Portfolio Review

2/1/2010


December-quarter earnings review

AmerisourceBergen’s ($27; ABC) profits jumped 44% to $0.52 per share, topping the consensus by $0.06. Revenue rose 12% to $19.34 billion, also exceeding expectations. The specialty group produced 8% higher sales, the drug-distribution unit 13%. Amerisource raised targets for fiscal 2010 ending September and now expects per-share earnings growth of 12% to 17% on at least 7% higher revenue. Amerisource, which rallied on the news, is a Focus List Buy and a Long-Term Buy.


Stryker ($55; SYK) grew profits 11% to $0.82 per share excluding special items, in line with the consensus. Revenue, fueled by a 10% jump in orthopedic implants, advanced 7% to $1.83 billion. The company expects per-share-profit growth of 8% to 12% in 2010. Stryker is a Buy and a Long-Term Buy.


Johnson & Johnson ($63; JNJ) earned $1.02 per share excluding special items, up 9% and topping analyst expectations by a nickel. Revenue increased 9% to $16.55 billion on stronger sales across all three business units: consumer (up 10%), pharmaceutical (up 5%), and medical devices and diagnostics (up 12%). J&J reported 16% higher international revenue. In other news, a U.S. court voided four patents for J&J’s Cypher drug-eluting stent. J&J said it will appeal the ruling, the latest development in a long-running series of lawsuits against Boston Scientific ($9; BSX). J&J is a Long-Term Buy.


BMC Software’s ($38; BMC) earnings surged 19% to $0.76 per share excluding special items, topping the consensus estimate by $0.08. Sales also exceeded expectations, climbing 4% to $508 million on 12% growth in licensing. BMC raised its profit guidance for fiscal 2010 ending March above current Wall Street estimates. BMC Software is a Focus List Buy and a Long-Term Buy.


Qualcomm ($47; QCOM) posted per-share profits of $0.62 excluding special items, up 100% and $0.06 better than Wall Street projections. Revenue increased 6% to $2.67 billion. However, the company trimmed its sales forecast for fiscal 2010 ending September, reflecting a slower-than-expected recovery in developed markets. The news is disappointing, but it broke right before press time, and we don’t want to act rashly. For now the stock is a Long-Term Buy, but please check the Friday hotline for updated guidance.


Energen ($47; EGN) reported per-share profits of $0.81, down 11% and $0.06 below the consensus. Operating revenue dipped 3% despite a 5% increase in energy production. Energen raised its quarterly dividend 4% to $0.13 per share, payable March 1, the 28th consecutive annual increase. Energen is a Long-Term Buy.


Abbott Laboratories’ ($54; ABT) profits increased 11% to $1.18 per share excluding special items, topping the consensus by a penny. Sales climbed 11% to $8.79 billion. For 2010, Abbott expects earnings of at least $4.20 per share, up 13% and above the consensus estimate at the time of the announcement. In other news, the European Medicines Agency advised doctors to stop prescribing Abbott’s obesity drug Meridia because of alleged links to cardiovascular problems, while the Food and Drug Administration asked for a stronger warning label. Abbott is a Long-Term Buy.


Apple ($206; AAPL) posted earnings of $3.67 per share, up 47%. Sales jumped 32% to $15.68 billion. Apple said it sold 33% more Macintosh computers and 100% more iPhones, while the number of iPods sold declined 8%. In other news, Apple introduced its long-awaited iPad tablet, designed to fill the gap between laptop and smartphone and destined to compete against a similar gadget recently unveiled by Hewlett-Packard ($50; HPQ). Hewlett-Packard is a Buy and Long-Term Buy. Apple is rated A.


General Electric ($16; GE) earned $0.28 per share, down 20% and $0.02 ahead of the consensus estimate. Revenue fell 10% to $41.44 billion. GE anticipates roughly flat profits in 2010, with growth returning in 2011. General Electric is rated B.


