Portfolio Review

5/3/2010


Updates on Questar, Baxter, Transocean

Longtime Forecasts recommendation Questar ($48; STR) has risen 16% this year. Its Quadrix® scores have declined, and the valuation is no longer attractive. The company fell short of the consensus profit estimate in the March quarter, although production rose 10%, and we are no longer confident in the company’s ability to exceed expectations. Questar is being dropped from the Long-Term Buy List and the Top 15 Utilities portfolio. While the downgrade temporarily bumps the Long-Term Buy List’s cash position above our recommended 5% to 15% range, we will select new stocks for both portfolios in the May 10 issue.

In the three trading days after Baxter International ($47; BAX) declared March-quarter profits in line with the consensus, the shares fell 19%. For the quarter, Baxter delivered sales growth of 11% and per-share-profit growth of 12% excluding a special charge. However, the medical-equipment maker lowered its full-year guidance, citing weakness in the market for plasma-based products and drug rebates mandated by federal health-care reform legislation. The consensus now calls for per-share-profit growth of 4% this year and 9% next year, targets that sound unduly conservative. Baxter retains its Long-Term Buy rating.

Transocean’s ($85; RIG) Deepwater Horizon, an ultra-deepwater rig contracted to BP ($56; BP) at about $500,000 a day, sank when a fire broke out as it was completing a well in the Gulf of Mexico. Eleven workers are missing and presumed dead. BP has so far been unable to cap the well, which is leaking 1,000 barrels a day from the sea floor. The relatively small size of the spill as compared to other high-profile disasters suggests the damage can be mitigated — assuming the companies can close off the well.

Transocean says the rig was insured for $560 million, covering the loss and costs to remove of the destroyed vessel. BP is reportedly liable for the clean-up costs, though both BP and Transocean are likely to face a number of lawsuits. Environmental and financial concerns could weigh on Transocean shares in the near term, and the stock is being dropped from the Buy List. But at current levels, we see substantial rebound potential over the two- to four-year haul. Transocean is a Long-Term Buy. BP is rated B (average).

March-quarter earnings

Aflac ($52; AFL) grew operating earnings 16% to $1.41 per share excluding net realized investment gains and losses, topping the consensus by $0.09. Revenue climbed 5% to $5.07 billion. Aflac provided strong sales and profit guidance, but investment exposure to troubled banks in Greece and Portugal pressured the shares. Aflac is a Focus List Buy and a Long-Term Buy . . . AmerisourceBergen ($31; ABC) grew earnings 34% to $0.63 per share, topping the consensus by $0.08. Helped by the launch of new generic drugs, revenue advanced 11% to $19.30 billion. The company also raised its profit guidance for fiscal 2010 ending September and now projects 19% to 24% growth. Amerisource is a Focus List Buy and a Long-Term Buy . . . Hospira ($54; HSP) earned $0.94 per share excluding a series of special items, up 57% and $0.22 above the consensus. Sales also beat projections, rising 17% to $1.01 billion. Hospira raised its guidance for 2010 sales and earnings per share, but the company is pulling two drugs and an infusion pump from the market for safety reasons, and the guidance was lower than some expected in the wake of such a strong quarter. Hospira is a Focus List Buy and a Long-Term Buy . . . Travelers ($51; TRV) reported operating income of $1.22 per share, down 9% and $0.15 short of Wall Street expectations. Catastrophe losses jumped to $312 million from $54 million a year earlier, the product of winter storms in the U.S. and Chile’s earthquake. In other news, Travelers raised its quarterly dividend 9% to $0.36 per share, payable June 30. Travelers is a Focus List Buy and a Long-Term Buy . . . Raytheon ($58; RTN) reported profits of $1.18 per share from continuing operations, up 6% excluding special items, topping Wall Street’s forecast by $0.07. Revenue increased 3% to $6.05 billion, and bookings surged 25% to $6.53 billion. Raytheon is a Focus List Buy and a Long-Term Buy . . . Comcast’s ($18; CMCSa) per-share profits jumped 15% to $0.31, topping the consensus estimate by a penny. Revenue rose 4% to $9.20 billion, reflecting impressive customer growth of 7% for high-speed Internet, 9% for digital video, and 17% for voice. Comcast is a Focus List Buy and a Long-Term Buy . . . General Dynamics ($77; GD) said profits from continuing operations were flat at $1.54 per share, $0.03 ahead of Wall Street’s estimate. Although operating profit margins widened, revenue fell short of the consensus, slipping 6% to $7.75 billion. The company reported strong orders at its aerospace unit. General Dynamics is a Buy and a Long-Term Buy . . . Rogers Communications’ ($35; RCI) per-share earnings surged 73% to $0.69 excluding special costs, topping the consensus estimate by $0.16. Sales advanced 5%. The wireless segment, Roger’s biggest business, generated 8% higher revenue and 17% higher profits, but weak subscriber growth disappointed analysts. Rogers is a Buy and a Long-Term Buy . . . Sigma-Aldrich ($58; SIAL) said per-share profits rose 24% to $0.84 excluding restructuring costs, $0.05 above the consensus. The company raised its 2010 earnings guidance and now expects 9% to 14% growth. Sigma-Aldrich is a Long-Term Buy.

Corporate roundup

Research In Motion ($71; RIMM) shares bounced after the company unveiled the new operating system for its BlackBerry smart phones. Features include a touch screen, new Web browser, better camera, and friendlier display, features that should help RIM continue its push into the consumer market. Research In Motion is a Buy and a Long-Term Buy . . . Hewlett-Packard ($53; HPQ) agreed to buy smart phone maker Palm ($5; PALM) for $5.70 per share, or nearly $1 billion cash, in a deal that will give the tech giant greater access to a fast-growing market. H-P is a Buy and Long-Term Buy . . . A federal appeals court ruled that a class-action lawsuit can continue against Wal-Mart Stores ($54; WMT). More than a million women could participate in the gender-discrimination suit, first filed in 2001, that exposes the retailer to potential damages worth billions of dollars. Wal-Mart is a Long-Term Buy . . . Current and former employees at Goldman Sachs ($153; GS) defended their conduct in a Senate hearing as legislators blasted the bank for allegedly inflating the housing bubble and then profiting off its collapse. Goldman Sachs is rated B (average) . . . General Electric’s ($19; GE) CEO said the company’s earnings growth is recovering and he expects a dividend hike, though no earlier than 2011. General Electric is rated B (average).

Dividend news

IBM ($129; IBM) boosted its quarterly dividend 18% to $0.65 per share, payable June 10, marking its 15th consecutive annual increase. The company also authorized $8 billion in share repurchases. IBM is a Focus List Buy and a Long-Term Buy . . . Lubrizol ($91; LZ) raised its quarterly dividend 16% to $0.36 per share, payable June 10. Lubrizol is a Buy.

  RANK CHANGES

Questar ($48; STR) is being dropped from the Long-Term Buy List. Transocean ($85; RIG) is being dropped from the Buy List. The Vanguard Short-Term Investment-Grade ($10.74; VFSTX) fund now represents 13.2% of the Buy List and 17.5% of the Long-Term Buy List, though we plan to add at least one stock to the Long-Term Buy List next week.


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