Portfolio Review

9/30/2013


Corporate roundup

Bed Bath & Beyond ($75; BBBY) earned $1.16 per share in the August quarter, up 18% and a penny above the consensus. Same-store sales climbed 3.7% with total revenue up 9% to $2.82 billion. The retailer projects per-share-profit growth of 8% to 13% in the November quarter, versus the consensus of 9% at the time of the announcement. Bed Bath & Beyond is a Buy and a Long-Term Buy.


Alliance Data Systems ($211; ADS) expanded dotz, a Brazilian loyalty program similar to its Canadian Air Miles, into two new markets in the South American country. Alliance plans to roll out dotz into another two markets by the end of the year. The company holds a 37% stake in dotz, which saw its membership nearly triple to 8.2 million participants in the year ended June. Alliance Data is a Focus List Buy and a Long-Term Buy.


Hertz Global ($26; HTZ) said Chief Financial Officer Elyse Douglas will resign Oct. 1, though will she will stay with the company through the end of the year to help with the transition. Douglas, not yet age 60, cited "personal reasons," including, a wish to not relocate to the company's new headquarters in Florida from its current offices in New Jersey. She has served as Hertz's CFO since 2007. Hertz Global is a Buy and a Long-Term Buy.


Visa ($193; V) and MasterCard ($685; MA), under pressure from French officials, agreed to cut interbank fees 44% and ATM fees 27% in France. Visa is a Buy and a Long-Term Buy. MasterCard is rated B.


Kroger ($41; KR) said David B. Dillon, its CEO since 2003, will retire in January. Dillon, age 62, will hand over the reins to W. Rodney McMullen, currently Kroger's president. The grocer also hiked its quarterly dividend 10% to $0.165 per share, payable Dec. 1. Check out the nearby table for a list of companies on our Monitored List that have raised their dividends since the end of July. Kroger is a Focus List Buy and a Long-Term Buy.

A spin-off and a takeover bid

Agilent Technologies ($52; A), an instrument maker that has long straddled the divide between health-care and technology sectors, announced plans to split itself into two separate companies. The life-sciences and diagnostics company will retain Agilent's name, generate annual revenue of about $3.9 billion, and maintain the quarterly dividend, currently $0.12 per share. The measurement-equipment business will have sales of about $2.9 billion and probably won't pay a dividend. Agilent is rated B (average).


Just days after warning that it lost more than $995 million in the August quarter, BlackBerry ($9; BBRY) accepted a preliminary takeover offer from Fairfax Financial Holdings ($407; FRFHF), a Canadian insurer that already owns a 10% stake in the struggling company. Fairfax proposes to pay $9 per share for the 90% of BlackBerry shares it does not yet own. BlackBerry is rated C (below average).

Financials update

J.P. Morgan Chase ($50; JPM) agreed to pay $920 billion in fines to settle civil investigations into the "London Whale" disaster that resulted in $6.2 billion in trading losses. Separately, the bank said it will pay a total of $389 million to resolve claims it improperly billed customers for credit-monitoring products.

J.P. Morgan has also entered talks to end U.S. probes into mortgage-backed securities the bank sold from 2005 to 2007. The bank has reportedly offered to pay roughly $11 billion, though federal and state governments still seek billions more. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.


Wells Fargo ($42; WFC) slashed 1,800 jobs from its mortgage business, in addition to 3,000 positions already eliminated. The combined cuts equate to nearly 2% of the bank's work force. CFO Timothy Sloan expects $80 billion in mortgage originations for the September quarter, down 42% from last year and 29% below the June quarter. In related news, Citigroup ($49; C) plans to cut 1,000 jobs, or about 8% of the staff in its U.S. mortgage division. Wells Fargo is a Focus List Buy and a Long-Term Buy. Citigroup is rated A (above average).

Health exchanges shouldn't slow Express Scripts

Shares of Express Scripts ($61; ESRX) have retreated on concerns that the pharmacy-benefit manager could be hurt by federally mandated health-insurance exchanges. The stock tumbled 5% on Sept. 18 after Walgreen ($55; WAG) announced it would move roughly 160,000 employees to an exchange. Exchanges allow employers to select private health plans for workers. While it is too early to gauge the full impact of the exchanges on Express Scripts, recent concerns could prove exaggerated for two main reasons:

• Express Scripts generates similar profit margins whether workers use a traditional employer health plan or an exchange.

• The number of workers projected to join exchanges will probably be small relative to the total pool of insured employees and family members.

Express Scripts' strong market position, healthy cash flow, and solid balance sheet should help sustain growth. For 2013, Wall Street targets per-share earnings of $4.31, up 15%. Per-share profits should climb another 15% next year. The stock trades at less than 15 times trailing earnings — a valuation that seems low considering the company's steady growth. The five-year average P/E is 22 and the 10-year norm is 24. Express Scripts, which earns a Quadrix® Value score of 90, is a Focus List Buy and a Long-Term Buy.

Apple bounces back

Apple ($489; AAPL) sold 9 million iPhones — combining both iPhone 5S and the cheaper 5C model — in the devices' opening weekend, topping the 5 million sold at the last iPhone launch in September 2012. Keep in mind that Apple included China in the initial launch this year; in 2012, the new iPhone debuted in China three months after its U.S. release, selling 2 million phones there in its first weekend. Still, sales easily exceeded analyst expectations of 6 million to 7 million units.

Supplies of the iPhone 5S ran out within 24 hours, and though Apple didn't break out its sales figures, one published report said sales of the 5S model more than tripled the 5C version. Apple now sees September-quarter revenues near the upper end of its projected range of $34 billion to $37 billion. Sales in the year-ago quarter totaled $35.97 billion. Apple shares rallied on the news and have jumped 23% since the end of June. Apple, with an Overall score of 96, is a Buy and a Long-Term Buy.

DIVIDEND HIKES
Company (Price; Ticker)
New Yield
(%)
New
Quarterly
Dividend
($)
Dividend
Change
(%)
Altera ($37; ALTR)
5.1
0.48
9
Altria ($35; MO)
5.4
0.48
9
Anadarko ($94; APC)
0.8
0.18
100
Covidien ($63; COV)
2.0
0.32
23
Dover ($91; DOV)
1.6
0.38
7
Hess ($79; HES)
1.3
0.25
150
Kroger ($40; KR)
1.6
0.17
10
McDonald's ($97; MCD)
3.3
0.81
5
Microsoft ($33; MSFT)
3.4
0.28
22
Mondelez ($32; MDLZ)
1.8
0.14
8
Monsanto ($106; MON)
1.6
0.43
15
Phillip Morris ($90; PM)
4.2
0.94
11
Texas Inst. ($40; TXN)
3.0
0.30
7
Union Pacific ($159; UNP)
2.0
0.79
14
Note: Recommended stocks in bold.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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