Portfolio Review

4/19/2010


National Oilwell downgraded

National Oilwell Varco ($42; NOV) is being sold from the Buy List and Long-Term Buy List because of its declining Quadrix® scores, subpar earnings-estimate trends, and potential for disappointing March-quarter results. Also, the stock’s inability to rally on the recent jump in oil prices is discouraging.

The provider of drilling rigs and other oilfield equipment is expected to report a 25% decline in per-share earnings for the quarter. But investors will be looking for stabilization in the rig-technology segment’s order backlog, which dropped by 12% in the three months ended December. The stock, though cheap relative to historical norms at 13 times expected 2010 earnings, no longer ranks among our top picks for 12-month or long-term gains. On our Monitored List, National Oilwell’s rating is being dropped to B (average).

Retail review

U.S. retail sales rose 1.6% in March, topping the consensus. Strong demand for cars lifted results, but sales rose 0.6% from February levels excluding autos. The willingness of consumers to spend has been a bit of a surprise, given the lack of sustained job growth and continued problems with the housing market.

Retail stocks are riding a wave of optimism. The median retailer in the S&P 1500 Index has risen 20% over the last two months, well above the index’s 12% gain. While the group as a whole looks pricey, several retailers represent appealing investment opportunities. Our favorites include Ross Stores ($57; ROST), featured in Focus Favorites, and the three stocks discussed below:

TJX ($46; TJX) reported 12% higher same-store sales in March, well ahead of the consensus estimate of 6.5%. Total sales advanced 19%. For fiscal 2011 ending January, TJX now expects per-share profits of $3.17 to $3.31, implying 12% to 17% growth, versus the consensus of $3.17 at the time of the announcement. TJX is a Buy and a Long-Term Buy.

Wal-Mart Stores ($55; WMT) is cutting prices on about 10,000 products, primarily food and other staples, in an effort to revive sales growth and keep the new customers it attracted during the recession. Wal-Mart is a Long-Term Buy.

In the wake of a disappointing December quarter, Advance Auto Parts ($45; AAP) is expected to post a 2% decline in per-share profits for the March quarter. The shares rallied on an April 14 brokerage upgrade but are up less than 12% for the year, below the S&P 1500 Retail Group Index’s 16% gain. Advanced Auto generates strong cash flow and will face easier growth comparisons as the year goes on. Advance Auto is a Long-Term Buy.

Obama lifts energy

President Obama proposed opening up the eastern Gulf of Mexico, sections of the Atlantic coastline, and the northern coast of Alaska for offshore drilling. It was welcome news for oil drillers burdened by excess rig capacity. Heavy trading pushed up shares of Transocean ($85; RIG), the biggest of the deepwater drillers, while outfitter Oceaneering International ($62; OII) also rose.

But investors could be getting ahead of themselves. Any drilling spawned by Obama’s proposal is likely at least two years away and may face legal and political challenges. Transocean is a Buy and a Long-Term Buy. Oceaneering is a Long-Term Buy.

Mergers and deals

According to several news reports, Lubrizol ($91; LZ) has offered to buy Germany’s Cognis, a maker of specialty chemicals and food additives, for $4.1 billion. However, just before the Forecasts went to press, Lubrizol shares rallied as a German newspaper reported the company was not interested in a deal. Reports have also named other interested parties, including BASF, a German chemical company.

An acquisition of this scale would likely end speculation that Lubrizol could itself be a takeover target for private-equity groups. While a deal for Cognis makes some strategic sense, we are withholding judgment until we learn both whether the offer is genuine and how much the purchase would cost. For now, Lubrizol remains a Buy.

Research In Motion ($73; RIMM) agreed to buy QNX Software Systems from Harman International ($48; HAR) for an undisclosed sum. The deal could help RIM break into the car-audio market. RIM is a Buy.

Hospira ($58; HSP) offered about $141 million in cash to purchase Javelin Pharmaceuticals ($2; JAV), well above Myriad Pharmaceuticals’ ($5; MYRX) December bid. Javelin plans to cancel its deal with Myriad unless a higher bid is forthcoming. Javelin has filed for U.S. approval to market Dyloject, a post-operative pain treatment. Hospira is a Focus List Buy and a Long-Term Buy.

March-quarter earnings

Intel’s ($24; INTC) reported profits of $0.43 per share in the March quarter, up nearly 300% and a nickel better than Wall Street’s forecast. Revenue jumped 44%, and Intel guided June-quarter sales above the market’s expectations. Intel is rated A (above average) . . . Alcoa ($14; AA) earned $0.10 per share excluding restructuring and special charges, compared to a loss of $0.59 in the year-ago quarter, matching the consensus estimate. Revenue fell short of the consensus. Alcoa is rated C (below average) . . . Chevron ($80; CVX) said it expects to report stronger earnings in the March quarter than it managed in the December quarter. The company expects energy prices to rise and the refining business to turn a profit. Chevron is rated B (average).

News roundup

Entergy ($82; ETR) raised its quarterly dividend by 11% to $0.83 per share, payable June 1, but shares fell on news that the electric utility will no longer consider spinning off its nuclear power plants due to resistance from New York regulators. Entergy, rated A in our quarterly Utility Update, is included in the Top 15 Utilities portfolio . . . Morgan Stanley ($30; MS) warned investors that its $8.8 billion real-estate fund could lose $5.4 billion on bad investments, which would make it the biggest loss in the history of private equity real estate investing. However, the stock rose on Tuesday, most likely buoyed by strong quarterly results from rival J.P. Morgan Chase ($46; JPM). Morgan Stanley, which wrote down those losses last year, is rated C (below average). J.P. Morgan is rated B (average).

Microsoft shows smart phone

Microsoft ($30; MSFT) has unveiled Kin, its first attempt to design a line of smart phones. Marketed as a social-networking device and less expensive than Apple’s ($240; AAPL) iPhone, the Kin is geared toward youths’ interests in instant messaging, e-mail, music, and Facebook. They feature a touch screen and slide-out keyboard. Two versions of the Kin will hit U.S. stores in May, with service by Verizon Wireless. Microsoft is rated a Long-Term Buy. Apple is rated A (above average).

  RANK CHANGES

National Oilwell Varco ($42; NOV) is being dropped from the Buy List and the Long-Term Buy List. The Vanguard Short-Term Investment-Grade ($10.72; VFSTX) fund now represents 10.1% of the Buy List and 15% of the Long-Term Buy List.


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