Portfolio Review

5/24/2010


CA downgraded

CA ($21; CA) was dropped from the Buy List and Long-Term Buy List on the May 14 hotline. The stock, down nearly 9% this year, suffers from deteriorating Quadrix scores and disappointing March-quarter earnings. CA grew profits 10% to $0.34 per share excluding special items, missing the consensus by $0.02. Revenue rose 7% but also fell short of expectations. The company plans to boost marketing spending 50% this year in an effort to rebrand itself as CA Technologies. The company now goes by a different name, but our advice remains the same: subscribers tracking our Buy List or Long-Term Buy List should sell.

Don’t abandon Aflac

Recent wild swings in Aflac’s ($45; AFL) stock reflect changing perceptions about Europe’s debt mess. Out of its $74.0 billion in investments, Aflac holds roughly $1 billion in Greek bank bonds and $750 million from Portuguese lenders. Aflac also owns about $285 million in Greek national debt and about $2 billion in bonds from other troubled countries, namely Portugal, Italy, and Ireland.

As long as the stability of European banks remains in doubt, Aflac’s stock could remain under pressure. The European Union pledged nearly $1 trillion to bolster weaker countries, support the euro, and ease fears that Greece’s debt woes could spread elsewhere. Only time will reveal the effectiveness of the bailout.

Despite its European worries, Aflac enjoys strong operating momentum in Japan. Wall Street expects per-share-profit growth of 12% this year, and the stock trades at just eight times the 2010 profit estimate. Aflac is a Focus List Buy and a Long-Term Buy.

GameStop still a good play

U.S. video-game sales plunged 26% to $766 million in April, according to research firm NPD. Software sales slumped 22%, surprising Wall Street, which had anticipated a 5% decline. Some industry watchers worry that consumers have been drawn to inexpensive online games. However, starting in May a stronger slate of new games, some featuring 3-D motion-control technology, is scheduled for release. The new game launches should lift sales at GameStop ($21; GME).

While takeover rumors continue to swirl around GameStop, its pricing strategy could be affected by game-maker Electronic Arts’ ($18; ERTS) decision to charge $10 for additional users (read: purchasers of used games) to access bonus content online. GameStop, slated to report April-quarter results May 20, remains a Buy.

News roundup

In the April quarter, Hewlett-Packard ($47; HPQ) earned $1.09 per share excluding special charges, up 27% and $0.04 above Wall Street’s forecast. Revenue rose 13% to $30.85 billion. For fiscal 2010 ending October, the company raised its per-share-profit guidance to $4.45 to $4.50, versus the consensus estimate of $4.45. H-P is a Buy and Long-Term Buy . . . Halozyme ($7; HALO) recalled shipments of a fluid-absorption drug after the discovery of glass particles in vials packed by Baxter International ($43; BAX). Halozyme said it might terminate their contract. While the impact on Baxter should be minimal — revenue from the drug is probably less than $10 million — the episode is the latest of a series of mishaps for the company. Baxter, trading at just 11 times estimated 2010 earnings, remains a Long-Term Buy . . . Stryker ($56; SYK) said it has resolved regulatory warning letters stemming from compliance issues at plants located in Michigan and Ireland. Stryker is a Buy and a Long-Term Buy . . . Pfizer ($16; PFE) said it plans to slash 6,000 jobs, roughly 5% of its total work force, and shutter eight plants. Pfizer is rated B (average).

Retail review

U.S. retail sales crept up 0.4% in April, according to the U.S. Census Bureau, double the median projection from a Bloomberg survey of economists. Retail sales have now risen in seven straight months and could presage a rise in consumer sentiment.

TJX ($44; TJX) said earnings surged 63% to $0.80 per share in the April quarter, topping the consensus by $0.02. Revenue also topped Wall Street forecasts by jumping 15% to $5.02 billion, helped by strong growth in foreign markets. Same-store sales rose 9%. However, the shares dipped on the company’s slightly disappointing outlook for the July quarter and fiscal 2011 ending January. TJX is a Buy and a Long-Term Buy.

Shares of Wal-Mart Stores ($54; WMT) rose after the retail giant reported April-quarter profits of $0.88 per share, up 14% and $0.03 above the consensus estimate. Revenue grew 6% to $99.10 billion on a 21% jump in international sales. Excluding fuel, U.S. same-store sales slipped 1.1%. Wal-Mart Stores is a Long-Term Buy.

Advance Auto Parts ($46; AAP) grew per-share profits 17% to $1.19 in the April quarter, exceeding the consensus by $0.19. Revenue topped expectations, and same-store sales rose 7.7%. The auto-parts retailer also raised its profit guidance for fiscal 2011 ending January. Advance Auto Parts is a Long-Term Buy.

Stay defensive

U.S. Defense Secretary Robert Gates has vowed to clamp down on the defense budget, and his aides expect the budget to remain steady or shrink in coming years. Gates, who has questioned the wisdom of the U.S. stockpiling massive and pricey weapons, trimmed 30 major acquisition programs last year. While the news is not good for defense contractors, it is also not a big surprise.

Both General Dynamics ($71; GD) and Raytheon ($55; RTN) look cheap, and Wall Street profit expectations for the next two years are modest. General Dynamics’ business-jet unit should see decent growth this year, and Raytheon seems better positioned than most to deal with defense-budget cuts. Raytheon is a Focus List Buy and a Long-Term Buy. General Dynamics is a Buy and a Long-Term Buy.

Oil spill update

BP ($45; BP) deployed a suction tube it says is capturing 2,000 barrels of oil a day, about 40% of the oil flowing from a well in the Gulf of Mexico. Until the flow of oil is stopped, expect shares of BP and rig operator Transocean ($63; RIG) to remain volatile. And even if BP gets the leak under control, the action will continue — in the courts and in the press.

By one account, BP and Transocean argued about how to plug the well in the hours leading up to the explosion, and both companies were aware that the blowout preventer had been damaged weeks earlier.

In other news, Transocean signed two contract extensions at day rates 19% and 26% below the rigs’ previous rates, including a deal with BP. In a third pact, Transocean contracted an ultra-deepwater rig at $475,000 per day, roughly the same price as its last contract. Transocean is a Long-Term Buy. BP is rated B (average).

  RANK CHANGES

CA ($21; CA) has been dropped from the Buy List and Long-Term Buy List, raising the recommended cash position for both lists.


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