Union, but such a transaction would pave the way for the formation of an independent competitor. The European firm's owners are slated to meet in April. Visa is a Buy and a Long-Term Buy.


U.S. regulators told Abbott Laboratories ($34; ABT) it must supply more information on the merits of a clamp for leaky heart valves. Abbott seeks U.S. approval for its Mitraclip heart device, currently sold in about 30 countries. Abbott is a Long-Term Buy.


Several companies, including EMC ($25; EMC) and IBM ($213; IBM), have entered talks to acquire SoftLayer Technologies, a company that provides database-web hosting. SoftLayer could be valued at more than $2 billion. EMC is a Buy and a Long-Term Buy. IBM is rated A (above average).


Google's ($811; GOOG) new Nexus 7 tablet, expected to launch in May, will switch to Qualcomm ($65; QCOM) processors, reported DigiTimes. Both Google and Qualcomm are Focus List Buys and Long-Term Buys.

Banks give back

Most, but not all, banks came out winners from the Federal Reserve's ruling on capital-allocation programs for the next 12 months. The Fed rejected BB&T's ($31; BBT) capital allocation due to "a qualitative assessment." The bank plans to resubmit its request and seems confident the objections aren't related to capital strength or earnings power. Although the Fed approved capital plans proposed by J.P. Morgan Chase ($49; JPM) and Goldman Sachs ($149; GS), both companies must address weaknesses in their planning and submit new proposals by September. BB&T is a Long-Term Buy. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy. Goldman Sachs is rated A (above average).

BANK CAPITAL-ALLOCATION PLANS, NEXT 12 MONTHS
Company (Price; Ticker)
Planned
Quarterly
Dividend
($)
Planned
Dividend
Hike
(%)
Dividend
Growth
In Past
Year
(%)
Planned Stock
Repurchases
($Millions)
Advice
American Express
($65; AXP)
0.23
15
11
4,200
Buy †
Bank of America
($13; BAC)
0.01
0
0
10,500 ‡
B (average)
Bank of New York Mellon ($28; BK)
0.15
15
0
1,350
B (average)
BB&T ($31; BBT) **
NA 
NA
44
NA
LT Buy
Capital One Financial
($54; COF)
0.30
500
0
0
B (average)
Citigroup ($46; C)
0.01
0
0
1,200
B (average)
Fifth Third Bancorp
($17; FITB)
0.12 §
20 §
25
984
Buy †
Goldman Sachs
($149; GS) *
NS
NS
43
NS
A (above avg.)
J.P. Morgan Chase
($49; JPM) *
0.38
27
20
6,000
Focus Buy †
U.S. Bancorp
($34; USB)
0.23
18
56
2,250
Buy †
Wells Fargo
($37; WFC)
0.30
20
108
3,882 +
Focus Buy †
Note: recommended stocks are in bold.     * Capital plans approved, but resubmitting.     ** Capital plan rejected.     NA Not applicable.     NS Not specified.     † Also qualifies as a Long-Term Buy.     ‡ Including preferred stock.
§ Half of hike already announced.

J.P. Morgan will increase its quarterly dividend 27% to $0.38 per share, payable July 31, while American Express ($65; AXP) expects to increase its quarterly dividend 15% to $0.23 per share. Amex is a Buy and a Long-Term Buy.


Wells Fargo ($37; WFC) surprised many investors with the size of its planned hike to the quarterly dividend — a 20% bump to $0.30 per share. Wells Fargo is a Focus List Buy and a Long-Term Buy.


U.S. Bancorp ($34; USB) plans to boost the quarterly dividend 18% to $0.23 per share, payable in July. U.S. Bancorp is a Buy and a Long-Term Buy.


Fifth Third Bancorp ($17; FITB) raised its quarterly dividend 10% to $0.11 per share, payable April 18. It will consider another increase in June. Fifth Third is a Buy and a Long-Term Buy.


The U.S. Senate issued a scathing report on J.P. Morgan's handling of losses suffered from the so-called "London Whale." The report alleges executives ignored risks and misled investors and regulators about the losses, which topped $6.2 billion.


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