Portfolio Review

4/6/2009


Accenture slumps on profit warning
Accenture ($27; ACN) earned $0.63 per share in the February quarter, down 2% but a penny better than consensus estimates. Excluding currency losses, a restructuring gain, and unusually low taxes in the year-earlier quarter, profits rose 19%. Revenue fell 6% to $5.27 billion but rose 3% at constant currency. Accenture lowered its profit guidance for fiscal 2009 ending August, implying per-share earnings could fall by as much as 2%.

Management described a paralysis that swept over the economy in January, impeding the conversion of Accenture’s pipeline into revenue. Some clients, operating without an approved budget, delayed decisions to start new work, especially in consulting. The small contract extensions that tend to boost quarterly sales by $300 million to $500 million also tailed off in the quarter.

Outsourcing revenue slipped only 1% in the February quarter, while consulting revenue (58% of sales) fell 10%. The shares sell for 10 times trailing earnings, a 42% discount to the three-year average. Accenture is being replaced on the Focus List by BMC Software ($33; BMC), reviewed on page 8. Accenture remains a Buy and a Long-Term Buy.

News roundup
General Motors ($2; GM) CEO Rick Wagoner was forced to resign as President Obama shortened his leash on two troubled automakers. GM has 60 days to avoid bankruptcy by pursuing tougher negotiations with bondholders and the autoworkers union, UAW. The administration gave Chrysler one month to find a solution, possibly accelerating a merger deal with Italian carmaker Fiat. If the automakers fail to satisfy the government, GM could be forced into a controlled bankruptcy by June 1 and broken into two companies. General Motors is an Underperform . . . Harris ($29; HRS) plans to spin off its 56% stake in Harris Stratex Networks ($4; HSTX), which provides products and services for wireless communications. On May 27, Harris shareholders will receive about 0.24 shares of Harris Stratex for every share of Harris. Harris is a Focus List Buy and a Long-Term Buy . . . Manitowoc ($3; MTW) withdrew its 2009 profit guidance on crumbling demand for cranes, projecting March-quarter profits well below expectations. Manitowoc also agreed to sell its ice-machine business for a disappointing $160 million to meet antitrust requirements following the $2.7 billion acquisition of British foodservice-equipment maker Enodis. Management warned that the low sale price will likely lead to the breach of debt covenants. Manitowoc is rated Neutral.

Pharmaceutical update
Shares of Biogen Idec ($52; BIIB) rose on encouraging news about multiple-sclerosis drug Tysabri. A study found that 74% of neurologists plan to increase their use of Tysabri in the next six months despite links to a deadly brain infection. By year end, Biogen hopes to develop a test to diagnose the disease PML. The PML rate in patients taking Tysabri for at least 12 months is about one in 4,000, well below expectations of one in 1,000. Biogen is a Focus List Buy and a Long-Term Buy.


The Food and Drug Administration approved Teva Pharmaceuticals’ ($45; TEVA) generic version of Johnson & Johnson’s ($53; JNJ) epilepsy drug Topamax. J&J is a Focus List Buy and a Long-Term Buy.


AstraZeneca’s ($35; AZN) saxagliptin pill for diabetes meets new FDA guidelines for heart risk, according to an FDA panel. The panel was slated to review the drug April 1. AstraZeneca is a Buy and a Long-Term Buy.


Following the $6.5 billion purchase of ImClone Systems, Eli Lilly ($33; LLY) seeks more acquisitions between $5 billion and $15 billion. Eli Lilly is rated Neutral.

Tech beat
As IBM ($87; IBM) reportedly pursues a deal with Sun Microsystems ($7; JAVA), it has denied interest in acquiring Satyam, the Indian outsourcer caught cooking its books. In other news, IBM plans to cut 5,000 U.S. jobs, about 4% of the domestic work force, with many positions moving to India. IBM is a Focus List Buy and a Long-Term Buy. Sun is rated Neutral . . . Dolby Laboratories ($34; DLB) signed a licensing agreement to use its 3-D color-correction technology with International Datacasting’s hardware in movie theaters. Dolby is a Focus List Buy.

Financial review
America’s biggest banks pledged to support economic recovery plans laid out by the Obama administration. The president met with bank executives to discuss a strategy to revive lending and clear their balance sheets of up to $1 trillion in toxic assets with the help of private investors . . . CEOs of J.P. Morgan Chase ($27; JPM) and Bank of America ($7; BAC) said business conditions were not as good in March as they were in January and February, disappointing investors after several banks reported encouraging results in early 2009. J.P. Morgan and Bank of America are rated Neutral . . . Lincoln National ($7; LNC) withdrew a request for federal funding, saying it probably wouldn’t qualify under a plan designed for banks. Shares sank 39% on the news, which sparked a broad sell-off across insurance stocks, including Aflac ($19; AFL). Lincoln National is rated Neutral. Aflac is a Long-Term Buy . . . Wells Fargo ($14; WFC) sold $3.5 billion of debt backed by the Federal Deposit Insurance Co. Wells Fargo is rated Neutral . . . Morgan Stanley ($23; MS) plans to merge its Japanese brokerage business with that of Mitsubishi UFJ Financial Group, owning 40% of the joint venture. Morgan is rated Neutral.

Digest
Ingersoll-Rand ($14; IR) warned that 2009 per-share profits would fall well below earlier guidance. The company also slashed its quarterly dividend 61% to $0.07 per share. Ingersoll-Rand is rated Neutral.


Best Buy’s ($38; BBY) per-share earnings decreased 6% to $1.61 excluding restructuring and impairment charges, as same-store sales dipped 4.9%. Best Buy is rated Neutral.


After receiving an order for 30 geared turbofan engines in March, United Technologies ($43; UTX) said it could see additional orders this year for the engines. United Technologies is a Buy and a Long-Term Buy.


Medtronic ($29; MDT) won approval to launch a drug-eluting stent in Japan. Medtronic is rated Neutral.


Wal-Mart Stores ($52; WMT) raised its majority stake in Chilean supermarket chain D&S to over 73%. Wal-Mart Stores is a Long-Term Buy.

  RANK CHANGES
BMC Software ($33; BMC) is being added to the Focus List. Accenture ($27; ACN) is being dropped from the Focus List but remains a Buy and a Long-Term Buy.

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