Portfolio Review

12/30/2013


Amex share rise on surcharge news

American Express ($88; AXP) has agreed to let retailers apply surcharges to purchases made with its credit and debit cards. Those surcharges will give merchants leeway to steer customers toward cheaper payment options, potentially resulting in fewer transactions for Amex. Still, Amex says it believes many merchants will withhold these surcharges to avoid alienating customers. It also agreed to pay up to $75 million in lawyer fees from two class-action lawsuits that challenged Amex's prior stance on surcharges.

The settlement pushed Amex shares to a record high. The stock is up 15% since posting September-quarter results that topped consensus estimates for both earnings per share and sales. Spending on corporate cards rebounded in the quarter, while a base of affluent shoppers sheltered Amex from the ripples of the government shutdown. On Oct. 16, Amex said it had not seen any effects on cardmember spending from the government shutdown, which ended that same day. Revenue has climbed in 15 straight quarters, and analyst estimates project at least 5% growth in both the December and March quarters. Management projects long-term sales growth of 8% a year. Despite earning an Overall rank of just 68, Amex remains a Long-Term Buy.

Foot Locker shares finally kick into gear

Foot Locker ($41; FL) shares, lagging the S&P 1500 Index for much of the year, have rallied 21% since the end of September, easily outpacing the index's 8% gain. In the week before Christmas, the stock soared to an all-time high, helped by encouraging results from key players in the shoe business.

Nike ($77; NKE) said November-quarter earnings per share rose 4% and sales 8%, with growth driven by footwear and stronger-than-expected growth in Europe. Improvement in Europe is another bullish signal for Foot Locker, which entered the fiscal year with more than 17% of its stores located in Europe and completed an $87 million acquisition in July to expand its presence there. Boding well for future growth, Nike said advanced orders for merchandise to be delivered by April jumped 12% to $10.4 billion. Nike accounts for about 65% of Foot Locker's inventory.

Meanwhile, Finish Line ($28; FINL) said Dec. 20 that same-store sales rose 7.1% in the November quarter and are up by mid-single-digits so far in December. Finish Line's results could point to encouraging momentum for Foot Locker, which reported 4.1% growth for the October quarter. Foot Locker's same-store sales have topped those of its rival by an average of 2.9 percentage points over the past five quarters.

At less than 16 times trailing earnings, Foot Locker shares trade 12% below the median for S&P 1500 apparel retailers and 29% below their own five-year average. Foot Locker, earning a Value rank of 84 and Overall score of 90, is a Buy and a Long-Term Buy. Nike is rated B (average).

Corporate roundup

Apple ($549; AAPL) struck a deal that will bring its iPhones to China Mobile's ($52; CHL) network. China Mobile's 760 million subscribers can begin preordering the iPhone on Dec. 25, ahead of the device's Jan. 17 launch. Terms were not disclosed, though analysts say the deal could double the number of iPhones Apple sells in China. Greater China, an area consisting of Hong Kong, Taiwan, and China, helped drive Apple's growth in fiscal 2013 ended September and accounted for 15% of the company's sales. Apple is a Focus List Buy and a Long-Term Buy.


The European Union rejected Google's ($1,101; GOOG) latest proposal to settle a three-year feud over antitrust allegations. A group of rivals that includes Microsoft ($37; MSFT) has accused Google of unfairly promoting its own products in search results and stealing travel reviews. Joaquin Almunia, the EU's competition commissioner, said time is running short for Google to submit a better offer to avoid formal charges or a multibillion-dollar penalty. Google is a Focus List Buy and a Long-Term Buy. Microsoft is rated A (above average).


Target ($62; TGT) reported a security breach affecting up to 40 million payment cards over the 19-day period Nov. 27 to Dec. 15. In a bid to win back customers, the retailer offered a 10% discount on most merchandise during the final weekend before Christmas. As a precautionary measure, J.P. Morgan Chase ($58; JPM) said it has limited daily debit-card use for its 2 million customers who shopped at Target during the 19-day period and has extended hours at its bank branches for those who need to withdraw more cash. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy. Target is rated B (average).

Earnings reviews

Oracle ($36; ORCL) said November-quarter earnings per share rose 7% to $0.69, squeezing past the consensus by $0.02. Revenue crept 2% higher to $9.28 billion. Sales rose 6% for license updates and product support, held flat for new software licenses and cloud subscriptions, and slipped 3% for hardware products. Oracle has struggled to protect its turf in business software from smaller players that undercut its prices. It also faces competition from the likes of Amazon.com ($402; AMZN), which has moved into cloud-based services. Seeking to expand its cloud business, Oracle agreed to pay $1.39 billion to acquire Responsys, which helps companies manage marketing campaigns across multiple platforms. Oracle is rated A (above average).


Walgreen ($59; WAG) grew earnings per share 24% to $0.72 in the November quarter to match the consensus estimate. Excluding a tax benefit, earnings missed the consensus by 10%. Revenue climbed 6% to $18.33 billion, while same-store sales rose 5.4% on a larger basket size and slightly higher customer traffic. Prescription sales rose 7% and accounted for 65% of total revenue. Walgreen said its share of the U.S. market for retail drug prescriptions expanded to 19.4%. However, gross profit margins narrowed due to increased promotional activity and fewer new generic drugs. Walgreen is rated A (above average).


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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