Portfolio Review

3/30/2009


BMC upgraded
With strong operating momentum and a solid growth outlook, BMC Software ($32; BMC) appears well-positioned in data centers, one of the stronger technology areas. BMC has partnered with Cisco Systems ($17; CSCO) for a push into the market for servers, with BMC signing an exclusive deal to sell software that computer administrators use to control Cisco devices.

BMC’s cash, exceeding $5 per share, is more than three times its long-term debt. Cash flow, which consistently exceeds net income, has shown solid growth. Consensus estimates project per-share profits will decline 2% in the March quarter but rebound 12% in the June quarter. For the fiscal year ending March 2010, Wall Street expects 8% growth in per-share profits.

The stock, while not an outright bargain at 15 times expected year-ahead earnings, is cheap compared to its historical valuation and trades in line with the tech sector despite a superior outlook. BMC is being upgraded to a Buy and a Long-Term Buy. Cisco Systems is rated Neutral.

Precision Castparts added
Precision Castparts ($61; NYSE: PCP) manufactures complex metal components and products used primarily in the aerospace (55% of sales) and power-generation (24%) markets. Boeing ($36; BA) accounts for about 16% of total sales. Precision Castparts shares have slumped more than 50% from the 52-week high near $131, reflecting concerns about the aerospace market and delays in shipments of next-generation aircraft by Boeing and Airbus. Still, Precision Castparts is one of the few industrial companies likely to post near-term profit growth. The consensus earnings estimate for fiscal 2009 ended March 31 is $7.42 per share, up nearly 8% over the prior year. Growth should continue in fiscal 2010, with the consensus estimate at $7.85 per share.

Precision Castparts trades at just eight times trailing 12-month earnings, about half the 10-year average. The stock could remain under pressure until there is greater visibility regarding a resolution of production issues at Boeing and Airbus. But Precision Castparts’ leading market positions, strong finances, modest valuation, and solid growth potential should lead to market-beating returns over the next 36 to 48 months. Precision Castparts is being added to the Long-Term Buy List.

Airgas dropped from Focus List
Citing low sales volume across most segments, especially manufacturing, Airgas ($33; ARG) cut per-share earnings guidance for the March quarter by 12%. The company’s new annual projection implies at least 15% growth for the fiscal year ending March, but profits are expected to drop in fiscal 2010. Also, Airgas announced plans to freeze wages to save an additional $10 million. Airgas shares rallied modestly on the warning, perhaps because the stock is cheap even relative to the reduced guidance. The stock is being dropped from the Focus List but remains a Buy.

Financial review
Financial stocks surged after the Treasury Department unveiled plans to attract private investors to buy toxic assets weighing on banks’ balance sheets. The plan could ultimately lead to the sale of $2 trillion in assets.

Under one part of the plan, the FDIC would set up auctions for portfolios of bank loans and mortgage-backed securities, allowing banks to sell to the highest bidder. The Federal Reserve would finance up to 85% of the purchase price, while private investors and the Treasury would split the remainder. Also, the Treasury and Federal Reserve plan to buy mortgage-backed securities in an expansion of the Term Asset-Backed Securities Loan Facility (TALF), originally installed to finance consumer loans.

The plan cheered investors, with bank stocks jumping sharply. While the Forecasts has no recommendations in the banking sector, the plan could help Aflac ($22; AFL) and other insurers with problem assets. Aflac, yielding 5.2%, is a Long-Term Buy.

Notable news
DirecTV ($23; DTV) and the National Football League extended through 2014 their deal for Sunday Ticket, which makes all Sunday football games available to subscribers. The latest agreement includes broadband rights and will cost DirecTV $1 billion a year, up 43% from the previous contract. DirecTV is a Focus List Buy and a Long-Term Buy.


Johnson & Johnson ($53; JNJ) said a Food and Drug Administration panel recommended the approval of rivaroxaban, a drug for patients suffering from blood clots after hip or knee surgery. Separately, an investigation by Chinese health officials dismissed concerns that several J&J baby products contained carcinogens. Also, a French study found that J&J’s antibacterial Biopatch sponge lowers the risk of infection from catheter tubes by 61%. J&J is a Focus List Buy and a Long-Term Buy.


General Electric ($10; GE) expects its finance arm will be profitable in both the March quarter and 2009. This year, GE has raised $45 billion in long-term funding, 93% of its total goal to counter potential losses upwards of $40 billion between 2008 and 2010. General Electric is rated Neutral.

February-quarter results
Walgreen ($26; WAG) said February-quarter profits were flat at $0.69 per share excluding special items, $0.03 above the consensus. A strong performance in prescriptions helped lift same-store sales by 1.3%. Walgreen is rated Neutral.


FedEx’s ($44; FDX) earnings plunged 75% to $0.31 per share — about $0.22 below consensus expectations. The company gained market share even as revenue slipped 14%. FedEx also announced measures to lower expenses by $1.0 billion in 2010. FedEx is rated Neutral.

Technology update
IBM ($98; IBM) has unleashed a team of lawyers to pore over Sun Microsystems’ ($8; JAVA) contracts as the two companies consider merging. The deal, first reported at $6.5 billion though that price could be falling, would mark IBM’s largest acquisition. Together, the companies would control more than 40% of the server market, which could raise antitrust concerns. IBM, which is reportedly considering another round of job cuts, is a Focus List Buy and a Long-Term Buy. Sun Microsystems is rated Neutral . . . Microsoft ($18; MSFT) CEO Steve Ballmer said his software company could make up to 20 smaller acquisitions this year, though he still pines for the one that would bring at least part of Yahoo ($14; YHOO) under his control. Ballmer added that he has talked with Yahoo’s new CEO, Carol Bartz, and he “sees a real opportunity for a deal.” Microsoft is a Long-Term Buy.

  RANK CHANGES
Airgas ($33; ARG) is being dropped from the Focus List but remains a Buy. BMC Software ($32; BMC) is being upgraded to a Buy and a Long-Term Buy. Precision Castparts ($61; NYSE: PCP) is being initiated as a Long-Term Buy.

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