Portfolio Review

4/26/2010


March-quarter earnings

IBM ($130; IBM) earned $1.97 per share, up 16% and $0.04 above the consensus estimate. Revenue climbed 5%, also exceeding Wall Street’s forecast. Citing broad improvement across its business segments, IBM raised its profit guidance for 2010 to at least $11.20 per share, implying 12% growth and exceeding Wall Street expectations. However, services bookings fell 2%, or 7% in constant currency, and the stock dipped on the news. IBM is a Focus List Buy and a Long-Term Buy.


Johnson & Johnson’s ($66; JNJ) profits inched up 2% to $1.29 per share excluding a litigation gain, topping the consensus by $0.02. Fueled by a 13% jump in medical devices and diagnostics, revenue rose 4% to $15.63 billion. J&J trimmed its 2010 per-share-profit guidance by a nickel to $4.80 to $4.90, versus the $4.90 consensus. Management said fees and rebates from U.S. health-care reform efforts will reduce earnings by roughly $0.10 per share and sales by at least $400 million this year. J&J is a Long-Term Buy.


Stryker ($58; SYK) reported per-share profits of $0.80, up 13% and $0.02 ahead of Wall Street’s forecast. Revenue advanced 12%, or 9% in constant currency. Sales of orthopedic implants grew 11%, while medical and surgical equipment gained 15%. The company projects per-share-profit growth of 8% to 12% for 2010, in line with the consensus. Stryker is a Buy and a Long-Term Buy.


Abbott Laboratories ($53; ABT) said earnings rose 11% to $0.81 per share excluding special items, a penny better than the consensus. Revenue grew 15% to $7.70 billion. Sales of Humira, Abbott’s blockbuster rheumatoid-arthritis treatment, leapt 37% to $1.40 billion. Abbott said per-share earnings would have been $0.03 higher in the quarter if not for federal health-care reform, and the company pared its full-year target by $0.07. The shares fell on the news. Abbott is a Buy and a Long-Term Buy.


General Electric’s ($19; GE) profits from continuing operations fell 19% to $0.21 per share but topped the consensus estimate by a nickel. Revenue declined 5% to $36.61 billion, as industrial sales fell 2% and GE Capital’s revenue dipped 9%, impacted by efforts to downsize the financial business. In other news, the SEC is reviewing corporate comments made during the financial crisis that might have misled investors about the liquidity of GE Capital. GE is rated B (average).


Apple ($259; AAPL) reported profits of $3.33 per share, up 86% and $0.88 better than the consensus estimate. Revenue surged 49% to $13.50 billion, about $900 million ahead of the most aggressive analyst estimate. Relative to the year-earlier quarter, Apple sold 33% more Macintosh computers, 131% more iPhones, and 1% fewer iPods. Apple is rated A (above average).


Coca-Cola ($54; KO) grew per-share profits 23% to $0.80 excluding special charges, exceeding the consensus by $0.06. Sales advanced 5% to $7.53 billion, lifted by growth in all geographic regions except North America. Unit case volume rose 3% despite a 2% decline in North America. Coca-Cola is rated A (above average).

Financial review

The U.S. Securities and Exchange Commission charged Goldman Sachs ($160; GS) and one of its vice presidents with fraud. The SEC alleges Goldman misled investors with a synthetic collateralized debt obligation called ABACUS. Goldman allegedly let a hedge-fund manager pick some of the subprime mortgage securities for inclusion in ABACUS. The manager then bet heavily against the securities. ABACUS cost investors more than $1 billion, the SEC estimates. U.K. regulators have launched their own investigation. Goldman plans to fight the charges. But regardless of the outcome of the court battles, the charges could precipitate stricter federal regulations and ultimately trim the profitability of banks. Goldman’s stock sank nearly 13% on the news.

Not even a blow-out quarter offered much consolation for Goldman investors. Per-share profits jumped 65% to $5.59 per share in the March quarter, well ahead of the consensus estimate of $4.01. The bank reported 36% higher revenue from trading and investment banking. Goldman is rated B (average).


Citigroup ($5; C) earned $4.4 billion, or $0.15 per share, in the March quarter, compared to a loss in the prior-year quarter, beating the consensus by $0.15. Results exclude a $10.1 billion loss from repayment of federal bailout funds and a loss-sharing agreement with the U.S. government. Revenue slipped 6%. Citigroup is rated C (below average).


Bank of America’s ($19; BAC) per-share profits fell 36% to $0.28 in the March quarter, as a huge share offering in the December quarter offset a slight increase in net income. Profits topped the consensus by $0.19 per share. Revenue net of interest expense dipped 11%. Bank of America is rated C (below average).


Wells Fargo ($34; WFC) reported that per-share earnings fell 20% to $0.45, exceeding the consensus by $0.03. Revenue crept up 2% to $21.45 billion, falling short of expectations. The CEO said, “we have turned the corner on many of the credit challenges.” Wells Fargo is rated B (average).

News roundup

The Federal Communications Commission seeks more information on Comcast’s ($19; CMCSa) proposed $28 billion purchase of a majority stake in NBC Universal. The commission is waiting on data from the two companies showing potential benefits of the deal and how it could affect online video distribution. Comcast has said that it hopes to complete the deal by the December quarter. Comcast is a Focus List Buy and a Long-Term Buy . . . After lagging the market for much of the winter, shares of GameStop ($25; GME) rallied 48% from February lows as the video-game industry began to right itself. U.S. video-game sales advanced 6% in March. Software sales rose 10% — the first monthly increase since September — offsetting 4% lower hardware sales. Following the sales report, GameStop shares rose, also helped by a brokerage upgrade. GameStop is a Buy . . . Hospira ($57; HSP) agreed to purchase Javelin Pharmaceuticals ($2; JAV) for roughly $145 million in cash. Hospira will spend an additional $13 million in termination fees and principal and interest repayments so Javelin can back out of its original takeover agreement with Myriad Pharmaceuticals ($5; MYRX). In other news, Hospira received warnings from the U.S. Food and Drug Administration following the inspection of two plants in North Carolina. Some of the problems, the FDA said, are repeat violations from an inspection last year. Hospira postponed some shipments from the plants until it investigates further but added that it doesn’t foresee the delays affecting 2010 financial targets. By one analyst estimate, the products involved contribute less than $10 million in sales and less than a penny in per-share earnings each quarter. Hospira is a Focus List Buy and a Long-Term Buy . . . DirecTV ($36; DTV) and DISH Network ($22; DISH) agreed to dismiss all lawsuits and countersuits stemming from DISH’s “Why Pay More” television commercials. DirecTV is a Focus List Buy and a Long-Term Buy . . . Shares of Questar ($46; STR) jumped in after-hours trading April 21 after the company said it might spin off most of its exploration-and-production business, holding onto its natural-gas utility and pipeline unit. The businesses reportedly considered for the spin-off earned $213 million last year, or about 54% of the company’s total income. The implications of such a spin-off are not yet clear, and for now Questar remains a Long-Term Buy.

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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