Portfolio Review

7/19/2010


Retail sputters in sultry June

Deep discounts and favorable weather failed to revive the sluggish retail sector in June. Based on an index of 28 retail stocks tracked by Thompson Reuters, retailers reported 3.1% higher same-store sales, following a 4.9% decline a year earlier, but more than half of the retailers missed analyst forecasts. Hit especially hard were discounters, which, unlike many other retailers, face fairly strong comparisons from 2009. Shares of Ross Stores ($54; ROST) fell 2% while TJX ($43; TJX) shed 5%, even though both companies reported sales growth and boosted profit guidance.

Ross Stores said same-store sales rose 5%, compared to the 5.1% consensus. Total sales rose 9% to $725 million. The discounter expects same-store-sales growth of 3% to 4% in July. For the July quarter, Ross raised its per-share-earnings target range. The midpoint of $1.01, representing growth of 23%, was a penny above the consensus at the time of the announcement.

TJX grew same-store sales 3%, short of Wall Street’s 4.2% target. Total revenue advanced 7% to $2.0 billion. TJX raised its profit guidance for the July quarter and full-year, projecting growth of at least 14%, though the new targets were slightly below the consensus. Ross is a Focus List Buy and a Long-Term Buy. TJX is a Buy and a Long-Term Buy.

Technology review

Hewlett-Packard ($47; HPQ) won a computer-networking contract with the U.S. Navy worth an initial $27 million. If all options are exercised, the deal could ultimately reach about $3.4 billion. H-P is a Buy and Long-Term Buy.


NTP, a wireless patent house, has sued Apple ($252; AAPL), Google ($489; GOOG), Motorola ($7; MOT), and Microsoft ($25; MSFT) over the wireless e-mail technology used in smart phones. NTP could seek royalties as high as 5% of the average selling price of the phones. In 2006, NTP plucked $612 million from Research In Motion ($56; RIMM) following a similar complaint. NTP’s patents are set to expire in 2012. Apple is a Long-Term Buy. Research In Motion is a Buy and a Long-Term Buy. Microsoft is a Long-Term Buy. Google is rated A (above average). Motorola is rated C (below average).


Apple and AT&T ($25; T) also face a class-action lawsuit that alleges antitrust violations. The suit centers on AT&T’s contract with Apple as the exclusive carrier of the iPhone. It also takes aim at Apple’s control over applications that can be installed on the popular wireless phones. Apple is a Long-Term Buy. AT&T is rated B (average).

Energy update

Chevron ($73; CVX) expects to report stronger earnings in the June quarter than it delivered in the March quarter, helped by strength in its downstream business. The consensus projects June-quarter per-share profits of $2.18, versus $2.36 in the March quarter. Chevron is rated A (above average).


Interior Department Secretary Ken Salazar issued a new moratorium that would permit shallow-water drilling but will halt most operations in deeper waters until November. The new ban will focus on the drillers’ equipment and emergency plans rather than the depth of their wells. A federal judge struck down an earlier, broader moratorium.


As tar balls washed ashore in Texas, BP ($37; BP) installed a new well cap and expressed some hope that it can seal the ruptured well in the Gulf of Mexico. Costs linked to the Gulf of Mexico oil spill have soared to $3.5 billion, and BP is not getting much help from its partners. Anadarko Petroleum ($48; APC), which owns 25% of the well, refused to pay a $272 million bill sent by BP, blaming the problems on the British oil giant’s recklessness. Rather than issuing more stock to cover the mounting expenses, BP has discussed selling up to $10 billion in assets to Apache ($87; APA). BP dismissed speculation that it is pursuing a takeover bid from Exxon Mobil ($59; XOM). Anadarko is rated C (below average). Apache, BP, and Exxon are rated B (average).

Corporate roundup

In the June quarter, Alcoa ($11; AA) earned $0.13 per share from continuing operations, $0.02 above the consensus and up from a $0.32 loss in the year-ago quarter. Revenue jumped to $5.19 billion, up 6% from the March quarter and 22% from the year-earlier period. The aluminum company cited broad industrial strength and increased its projection for global aluminum consumption in 2010. Alcoa is rated C (below average).


Bank of America ($16; BAC) said it accidentally misclassified repurchase agreements as sales rather than borrowings over a three-year period from 2007 through 2009. The six transactions were valued at up to $10.7 billion and resulted in Bank of America underreporting its leverage. The bank, with total assets exceeding $2.3 trillion, said the error was immaterial to its financial results. Bank of America is rated C (below average).


Yet again, Johnson & Johnson ($61; JNJ) expanded a recall of its over-the-counter medications, including Tylenol, Benadryl, and Motrin. This marks J&J’s seventh recall in the last year. Separately, J&J agreed to purchase device maker Micrus Endovascular ($23; MEND) for about $480 million in cash. Micrus produces catheters and other treatments designed to treat stroke-related ailments. J&J is a Long-Term Buy. 


The U.S. Food and Drug Administration ordered Baxter International ($44; BAX) to recall all of its Colleague infusion pumps after regulators deemed the company’s prior efforts to correct the devices as insufficient. Baxter must provide a refund or replace about 200,000 drug pumps. Hospira ($59; HSP), which sells competing devices, could benefit from the recall. Baxter is a Long-Term Buy. Hospira is a Focus List Buy and a Long-Term Buy.


Comcast ($19; CMCSa) won approval from the European Union to purchase a majority stake in NBC Universal. Meanwhile, U.S. regulators resumed their review of the deal after receiving amended documentation from Comcast. The deal is expected to face plenty of scrutiny in the U.S. and could come with concessions to limit Comcast’s market power. Comcast is a Focus List and Long-Term Buy.


Lockheed Martin ($76; LMT) won a contract worth up to $5 billion over 10 years to provide logistical support for the U.S. military. Lockheed is rated B (average).


L-3 Communications ($73; LLL) approved the repurchase of up to $1 billion of its shares through the end of 2012. L-3 is rated A (above average).


Walgreen ($29; WAG) boosted its quarterly dividend 27% to $0.175 per share, payable Sep. 11. Walgreen has raised its dividend for 35 straight years. Walgreen is rated A (above average).


eBay ($21; EBAY) faces a $3.8 billion lawsuit for allegedly violating XPRT Ventures’ payment-systems patents. eBay is rated B (average).

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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