Portfolio Review

11/9/2009


Travelers in, Precision out

Property-casualty insurer Travelers ($50; TRV) boasts a conservative investment portfolio and has dodged many of the landmines that crippled rivals. Both profit estimates and the stock price jumped after Travelers raised profit guidance last month, and the 2010 consensus of flat sales and per-share earnings seems low considering Travelers’ improving operating momentum.

Travelers raised its quarterly dividend 10% to $0.33 per share in October. A strong financial position suggests future increases are likely. The company, which has lowered the share count by more than 5% over the past year, authorized another $6 billion in share repurchases in October.

Trading at less than nine times trailing earnings, an 18% discount to the five-year average, the stock seems capable of reaching $64 over the next 12 months. Earning Quadrix scores of at least 59 for all six categories and an Overall score of 98, Travelers is being upgraded to a Buy and a Long-Term Buy.


Precision Castparts ($96; PCP) has risen 19% since it was recommended on May 21, outperforming the S&P 500 Index by nearly 2%. But Precision missed the consensus profit estimate for the September quarter, hurt by inventory destocking in the aerospace industry. The Quadrix Overall score has fallen to 79, and profit expectations for fiscal 2010 ending March are on the decline. In the wake of the solid stock-price performance and declining earnings estimates, the stock no longer looks cheap, trading at 13 times estimated year-ahead earnings, roughly in line with the five-year average forward P/E. Precision Castparts is being downgraded to Neutral.

Technology review

Continuing a cautious stance held through the downturn, Microsoft ($28; MSFT) CEO Steve Ballmer predicted corporate spending for technology will grow but is unlikely to quickly return to levels seen in the years before the economic slowdown. Technology budgets still face many of the same constraints that have depressed global purchases of personal computers. Microsoft is a Long-Term Buy.

Reflections of Microsoft’s concerns have sprouted up in many September-quarter earnings reports, though three of our favorite technology stocks delivered solid results.

BMC Software ($37; BMC) increased per-share profits 18% to $0.66 excluding special items, $0.08 better than the consensus. Sales slipped 1% to $462 million, though total bookings rose 6% to $431 million. Bookings increased 4% in constant currency. The company hiked its operating-profit guidance for fiscal 2010 ending March to a range with a midpoint of $2.60, implying 15% growth, well above the 11% consensus. BMC is a Focus List Buy and a Long-Term Buy.


Cognizant Technology Solutions ($42; CTSH) earned $0.48 per share excluding special items, up 20% and $0.07 ahead of the consensus. Revenue topped expectations, jumping 16%. Cognizant anticipates per-share earnings of $0.49 excluding stock-based-compensation expense in the December quarter, 29% higher than year-ago results and 17% above the consensus estimate. Cognizant, a Focus List Buy and a Long-Term Buy, rallied 8% on the earnings news.


Dolby Laboratories ($44; DLB) topped the consensus by $0.05 with profits of $0.38 per share, down 10%. Flat sales of $164 million also exceeded expectations. Looking ahead to fiscal 2010 ending September, Dolby expects per-share profits between $2.07 and $2.20, versus the $2.11 earned in fiscal 2009 and the consensus of $2.00. Dolby is a Focus List Buy.

Berkshire buying Burlington

Berkshire Hathaway ($3,325; BRKb) agreed to acquire the 77.4% of Burlington Northern ($97; BNI) it doesn’t already own for $100 per share in a stock-and-cash deal that represents a 31% premium to the railway’s closing price prior to the announcement. The $26 billion deal is the biggest in company history. Berkshire CEO Warren Buffett said he expects the long-term rise in fuel prices to make railroads more competitive relative to trucks. In related news, Berkshire plans a 50-to-1 split of its class B shares to help facilitate the stock-swap portion of the deal. Burlington Northern is rated Neutral.

Health-care checkup

AmerisourceBergen’s ($23; ABC) September-quarter profits surged 22% to $0.44 per share, eclipsing the consensus by $0.04. Operating revenue rose 10% to $18.27 billion, also above Wall Street forecasts. For fiscal 2010 ending September, Amerisource expects per-share profits of $1.82 to $1.92. The midpoint of that range implies 11% growth and exceeds the consensus estimate of $1.84. Amerisource is a Focus List Buy and a Long-Term Buy . . . Stryker ($47; SYK) could face fines of more than $500 million if found guilty of federal charges of promoting bone-growth products for off-label uses and making false statements to the Food and Drug Administration. The Stryker Biotech unit, its former president, and three current sales managers were indicted. In other news, Stryker will stop paying its dividend annually, moving to a quarterly distribution. A transitional dividend of $0.10, payable on Dec. 16, will increase the total 2009 payout to $0.50, up 52% from 2008 levels. The company plans to initiate a quarterly dividend of $0.15 in January. Stryker is a Buy and a Long-Term Buy . . . AstraZeneca ($44; AZN) grew September-quarter earnings 28% to $1.68 per share excluding special items, exceeding Wall Street estimates by $0.29. Revenue climbed 5% to $8.20 billion. Sales of cholesterol drug Crestor jumped 24% to $1.15 billion, while the Seroquel antipsychotic saw revenue rise 9% to $1.23 billion. In other news, the company will pay $520 million to settle two federal investigations and two whistleblower lawsuits related to the marketing of Seroquel. AstraZeneca is a Buy and a Long-Term Buy . . . Johnson & Johnson ($59; JNJ) will take a charge of at least $1.1 billion in connection with plans to slash 6% to 7% of its work force. The company says the cuts will reduce costs by at least $1.4 billion a year by 2011. J&J is a Buy and a Long-Term Buy.

Corporate report

Comcast ($15; CMCSA) grew per-share earnings 22% to $0.28 excluding special items in the September quarter, exceeding the consensus by $0.03. Revenue climbed 3% to $8.80 billion as Comcast expanded its customer base by 1.07 million. Average total revenue per video customer increased 6% to $117 as more customers subscribed to multiple products. Excluding the impact of economic stimulus packages, free cash flow jumped 20% to $1.11 billion. Comcast is a Focus List Buy and a Long-Term Buy . . . New York’s attorney general filed antitrust charges against Intel ($19; INTC), which was fined $1.45 billion by the European Union in May for issuing illegal rebates. Intel is rated Neutral.

Energy update

Schlumberger ($64; SLB) expects a recovery in drilling activity in 2010 — but not a return to 2008 levels. North America remains one of the weakest regions, and the entire energy sector still faces brutal profit and revenue comparisons because of last year’s record-high energy prices. Schlumberger is a Long-Term Buy.


Oceaneering ($53; OII) earned $0.90 per share in the quarter, down 8% but $0.03 ahead of the consensus estimate. Revenue declined 6% but still exceeded Wall Street expectations. Despite the better-than-expected results, the shares fell as Oceaneering issued conservative profit guidance for the December quarter and 2010. Oceaneering is a Focus List Buy.


Transocean’s ($86; RIG) profits fell 20% to $2.65 per share excluding special charges, missing the consensus by $0.02. Revenue slid 12% on weak activity in shallow waters. Lower demand for midwater floaters and jack-ups caused fleet utilization to fall to 75%, versus 84% in the June quarter and 89% a year ago. New contracts for Transocean’s deepwater and harsh environment floaters pushed the average day rate to $283,800, up 17%. Transocean is a Focus List Buy and a Long-Term Buy.

  RANK CHANGES
Travelers ($50; TRV) was added to the Buy and Long-Term Buy lists, replacing Precision Castparts ($96; PCP), which was downgraded to Neutral.

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