Portfolio Review

5/10/2010


Rank changes

Rogers Communications ($36; RCI), a Canadian cable and wireless telecom provider already rated Buy and Long-Term Buy, is being added to the Focus List. In the last year, Rogers’s sales rose 33% and free cash flow more than doubled. Challenges facing Rogers include new entrants to the wireless market, including cable rival Shaw Communications’ ($19; SJR) wireless push into eastern Canada. Competition aside, we expect Rogers to build on recent operating momentum. The consensus projects 9% growth in per-share profits this year, and estimates have been trending upward for the last three months. Despite its growth potential, Rogers trades at just 13 times trailing earnings, about 40% below the three-year average P/E ratio.


General Mills ($72; GIS) is being dropped from the Focus List, though it remains a Buy and a Long-Term Buy. The stock’s Quadrix® Overall score has declined in recent weeks and is now at 69. General Mills has delivered solid growth in recent quarters, and the stock still has attractive year-ahead potential. However, it no longer ranks among our favorite 14 to 18 stocks. In other news, General Mills plans to split its stock two-for-one on June 8.


Intel ($23; INTC) is being upgraded to a Long-Term Buy. The stock scores above 80 in five of the six Quadrix categories and earns an Overall rank of 99. The world’s largest semiconductor maker, Intel stands to benefit from renewed demand for computers as the economic recovery progresses. The stock trades at 15 times trailing earnings, a 22% discount to the three-year average P/E ratio. Earnings estimates have jumped over the past month, but the 2010 consensus of $1.87 per share still seems conservative. If the company meets the consensus target and maintains a P/E of 15, the shares would reach $28.

Stick with these picks

The U.S. Food and Drug Administration ordered Baxter International ($45; BAX) to recall drug-infusion pumps linked to more than 56,000 complaints from 2005 through 2009. Nearly 200,000 of the pumps are in use, and the company expects to take a pretax charge of at least $400 million in the March quarter to cover the costs of the recall. While Baxter’s quality-control issues are worrisome, the stock, down more than 20% over the last two weeks, offers solid recovery potential over the next three years. Baxter remains a Long-Term Buy.


Shares of Aflac ($49; AFL) sold off on fears about its investments, valued at $74.0 billion at the end of March. The insurer’s portfolio includes $1.75 billion in bonds tied to banks in Greece and Portugal, two countries that saw their credit ratings slashed last month. While the investments could weigh on the shares, Aflac enjoys substantial operating momentum and trades at just nine times the 2010 profit estimate. The stock is a Focus List Buy and a Long-Term Buy.


Johnson & Johnson ($65; JNJ) has recalled more than 40 products, including pediatric versions of Tylenol, Motrin, Zyrtec, and Benadryl, due to manufacturing problems. The FDA said ingredients that may have been used in the medicines were contaminated, although the extent or danger of any contamination has yet to be determined. J&J has historically not been known for lax quality controls, and the stock remains a Long-Term Buy.

March-quarter earnings

Cognizant Technology Solutions’ ($52; CTSH) profits jumped 29% to $0.53 per share excluding stock-based compensation and some foreign tax charges, exceeding Wall Street’s forecast by $0.05. Sales grew at the same rate, also topping the consensus. Cognizant is a Focus List Buy and a Long-Term Buy . . . CVS Caremark’s ($36; CVS) profits from continuing operations rose 9% to $0.60 per share, $0.02 above the consensus. Revenue inched up 2% on modest growth at both the retail and pharmacy-services segments. Same-store sales rose 2.3%. CVS is a Focus List Buy and a Long-Term Buy . . . In the March quarter, Dolby Laboratories ($66; DLB) earned $0.80 per share excluding a variety of special items, up 21% and easily topping the consensus estimate of $0.62. Sales rose 19%. The company sharply raised sales and per-share-earnings targets for the fiscal year ending September. Dolby is a Focus List Buy . . . Energen ($48; EGN) grew per-share profits 22% to $1.62 per share, topping the consensus by $0.02. Energen is a Long-Term Buy . . . NII Holdings ($40; NIHD) earned $0.28 per share, below the consensus estimate of $0.50. Excluding currency losses, NII earned $0.35 per share. Operating income jumped 40%. Sales grew 33%, largely on a 78% surge in Brazil. The subscriber count topped 7.7 million, up 20% from year-earlier levels. NII is a Focus List Buy . . . Oceaneering International ($62; OII) said per-share profits fell 11% to $0.71, missing the consensus by $0.03. Revenue was flat. Oceaneering is a Long-Term Buy . . . Varian Medical Systems’ ($56; VAR) profits from continuing operations jumped 14% to $0.73 per share in the March quarter, exceeding the consensus estimate by $0.05. Revenue increased 6% to $586 million, also topping analyst projections. The company’s order backlog rose 6% to $2.02 billion. Varian Medical is a Focus List Buy and a Long-Term Buy.

Transocean, BP under fire over oil spill

Thousands of barrels of oil have been leaking every day from a well damaged when a deepwater drilling rig owned by Transocean ($73; RIG) and rented by BP ($51; BP) burned on April 20 and sank two days later.

On May 3, BP said it had capped one of three leaks. Multiple efforts to plug the other leaks have failed, and estimates of the amount of oil leaking into the Gulf of Mexico have risen over the last week. BP’s latest effort, lowering a concrete dome over the well, was slated to start on May 6.

Estimates of clean-up costs vary from $1 billion to $7 billion, with billions more in losses for businesses in Florida and Louisiana. But the damage could get much worse if the spill wraps around Florida and flows up the Atlantic Coast.

For now, the burden of funding the cleanup lies with the well owners, including BP, which controls a 65% stake, and Anadarko Petroleum ($64; APC), with a 25% interest. BP promised to pay claims associated with the spill but has blamed the accident on faulty equipment. Cameron International ($39; CAM) supplied a shut-off valve that has failed to close. Shortly before the explosion, Halliburton ($30; HAL) was working on the well, using a cementing process that has been blamed for other well blowouts. Shares of all five stocks have fallen since the disaster.

Just a couple months ago, Transocean had reviewed the safety of its fleet and appeared to be taking a harder stance on preventing accidents. The board eliminated executive bonuses last year because the company missed internal safety targets. Transocean’s safety record is better than the industry average, based on the number of incidents per hour worked.

In other news, Transocean earned $2.22 per share excluding charges in the March quarter, down 41% but $0.12 above the consensus. Revenue dipped 17% to $2.60 billion, falling short of Wall Street expectations. Transocean is a Long-Term Buy.
BP is rated B (average). Anadarko and Halliburton are rated C (below average).

  RANK CHANGES

Rogers Communications ($36; RCI) is being added to the Focus List. General Mills ($72; GIS) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. Intel ($23; INTC) is being added to the Long-Term Buy List.


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