Exelon’s ($47; EXC) profits declined 14% to $0.92 per share excluding special items but beat the consensus by $0.06. Shares slumped on profit guidance for the March quarter that fell well short of Wall Street expectations, though the full-year projection was unchanged. Exelon is rated B and is also a component of our Top 15 Utilities portfolio.

Profits don’t tell whole story at General Dynamics

General Dynamics ($69; GD) earned $1.58 per share excluding discontinued operations in the December quarter, down 2% and a penny above the consensus. Revenue rose 1% to $7.90 billion. A 23% sales decline in the aerospace unit was offset by higher revenue from the other segments, including a 12% jump in marine systems. The total backlog stands at $65.55 billion, down 12% from a year earlier. The company expects per-share-profit growth of 3% to 5% this year, and the top end of its guidance range was $0.03 below the consensus.

Shares fell on the earnings report, but a couple catalysts provide rebound potential. Early indications suggest that the U.S. defense budget, set for release Feb. 1, will provide a boost to General Dynamics, the country’s fourth-largest defense contractor. The fiscal 2011 budget includes orders for ammunition, upgrades to Stryker combat vehicles, and $14.1 billion reserved for shipbuilding — all positives for General Dynamics. A new combat vehicle under development by the company also survived the latest round of cuts.

Another potential growth driver is a new shallow-water warship. General Dynamics is competing against Lockheed Martin ($77; LMT) for the contract, expected to exceed $5 billion. General Dynamics is a Buy and a Long-Term Buy.

Tech and telecom roundup

Oracle ($24; ORCL) closed its $7.5 billion acquisition of Sun Microsystems ($9; JAVA) after the European Union completed its six-month investigation and cleared the deal. Oracle appeased antitrust concerns regarding the free MySQL database by promising to continue development of the open-source software. The company confirmed that it intends to keep most of Sun’s hardware business, using the servers in conjunction with its own software to create complete computer systems for businesses. Oracle is a Buy and Long-Term Buy . . . The Federal Communications Commission voted to close a loophole that had permitted cable TV companies to withhold programs from satellite providers and other competitors. For example, under the previous rules, Comcast ($16; CMCSa) had been able to shut out rivals, including DirecTV ($31; DTV), from carrying its SportsNet Philadelphia channel that broadcasts professional sporting events. Both Comcast and DirecTV are Focus List Buys and Long-Term Buys . . . A brokerage upgrade of Dolby Laboratories ($50; DLB) cited strong December shipments of notebook computers, DVDs, and liquid-crystal display televisions, projecting the momentum would continue. Dolby shares rose 6% on the day of the upgrade. Dolby generates 83% of its revenue from licensing, mostly for audio technology found in computers and consumer electronics. Dolby, which is slated to report December-quarter results Feb. 3, is a Focus List Buy . . . Seeking to unfurl 3G coverage across Mexico, NII Holdings ($35; NIHD) said it plans to bid on new frequencies during a government auction in May. NII Holdings is a Focus List Buy.

News digest

Berkshire Hathaway ($68; BRKb) will replace Burlington Northern Santa Fe ($99; BNI) in the S&P 500 Index once it completes the $26 billion acquisition of Burlington, probably this month. Berkshire’s Class B shares split 50-to-1 on Jan. 21. Berkshire is rated B.


While Kimberly-Clark ($60; KMB) reported per-share profits that missed the consensus and issued disappointing guidance for 2010, the company said it expected to raise the quarterly dividend. Kimberly-Clark is rated A.


Oneok ($45; OKE) raised its quarterly dividend 5% to $0.44 per share, payable Feb. 12. Oneok earns an A rating in the Utility Update and is part of our Top 15 Utilities portfolio.


Canadian National Railway ($52; CNI) raised its quarterly dividend 7% and authorized the repurchase of up to 15 million shares, or 3% of the stock not held by insiders. Canadian National is rated B.


Valero Energy ($19; VLO) slashed its quarterly dividend 67% to $0.05 per share. Valero is rated C.

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

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