Portfolio Review

9/29/2014


Tech update

Long lines greeted Apple's ($102; AAPL) iPhone 6 and 6 Plus debut, as weekend sales topped 10 million units. CEO Tim Cook said supply constraints kept Apple from selling even more. No iPhone has enjoyed a more successful launch; Apple sold 5 million iPhone 5 handsets and 4 million of the iPhone 4S in their first weekends. An ongoing regulatory review delayed Apple's launch in China, though officials say the phones have entered the final stages of the approval process.

Apple's profit margins should get a boost from the iPhone 6 Plus, priced $100 above the smaller model but costing just $16 more to build, according to researcher IHS. Qualcomm ($76; QCOM) and Skyworks Solutions ($59; SWKS) gained more share of the components used in the new iPhones relative to older models. In other news, speculation swirls that a new iPad could arrive in October. Apple is a Focus List Buy and a Long-Term Buy. Skyworks is a Buy and a Long-Term Buy. Qualcomm is a Long-Term Buy.


EMC ($30; EMC) shares rose on a report that the company discussed selling itself to Dell and Hewlett-Packard ($36; HPQ) over the past year. Talks between EMC and H-P reportedly broke down a few weeks ago, and it's uncertain whether they could continue. Negotiations may have centered on EMC's roughly 80% stake in VMware ($95; VMW), which has a total stock-market value of $41.4 billion. So far, EMC has withstood shareholder pressure to sell its position in VMware. With a stock-market value of $61.3 billion, EMC is a Long-Term Buy. H-P is rated A (above average). VMware is rated B (average).


Joaquin Almunia, the European Union's antitrust chief, warned Google ($598; GOOGL) that it will face formal charges unless it makes more concessions in a longstanding investigation of the company's search business. Almunia rejected calls by European politicians to break up Google in a way similar to how the U.S. ended monopolies in the oil industry more than a century ago. However, he did mention that Google could pose larger antitrust problems than Microsoft ($47; MSFT), which faced more than $2.8 billion in fines over the past decade. Google is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Kroger ($53; KR) raised its quarterly dividend 12% to $0.185 per share, payable Dec. 1. The retailer has boosted its dividend more than 9% in five consecutive years. Kroger is a Focus List Buy and a Long-Term Buy.


Dover ($82; DOV) reiterated its full-year guidance for earnings per share but warned that September-quarter results would fall short of internal expectations. Dover blamed the disappointing results on higher-than-expected acquisition costs, softness in overseas energy markets, and customers delaying purchases from its refrigeration business. The company said orders picked up in September after a slow start for the quarter. Management reiterated its full-year guidance for earnings per share of $4.75 to $4.85, though the consensus — $4.84 at the time of the announcement — has already begun to fall.  Dover, which has raised its dividend in 59 consecutive years, remains a Long-Term Buy.


CVS Health ($81; CVS) says use of Sovaldi, Gilead Sciences' ($109; GILD) hepatitis C drug, has declined in recent months, based on a study stretching from May through August. Discontinuation rates for Sovaldi were unusually high, perhaps due to patients anticipating new treatments, expected to launch later this year. U.S. regulators are expected to announce by Oct. 10 their review of a new pill that combines Sovaldi with an experimental treatment. CVS is a Buy and a Long-Term Buy. Gilead Sciences is a Long-Term Buy.


Boeing ($129; BA) said it will increase monthly production of its 737 jetliner to 47 by 2017 and possibly 52 further out. It currently builds 42 of the narrow-body 737s each month. In July, Boeing reported a record $377 billion backlog for commercial airplanes, accounting for more than 5,200 jets, or seven years of production.

The production increase drew criticism from Airbus, which warned Boeing against boosting production in an effort to drive sales, though the European aerospace giant is also ramping its production. Airbus' real concern may involve potential supply shortages within the industry. Air Lease ($34; AL), which leases commercial aircraft, questioned the plans of both companies, saying most suppliers are already operating at full capacity. B/E Aerospace ($86; BEAV) supplies lavatory and lighting systems for the Boeing 737. B/E Aerospace is a Buy and a Long-Term Buy. Boeing is rated A (above average). Air Lease is a Best Buy in Upside, our sister publication focused on smaller stocks.


The Securities and Exchange Commission is investigating allegations Pacific Investment Management (Pimco) fraudulently inflated the returns of PIMCO Total Return ETF ($109; BOND), according to The Wall Street Journal. The probe centers on whether Pimco purchased investments at a discounted price and then applied higher valuations, giving the ETF the appearance of quick gains. For now, the PIMCO Total Return ETF remains one of our recommended mutual funds.


The U.S. Treasury rolled out new rules to curb the surge in so-called inversion deals, mergers designed to lower the acquirer's corporate tax rate. The new rules will reduce tax savings and make these deals more difficult to pull off. It would also become tougher for U.S. companies to spin off subsidiaries overseas, a tactic used to move assets out of reach of U.S. taxation. The rules apply to all acquisitions not yet completed, potentially causing several pending deals to unravel, especially in the health-care sector.

Despite new dents, Magna still a sweet ride

Magna International ($104; MGA) shares trade 9% off their all-time high, set Aug. 20. Although robust growth for auto-parts companies in North America (about half of Magna's sales) may be abating, Europe (42% of sales) shows signs of improvement. Magna is also aggressively pushing into emerging markets, announcing plans for two new plants in India, both expected to begin production in 2015. Magna already operates nine factories in the country. In other news, Magna says Brazil has opened an antitrust probe into activities of a subsidiary there; it is too early to estimate the effect of the investigation. Magna, scoring above 85 for both Momentum and Value, remains a Focus List Buy and a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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