Portfolio Review

6/7/2010


Technology, telecom report

Apple ($261; AAPL) continues to gain momentum. The company has sold more than 2 million iPads since the tablet computer’s April 3 release. In the U.S., stores have struggled to keep the iPad in stock. Apple surged past Microsoft ($26; MSFT) to become the biggest technology company in the world based on market capitalization and the second-largest company of any kind behind Exxon Mobil ($59; XOM). In other news, AT&T ($24; T) said that 40% of its iPhone sales are going to business customers, evidence that Apple is encroaching on a market dominated by Research In Motion ($59; RIMM). Apple and Microsoft are rated Long-Term Buy. Research In Motion is a Buy and a Long-Term Buy. AT&T and Exxon are rated B (average).


Mexico is collecting bids for its wireless spectrum auction scheduled to end June 9. Controlling 3.6% of the Mexican wireless market, NII Holdings ($35; NIHD) has partnered with Grupo Televisa to bid on the airwaves so they can build high-speed third-generation networks. NII Holdings is a Focus List Buy.


Hewlett-Packard ($46; HPQ) plans to cut jobs and shift its spending to higher-margin services, reducing the work force by a net 3,000 jobs, or 1%, over the next three years. H-P will take $1 billion in charges related to the changes and expects to be saving $500 million to $700 million annually by the end of fiscal 2013 ending October. H-P is a Buy and a Long-Term Buy.

Health-care review

CVS Caremark ($34; CVS) said it has been charging some Medicare customers more than expected for prescription services since the beginning of 2010. Management blamed a computer glitch for the mistake that caused CVS’ brand-name drugs to be listed on Medicare’s comparison-shopping Web site at below the actual price. The company says it will reimburse customers for the difference between the actual price and that listed on the Web site — if they ask for their money back. CVS Caremark is a Focus List Buy and a Long-Term Buy . . . The Food and Drug Administration said it might pursue criminal charges against a Johnson & Johnson ($59; JNJ) unit, citing the segment’s alleged “pattern of noncompliance.” The McNeil Consumer Healthcare business is facing rising criticism for manufacturing problems and the way it handled a recall of children’s Tylenol and other drugs. J&J is a Long-Term Buy.

Corporate roundup

Asda Group, a subsidiary of Wal-Mart Stores ($51; WMT), agreed to purchase Netto’s discount supermarkets in the U.K. for $1.13 billion. Asda, the second-largest food retailer in Great Britain, has seen its market share shrink to 17%. In other news, Wal-Mart’s U.S. stores have cut the price of several food items and other essentials in an effort to boost traffic. Wal-Mart is a Long-Term Buy . . . President Obama says he will veto any legislation that funds the development of a second engine design for the F-35 fighter jet. The House passed a defense bill that allocated $485 million for an engine built by General Electric ($16; GE) and Rolls-Royce, citing the need for competition with an engine made by United Technologies ($66; UTX). Some political leaders doubt whether Obama will follow through on the threat and veto a $726 billion military budget over one or two provisions he doesn’t like. GE and United Technologies are rated B (average) . . . Newmont Mining ($55; NEM) says it will need $3 billion to develop the Elang copper reserve in Indonesia. The firm estimates that the Elang property contains enough copper to produce through 2060. Newmont is a Buy and a Long-Term Buy . . . Express Scripts ($101; ESRX) set June 7 as the date for a previously announced 2-for-1 stock split. Express Scripts is rated A (above average) . . . GameStop ($22; GME) named Chief Operating Officer Paul Raines to succeed CEO Dan DeMatteo, who will become executive chairman. GameStop is a Buy.

Oil spill has energy sector slipping

In the wake of BP’s ($37; BP) latest failed effort to stop the flow of oil from a ruptured well in the Gulf of Mexico, the company has moved on to yet another strategy. Energy stocks of all stripes plunged on the news of BP’s inability to plug the well with drilling mud, and volatility will probably continue until the leak is fixed.

This time, BP is trying to shear off a damaged pipe, hopefully allowing the company to place a dome atop the clean break. BP successfully made one cut, but a blade got stuck during a second cut, and the success of the efforts was not apparent at press time. If the risky plan does not work, it could increase the flow of oil. An estimated 12,000 to 19,000 barrels per day are already befouling the gulf, and after more than 40 days of leakage, this spill has probably already surpassed the size of the Exxon Valdez spill in 1989.

BP’s costs related to the accident have already neared $1 billion, and with oil spotted just nine miles off the Florida coast, the total liability will certainly be much higher — as much as $40 billion, according to one estimate. Anadarko Petroleum ($42; APC), which owns 25% of the well, may be on the hook for a portion of those costs. President Obama said he would make sure BP pays for every cent of the containment and cleanup efforts, and the U.S. has launched a criminal investigation of the spill.

Obama issued a six-month moratorium on new U.S. drilling permits for all but shallow-water operations. He also ordered the suspension of work on 33 exploratory deepwater wells in the Gulf of Mexico until they conform to new safety rules.

While additional regulation of offshore drillers is likely, the long-term effects of the spill — assuming BP eventually stops the flow of oil — are impossible to quantify. U.S. demand for oil is unlikely to decline, at least in the near term. Contract driller Transocean ($50; RIG) — operator of the rig that exploded and sank when gas from the well came up the drilling pipe — said it does not expect a decline in long-term demand for drilling rigs in U.S. waters. However, stiffer regulation is likely to raise costs for oil drillers in coming years. Insurer W.R. Berkley ($27; WRB) has already raised premiums for deepwater rigs by 40%.

Transocean says it has enough cash to meet its near-term obligations and that its contract calls for BP to bear the costs of the disaster, although lawsuits are likely to hit everyone remotely connected with the oil spill. Transocean shares have fallen 45% since the accident. Oceaneering International ($40; OII), which had nothing to do with the spill, has seen its stock fall 39%, and many other energy stocks have suffered steep declines.

In related news, Transocean still plans to pay its special dividend of $3.11 per share (declared months before the accident and slated to be paid in four quarterly installments) but will suspend stock buybacks. Transocean and Oceaneering are rated Long-Term Buy. BP is rated B (average). Anadarko is rated C (below average).

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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