Stick with Accenture, Oracle

4/7/2008


Accenture ($36; NYSE: ACN) earned $0.64 per share in the February quarter, up 36% and $0.09 higher than the consensus. Net revenue increased 18%, as four of the five operating groups reported double-digit sales growth. Results benefited from record bookings, a reduced tax rate, and a lower share count. For fiscal 2008 ending August, management now expects per-share earnings of $2.55 to $2.60, compared to a prior forecast of $2.36 to $2.41. In fiscal 2007, Accenture earned $1.97 per share.

Despite strong operating momentum, Accenture shares have been stuck in Neutral this year, partly on concerns that technology spending will sputter. And while February-quarter results looked impressive on the surface, the closely watched operating profit margin dipped from the prior year, while an unexpected tax gain accounted for the earnings surprise. Still, Accenture’s outlook remains solid, reflecting strong demand and bookings, particularly in international markets. The stock has been roughly flat in 2008, versus a 10% decline for the S&P 1500 Information Technology Services Index. Accenture, trading at less than 14 times projected year-ahead earnings, remains a Focus List Buy and Long-Term Buy.


Oracle ($20; NASDAQ: ORCL) shares fell on news of a revenue shortfall. February-quarter per-share earnings rose 23% to $0.30 excluding one-time items, in line with consensus estimates. Oracle’s revenue increased 21% to $5.35 billion, below the $5.42 billion Wall Street expected because of weaker-than-expected growth in licenses for application software. The weakening economy may have weighed on Oracle’s results. Oracle’s cash flow from operations rose 55% to $5.11 billion in the nine months ended February. The sell-off seemed somewhat overdone, considering that consensus estimates already reflect a slowdown in revenue growth to 12% in the year ending May 2009, and at press time Oracle had regained most of the ground lost after the earnings announcement. Trading at 14 times projected year-ahead earnings of $1.40 per share, Oracle is a Buy and a Long-Term Buy.

News report
Citigroup ($24; NYSE: C) is undergoing its tenth restructuring since 2002, organizing geographically to give regional heads more authority. As part of that restructuring, the financial-services giant is forming separate units for its credit-card and consumer-banking businesses, though the company has not indicated any plans for a spin-off. Citigroup is rated Neutral . . . American Express ($47; NYSE: AXP) will buy General Electric’s ($38; NYSE: GE) commercial credit-card unit, serving more than 300 large corporate clients, for $1.1 billion. American Express and GE are rated Neutral . . . Citing weakness in consumer spending, J.C. Penney ($40; NYSE: JCP) lowered its April-quarter earnings target to $0.50 per share, down from a range of $0.75 to $0.80 and the $0.76 consensus. The company also said same-store sales would decline at a high-single-digit rate for the quarter. Penney is rated Neutral . . . IBM ($116; NYSE: IBM) has been temporarily suspended from pursuing contracts with the U.S. government. The suspension follows news of an investigation by the Environmental Protection Agency regarding unethical behavior in connection with a failed bid to modernize the agency’s computer system. IBM plans to challenge the suspension. IBM is a Buy and a Long-Term Buy . . . Iraqi Airways ordered 40 airplanes worth $5.5 billion at list prices from Boeing ($76; NYSE: BA). The company also received a $4.2 billion order for 35 jets from Malaysia Airlines. In addition, the U.S. Air Force and Marine Corps awarded Boeing and a partner a $10.4 billion contract to build 167 Osprey tilt-rotor aircraft. Boeing has signed a steady stream of contracts in recent months, but production delays for the company’s newest passenger jet and a dispute over a $26 billion tanker deal awarded to competitors could keep pressure on the shares. We will keep an eye on this Neutral-rated stock.

Health-care review
The U.S. Food and Drug Administration proposed new guidelines for making and testing drug-coated stents, some of which have caused blood clots. The proposal, which is not yet mandatory, calls for more extensive studies. Separately, a study found that patients using the Xience V stent made by Abbott Laboratories ($55; NYSE: ABT) were 40% less likely to suffer adverse events, such as heart attacks or death, than patients using a rival stent made by Boston Scientific ($14; NYSE: BSX). Abbott Labs is rated Neutral. Boston Scientific is rated Underperform . . . Johnson & Johnson’s ($66; NYSE: JNJ) foot and leg ulcer treatment Regranex is drawing new FDA scrutiny after a study found that patients using the drug had higher death rates from cancer. Diabetics use the drug in gel form on open sores. The FDA said it would make an of-ficial recommendation after completing its own safety review of Regranex. J&J is a Buy and a Long-Term Buy . . . A study found AstraZeneca’s ($41; NYSE: AZN) cholesterol drug Crestor helped decrease death rates in patients with no cholesterol problems. In related news, Vytorin, a rival drug made by made by Merck ($38; NYSE: MRK) and Schering-Plough ($15; NYSE: SGP), didn’t perform better than an older, cheaper drug. In the wake of several high-profile research failures, AstraZeneca needed a dose of good news. Some analysts are projecting maximum annual sales of more than $8 billion for Crestor, about three times the $2.8 billion sold in 2007. Vytorin, which generated more than $5 billion in sales last year, seems likely to lose share in the $35 billion market for cholesterol drugs. AstraZeneca is a Long-Term Buy. Merck is rated Neutral . . . Studies of Pfizer’s ($21; NYSE: PFE) painkiller Celebrex showed that high doses of the drug tripled patients’ risk of heart attack and stroke. Lower doses of the drug still increased risk slightly, though the study did not consider the most common dosage, which is about half that of the lowest studied. Celebrex is in the same drug category as Vioxx, which Merck pulled from the market in 2004 because of a link to heart attacks and strokes. Pfizer is rated Neutral.

News digest
A study of a Medtronic ($48; NYSE: MDT) heart-failure device found that it provided no statistical benefit over use of drugs alone. Medtronic is rated Neutral.


Microsoft ($29; NASDAQ: MSFT) says it has no plans to raise its $42 billion cash-and-stock offer for Yahoo ($29; NASDAQ: YHOO), though it has not yet taken any additional steps to initiate a hostile takeover. Microsoft is a Buy and a Long-Term Buy. Yahoo is rated Neutral.


Dell ($20; NASDAQ: DELL) plans to save $3 billion over three years by cutting jobs and closing at least one plant. Dell is rated Neutral.


Insurance broker Berkley ($29; NYSE: BER) will change its ticker symbol to WRB on April 15. Berkley is rated Neutral.


Monsanto ($113; NYSE: MON) agreed to buy De Ruiter Seeds for $863 million in cash. In other news, February-quarter profits per share more than doubled, and the company raised its profit target for fiscal 2008 ending August. Monsanto, richly valued at 35 times the 2008 consensus estimate, is rated Neutral.


Lockheed Martin ($101; NYSE: LMT) will build a $766 million radio-communications system for the Pentagon. The company also won a $596 million U.S. Air Force contract. Lockheed Martin is a Focus List Buy and a Long-Term Buy.


Altria ($22; NYSE: MO) spin-off Philip Morris International ($51; NYSE: PM) began trading March 31. Altria shareholders received one share of Philip Morris for each share of Altria they owned. Altria is rated Neutral. Philip Morris International has not yet been assigned a rating.


Walgreen’s ($39; NYSE: WAG) same-store sales rose 4.4% in March. Walgreen is a Long-Term Buy.


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