Portfolio Review

5/4/2009


CVS upgraded, Harris downgraded
In the March quarter, CVS Caremark’s ($32; CVS) per-share profits from continuing operations held flat at $0.51, $0.02 ahead of the consensus. Revenue rose 10% to $23.39 billion. The retail pharmacy segment grew sales 14%, with same-store sales up 3.3%. CVS also posted strong volume growth in the pharmacy-services segment as revenue rose 7%.

At just 13 times trailing earnings, the stock trades at a 35% discount to its five-year average P/E ratio. CVS also looks cheap compared to other drugstores and pharmacy-benefit managers, even though it enjoys a superior growth outlook. CVS is being upgraded to the Long-Term Buy List.


Harris’ ($30; HRS) March-quarter profits from continuing operations rose 31% to $1.02 per share. Sales edged up 2% to $1.36 billion. However, the company gave disappointing guidance for fiscal 2010 ending June. Harris expects per-share earnings of $3.10 to $3.40, well short of the $3.92 consensus.

Weak order rates suggest even Harris’ diminished forecast could be a stretch. Although the stock appears cheap relative to the lower guidance, Harris could remain hamstrung until its outlook stabilizes. We are dropping Harris from the Buy List and Long-Term Buy List. Investors tracking one of our recommended lists should sell the stock, now rated Neutral.

March-quarter earnings
Dolby Laboratories’ ($40; DLB) per-share earnings surged 22% to $0.60, topping consensus estimates by $0.14. Sales climbed 18% to $204 million, helped by the recognition of nearly $24 million in digital-cinema revenue deferred in earlier periods. Licensing revenue rose 7% to $160 million. The company raised the lower end of earlier guidance ranges for revenue and per-share profits for fiscal 2009 ending September, implying growth of 2% to 9% for sales and 1% to 10% for earnings. Dolby is a Focus List Buy.


Transocean ($73; RIG) reported per-share profits of $3.75 excluding special items, up 2% and $0.25 above the consensus. Sales were virtually flat at $3.12 billion as utilization of the drilling fleet held at 91%. Despite a decline in demand for shallow-water rigs, average lease rates rose 2% from the December quarter and 12% from a year ago. In other news, the company is taking at least three shallow-water rigs in Africa out of service. Transocean is a Focus List Buy and a Long-Term Buy.


AstraZeneca ($36; AZN) grew profits 24% to $1.58 per share, $0.18 above the consensus. Revenue was roughly flat at $7.70 billion but would have increased 7% at constant exchange rates. AstraZeneca is a Buy and a Long-Term Buy.


Cognizant Technology Solutions ($27; CTSH) increased per-share profits 8% to $0.41 per share excluding stock-based compensation charges, $0.04 above the consensus. Sales rose 16% to $746 million. The company projected June-quarter growth of at least 11% in sales and 20% in per-share profits, both well above the consensus. Cognizant is a Buy and a Long-Term Buy.


Chevron ($66; CVX) earned $0.72 per share excluding asset sales, down 71% and $0.09 short of the consensus. Sales fell 46% to $34.99 billion despite oil production increasing about 2.5%. The company said it would hold its quarterly dividend flat this year, ending a string of eight consecutive annual increases. Chevron is a Buy and a Long-Term Buy.


Exxon Mobil’s ($68; XOM) profits slid 54% to $0.92 per share, $0.03 short of the consensus. Upstream income plunged 60% on lower energy prices, while refining income dipped 3%. Revenue fell 45% to $64.03 billion. Exxon Mobil is a Long-Term Buy.


Precision Castparts’ ($76; PCP) profits from continuing operations rose 1% to $1.90 per share excluding special charges, $0.03 above the consensus. Revenue fell 9% to $1.60 billion, though operating margins improved in all three business segments. Precision Castparts is a Long-Term Buy.


Questar ($33; STR) earned $0.86 per share excluding mark-to-market gains and losses, down 14% and $0.07 better than the consensus. Revenue dipped 8% to $919 million. Questar lowered 2009 earnings expectations but maintained its production guidance. Questar is a Long-Term Buy.


Airgas ($44; ARG) posted per-share profits of $0.68, down 11% but $0.03 better than Wall Street expectations. Sales fell. For the June quarter, Airgas expects per-share earnings of $0.62 to $0.67, down 17% to 23% and below the consensus of $0.70. Airgas is a Buy.

Mergers and deals
DirecTV ($24; DTV) agreed to merge with Liberty Entertainment Group ($25; LMDIA), a unit being split off from Liberty Media Interactive ($7; LINTA). The resulting company gains control of Liberty Media’s 54% stake in DirecTV but also inherits roughly $2 billion in debt. DirecTV shares dipped on the news, but the arrangement simplifies its ownership structure, eliminating the longstanding overhang of a corporate parent with voting control. The new company will also own three regional sports networks and some Internet properties. DirecTV remains a Focus List Buy and a Long-Term Buy . . . Pepsi Bottling Group ($32; PBG) rejected PepsiCo’s ($50; PEP) offer to buy the 67% of the bottler it does not already own. PepsiAmericas ($25; PAS) is expected to decline a similar bid. The initial offers, which totaled $6 billion, could serve as an entry point for negotiations as PepsiCo tries to gain more control of its distribution network. Separately, PepsiCo raised its quarterly dividend 6% to $0.45 per share, payable June 30. PepsiCo is rated Neutral.

Aerospace roundup
After a series of well-publicized delays, Boeing ($43; BA) said its 787 Dreamliner will be ready for its first flight in the June quarter and expects to begin delivering the plane in the March quarter of 2010. Customers have already ordered 886 Dreamliners, so suppliers such as United Technologies ($52; UTX) and Precision Castparts ($76; PCP) stand to gain once production begins. United Technologies is a Buy and a Long-Term Buy. Precision Castparts is rated Long-Term Buy. Boeing is rated Neutral.

Finance update
Disclosure of the results of stress tests designed to measure how America’s biggest banks will weather the recession were delayed until May 7, a day after the Forecasts went to press. According to published reports, J.P. Morgan Chase ($35; JPM) has sufficient funds, but Bank of America ($11; BAC) must raise nearly $35 billion, Wells Fargo ($23; WFC) needs $15 billion, and Citigroup ($3; C) could require up to $10 billion. Bank of America, Citigroup, Wells Fargo, and J.P. Morgan Chase are rated Neutral.

  RANK CHANGES
CVS Caremark ($32; CVS) is being added to the Long-Term Buy List. Harris ($30; HRS) is being downgraded to Neutral. The Buy List now has 35.2% in the Vanguard Short-Term Investment-Grade ($9.95; VFSTX) fund, while the Long-Term Buy List has 34.0%.

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