Portfolio Review

8/2/2010


June-quarter earnings

In the June quarter, Aflac’s ($51; AFL) operating earnings rose 13% to $1.35 per share excluding after-tax realized investment losses of $0.12, topping the consensus by $0.02. The company realized investment losses of $0.53 per share in the year-ago quarter. Revenue of $4.98 billion, up 15%, reflected growth in both the Japan and U.S. businesses. The insurer gave September-quarter profit guidance that fell in line with Wall Street forecasts. Aflac is a Focus List Buy and a Long-Term Buy.


Excluding special items, AmerisourceBergen’s ($29; ABC) profits jumped 24% to $0.52 per share, exceeding the consensus by $0.03. Amerisource, a drug wholesaler, said revenue rose 7% to $19.60 billion, also ahead of Wall Street expectations. However, the shares tumbled on management’s September-quarter guidance, which projects per-share profits of $0.44 to $0.48, versus the $0.48 consensus. Amerisource expects profit growth of 28% to 30% in fiscal 2010 ending September, and Wall Street projections for 9% growth in fiscal 2011 seem unduly low. Amerisource is a Focus List Buy and a Long-Term Buy.


BMC Software’s ($38; BMC) profits increased 5% to $0.62 per share excluding special items in the June quarter, $0.02 short of the consensus estimate. Revenue advanced 2% to $461 million on growth in all business segments. Bookings surged 14% to $443 million. BMC Software is a Focus List Buy and a Long-Term Buy.


Comcast ($19; CMCSa) earned $0.33 per share excluding items, a penny above the consensus but flat with year-ago results. However, revenue beat Wall Street’s forecast, rising 6%. The cable unit, which accounted for 95% of the quarter’s sales, managed revenue growth of 5%, helped by 477,000 net subscriber adds. Comcast is a Focus List Buy and a Long-Term Buy.


Newmont Mining ($56; NEM) grew profits 79% to $0.77 per share excluding special items, but still missed the consensus by $0.07. Profits were pressured by lower realized copper prices and higher operating costs in the Boddington mine in Australia. Sales advanced 34% to $2.15 billion. In addition, the company hiked its quarterly dividend 50% to $0.15 per share, payable Sept. 29. Newmont is a Focus List Buy and a Long-Term Buy.


CVS Caremark’s ($31; CVS) profits were flat at $0.65 per share excluding special items, $0.03 short of the consensus. Excluding accruals for legal settlements, profits matched expectations. Revenue slipped more than 3% to $24.01 billion, as 4% growth at the retail unit failed to offset a 9% slide at the pharmacy-benefit-management (PBM) business. Anticipating weakness in the retail-pharmacy sector, CVS cut its 2010 guidance for same-store sales and per-share profits. However, the PBM unit said it signed Aetna ($28; AET) to a long-term contract that should entail roughly $9.5 billion a year in drug spending, helping to drive CVS shares higher. For now, CVS Caremark is a Focus List Buy and a Long-Term Buy.


Hospira ($53; HSP) said per-share profits advanced 18% to $0.86 excluding special items, exceeding Wall Street’s estimate by $0.07. Despite the impressive earnings, management reiterated full-year profit guidance below the consensus, in effect warning of lower-than-expected profits in the second half of the year and driving the shares lower. Sales edged up 1%. While the news is disappointing, Hospira seems well-positioned in the market and for now remains a Focus List Buy and a Long-Term Buy.


In the June quarter, Travelers ($51; TRV) said its operating income climbed 11% to $1.39 per share, $0.10 below the consensus estimate. Results were dampened by $239 million higher catastrophe losses caused by flooding and severe wind and hail storms. Consequently, Travelers trimmed the upper end of its 2010 guidance by $0.10 per share to $5.45, well below the $5.74 consensus at the time of the announcement. The profit guidance sounds conservative. Travelers, trading at nine times the high end of its 2010 profit guidance, remains a Focus List Buy and a Long-Term Buy.


Rogers Communications ($36; RCI) reported per-share earnings of C$0.80 excluding special items, up 23% and above analyst expectations. Paced by the wireless business, revenue advanced 5% to C$3.03 billion. Rising usage of smart phones contributed to 119,000 net subscriber additions. Rogers is a Focus List Buy and a Long-Term Buy.


Varian Medical Systems’ ($56; VAR) profits from continuing operations rose 9% to $0.74 per share, exceeding the consensus by $0.09. Revenue increased 13% to $578 million, while net orders jumped 14% and the order backlog rose 7% to $2.1 billion. However, Varian’s earnings projection for the September quarter fell short of analyst expectations. Varian is a Focus List Buy and a Long-Term Buy.


Laboratory Corp. of America ($75; LH) grew per-share profits 12% to $1.46, topping the consensus by $0.04. Revenue rose 4%. LabCorp raised the midpoint of its 2010 guidance for both sales and per-share earnings. LabCorp is a Buy and a Long-Term Buy.


Microsoft ($26; MSFT) earned $0.51 per share, up 50% and a nickel above the consensus. Revenue surged 22% on growth from the Windows 7 operating system, Xbox video-game system, and Bing search engine. Microsoft is a Long-Term Buy.

Corporate roundup

The European Commission is probing IBM ($129; IBM) for allegedly abusing its market position to squeeze out mainframe-software competitors. A separate investigation will determine if IBM discriminated against firms that provide mainframe maintenance. The news cast a shadow over IBM’s launch of a new generation of mainframe computers in July. IBM is a Focus List Buy and a Long-Term Buy . . . Mexican regulators will review results of a spectrum auction meant to promote wireless competition in the country. The president of Mexico’s Federal Telecommunications Commission said the auction’s goals appeared to have been met when NII Holdings ($38; NIHD) and Grupo Televisa ($19; TV) placed a joint bid for 30 megahertz of national spectrum. Because of rules limiting how much spectrum companies can own, NII and Televisia were the only qualified bidders for the spectrum, and they acquired it at a price 96% below that paid by rivals for a similar prize. NII Holdings is a Focus List Buy . . . Seeking to grow its online business, GameStop ($20; GME) agreed to purchase Kongregate, a social gaming site with 10 million users. Terms of the deal were not released. GameStop is a Buy . . . BP ($38; BP) took a $32.2 billion pretax charge in the June quarter to cover costs from the oil spill in the Gulf of Mexico. To fortify itself against future liabilities, BP plans to sell $30 billion of assets — more than one-tenth of total company assets — in the next 18 months. In related news, Robert Dudley will succeed Tony Hayward as CEO on Oct. 1. BP is rated B (average) . . . FedEx ($82; FDX), citing higher shipping volume, raised its profit guidance for the August quarter. The shipping giant is considered by many as a proxy for the economy. FedEx is rated C (below average) . . . General Motors reportedly plans in August to file its registration for an initial public offering. The U.S. Treasury owns a 61% stake in GM, which declared bankruptcy in 2009.

Dividend hikes

General Electric ($16; GE) raised its quarterly dividend 20% to $0.12 per share, payable Oct. 25. In Feb. 2009, the conglomerate slashed its dividend 68% to shore up its balance sheet. GE is rated B (average) . . . Kellogg ($52; K) boosted its quarterly dividend 8% to $0.405, payable Sep. 15. Kellogg is rated B (average) . . . Norfolk Southern ($57; NSC) raised its quarterly dividend 6% to $0.36 per share, payable Sep. 10. Norfolk Southern is rated B (average).

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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