Portfolio Review

6/23/2009


Legal woes don't hinder Microsoft
Once again, Microsoft ($23; MSFT) is in a potentially expensive tussle with the European Competition Commission, a new front in a battle that began back in 1993. However, recent stock performance suggests antitrust-related news has lost some of its shock value. Microsoft shares have jumped 55% from March 6 lows, versus 39% for the S&P 1500 Information Technology Sector Index and 34% for the broader S&P 1500.

Awaiting a Commission decision on charges of unfair trade practices, Microsoft said it will sell a European version of its new Windows 7 operating system without the Internet Explorer Web browser. The move might not be enough to appease regulators, who could still impose a fine and force Microsoft to bundle Explorer with rival browsers.

In related news, an industry group led by IBM ($107; IBM), Nokia ($15; NOK), and Oracle ($20; ORCL) accused Microsoft of understating its share of the European browser market. Microsoft reported its share has fallen 30% in the last four years.

Antitrust and recession concerns aside, there are reasons for Microsoft investors to be confident. While software demand has eroded, Microsoft has cut costs aggressively and is prepared to ride out a lengthy slowdown. In addition, the new Bing search engine helped Microsoft capture 12.1% of the U.S. market for Internet search in the second week of June, up from about 8% in May. Microsoft still trails market leaders Google ($416; GOOG) and Yahoo ($16; YHOO) by a wide margin.

Despite the run-up, Microsoft seems attractively valued at 13 times projected year-ahead profits of $1.74 per share — or less than 12 times earnings excluding the company’s $25.34 billion, or $2.84 per share, in cash. Microsoft is rated Long-Term Buy.

Mergers and deals
General Dynamics ($57; GD) bolstered its intelligence portfolio by agreeing to acquire Axsys Technologies ($54; AXYS) for $643 million, an 8% premium to the company’s price at the time of the offer. A maker of surveillance and imaging systems, Axsys should generate sales of roughly $280 million this year and begin adding to General Dynamics’ per-share profits in 2010. General Dynamics is a Buy and a Long-Term Buy.


At the Paris Air Show, United Technologies’ ($55; UTX) Pratt & Whitney division announced four jet-engine deals worth roughly $1.3 billion while the Hamilton Sundstrand unit signed up more than $2.6 billion in new business. Separately, General Electric ($13; GE) secured a $5.2 billion order from Etihad Airlines for 123 engines, including at least $1.3 billion for a GE and United Technologies joint venture. United Technologies is a Buy and a Long-Term Buy. GE is rated Neutral.


The United States is looking to sell up to 200 F-16 fighter jets in the Middle East and Far East. Built by Lockheed Martin ($82; LMT), the jets sell for $40 million to $50 million apiece. Lockheed has a backlog of 95 F-16s, which should keep production lines busy through 2012. Looking further out, Lockheed expects to sell at least 3,100 of its F-35 Joint Strike Fighters to the U.S. and current partner countries and said it could receive up to 2,000 additional orders from other countries. Lockheed is a Long-Term Buy.


Sun Microsystems ($9; JAVA) set July 16 as the date for shareholders to vote on Oracle’s ($20; ORCL) $7.4 billion acquisition proposal. Oracle is a Buy and Long-Term Buy. Sun Microsystems is rated Neutral.


Data Domain ($33; DDUP) has asked shareholders to reject an unsolicited $1.9 billion cash bid by EMC ($13; EMC). Management has accepted a competing offer from NetApp ($19; NTAP) valued at $1.9 billion in cash and stock — and with a $57 million termination fee. EMC is rated Neutral.

News roundup
A federal court ordered Exxon Mobil ($72; XOM) to pay 5.9% interest on damages from the 1989 Valdez oil spill and affirmed punitive damages of $507.5 million. Exxon has already paid $507.5 million in compensatory damages and $383 million of the punitive damages. Exxon is a Long-Term Buy . . . Procter & Gamble ($50; PG) said it will replace CEO A.G. Lafley with Robert McDonald, now the chief operating officer. McDonald will assume his new position July 1. P&G is rated Neutral . . . Wal-Mart Stores ($48; WMT) announced a new $15 billion share-repurchase program. The company has bought back about $21 billion of shares in the past five years. Wal-Mart is a Long-Term Buy . . . Target ($39; TGT) raised its quarterly dividend 6% to $0.17 per share, payable Sept. 10. Target is rated Neutral.

Health-care report
A U.S. Food and Drug Administration advisory panel supported AstraZeneca’s ($43; AZN) application to market Seroquel to children and adolescents suffering from schizophrenia and bipolar disorder. AstraZeneca is a Buy and a Long-Term Buy.


Billionaire investor Carl Icahn, who has tried in the past to take over Biogen Idec ($51; BIIB), has increased his influence, winning two of the 13 seats on the board. He has proposed breaking up the company and moving its state of incorporation, plans we do not favor. Biogen is a Focus List Buy and a Long-Term Buy.


Medtronic ($32; MDT) won approval to sell a new spinal implant but was also ordered to recall 37,000 pacemakers with defective wiring the FDA says can cause serious — and sometimes fatal — injuries. Medtronic is rated Neutral.

Performance and guidance
In the May quarter, FedEx ($51; FDX) earned $0.64 per share excluding special charges, down 56% but $0.13 above the consensus. FedEx expects per-share profits of $0.30 to $0.45 for the August quarter, well below the consensus estimate of $0.70. FedEx is rated Neutral . . . Qualcomm ($43; QCOM) raised its June-quarter sales guidance to a range of $2.67 billion to $2.77 billion, above the previous forecast of $2.4 billion to $2.6 billion and the $2.54 billion consensus. The company also increased operating-income estimates for the June quarter but warned that shipments would fall sequentially in the September quarter, dashing hopes of a quick recovery in the cell-phone market. Qualcomm is a Long-Term Buy . . . Home Depot ($23; HD) now expects per-share profits for fiscal 2010 ending January to be flat to down 7%, versus an earlier projection of a 7% decline. Home Depot is rated Neutral.

Financial review
Citigroup ($3; C) began a complex stock-swap deal that could be worth as much as $58 billion. Plans include exchanging up to $25 billion of preferred stock owned by the U.S. Treasury for common shares, leaving the government with a 34% stake in the company. The effort will boost Citigroup’s capital base as prescribed by federal stress tests but could dilute the share count by 76%. Citigroup is rated Neutral . . . Seeking to backstop potential investment losses, Hartford Financial ($12; HIG) said it will take up to $3.4 billion in federal loans and sell as much as $750 million of common stock. Hartford is rated Neutral . . . Lincoln National ($15; LNC) plans to raise about $2 billion in capital by issuing common stock, preferred stock, and debt. Lincoln also agreed to sell its British subsidiary to Sun Life Financial ($28; SLF), which should raise an additional $280 million to $300 million. Lincoln and Sun Life are rated Neutral . . . Goldman Sachs ($144; GS), Morgan Stanley ($28; MS), American Express ($25; AXP), and J.P. Morgan Chase ($34; JPM) received clearance to retire a total of $48.4 billion in TARP loans and were expected to begin repaying the funds last week. Goldman, Morgan, Amex, and J.P. Morgan are rated Neutral . . . Seeking to prevent another economic collapse, President Obama proposed overhauling the financial-services industry. Under his plan, the Federal Reserve would oversee the largest institutions and all banks would carry more capital.

  RANK CHANGES
No changes were made this week in Dow Theory Forecasts.

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