Portfolio Review

8/31/2010


H-P outbids Dell

In its search for a new CEO, Hewlett-Packard ($38; HPQ) said it will consider both internal and external candidates. But the company vowed that regardless of who it hired to lead, H-P would continue a strategy of transforming itself into a one-stop technology provider. That strategy sometimes drives H-P to make acquisitions. In an unexpected move, H-P offered $1.6 billion in cash, or $24 per share, to purchase 3PAR ($27; PAR) a data-storage company.

That bid represents a 39% premium to the $1.15 billion that Dell had agreed to pay a week earlier. Shares of 3PAR rose above H-P’s bid price following reports that Dell is considering a counterbid. Even the lowest bid price seems rich for the unprofitable company. But both suitors hold more than $12 billion in cash, and a bidding war could break out.

H-P has been full of surprises in recent weeks. Fortunately, its July-quarter performance, preannounced in early August, wasn’t one of them. As expected, per-share earnings increased 17% on an 11% revenue gain, fueled by double-digit growth in both servers and personal computers. Separately, Dell ($12; DELL) said July-quarter earnings rose 10% to $0.32, while revenue advanced 22% to $15.53 billion, both topping consensus estimates. Dell also jumped into the U.S. smart-phone market by introducing a model that runs on Google’s ($451; GOOG) Android operating system. H-P is a Buy and Long-Term Buy. Dell and Google are rated B (average).

Technology review

As India tries to gain access to e-mails sent from BlackBerry mobile devices, Research In Motion ($47; RIMM) seeks new ways to support its smart phone and broaden its business. First, RIM has purchased Cellmania, which designs the software that runs cell-phone software stores. Its clients include Sprint Nextel ($4; S) and T-Mobile. RIM is also looking to buy a mobile-advertising network. Talks to acquire one such company, Millennial Media, stalled over the price; Millennial valued itself at up to $500 million — too steep for RIM. Finally, RIM is reportedly developing a tablet, possibly called the BlackPad, to compete against Apple’s ($240; AAPL) iPad. Research In Motion is a Buy and a Long-Term Buy. Apple is a Long-Term Buy. Sprint Nextel is rated C (below average).


Intel ($18; INTC) agreed to pay $7.68 billion in cash for McAfee ($47; MFE), which ranks second in the antivirus-software market with an estimated 22% share. The offer represents a 60% premium to McAfee’s stock price before the announcement and would be the biggest in Intel’s history. Intel hopes to tap an emerging market, security for mobile devices. But Intel, a maker of semiconductors, could also be stretching beyond its expertise. The deal was widely panned by analysts, and we are not fond of it either. However, it’s hard to find fault with Intel’s valuation of 11 times trailing earnings, a 40% discount to the three-year average P/E ratio. Earning a Value score of 90, Intel is a Focus List Buy and a Long-Term Buy.

July-quarter earnings

Ross Stores ($50; ROST) said quarterly earnings rose 30% to $1.07 per share, matching the consensus estimate. Same-store sales rose 4%, while total revenue grew 8% to $1.91 billion. For the October quarter, Ross sees same-store sales rising 1% to 2%, on top of an 8% gain in the year-ago period. The company expects per-share profits of $4.18 to $4.27 in fiscal 2011 ending January, representing 18% to 21% growth. Ross is a Focus List Buy and a Long-Term Buy.


Shares of Medtronic ($31; MDT) plunged when the medical-device maker reported disappointing July-quarter results and cut its outlook for fiscal 2011 ending April. Per-share earnings rose 1% to $0.80 excluding special items, while revenue slipped 4%, although it rose 2% at constant currency and excluding an extra week in the year-earlier quarter. Both top- and bottom-line results missed consensus estimates. Medtronic blamed the poor quarter on weak global demand and pricing pressure. Other medical-device stocks also slumped on the news. Medtronic is being downgraded to B (average).

Corporate roundup

Newmont Mining ($57; NEM) said shareholders of its Indonesian unit approved plans to sell a 10% stake in the business through an initial stock offering. The move would list the stock on Indonesia’s stock exchange, where stocks are trading near record highs. The Indonesian unit has said it needs $3 billion to develop a copper reserve in the country and is also looking to secure $800 million in loans. Newmont is a Focus List Buy and a Long-Term Buy.


Government-sponsored mortgage-finance companies Fannie Mae and Freddie Mac are looking to recover losses from loans that failed to meet underwriting requirements. That could leave the four biggest U.S. banks — J.P. Morgan Chase ($36; JPM), Bank of America ($13; BAC), Citigroup ($4; C), and Wells Fargo ($24; WFC) — on the hook for billions of dollars. Fitch Ratings estimated the banks’ losses at between $17 billion and $180 billion, depending on the amount of loans pushed back to the banks and how much of the assets’ value the banks can recover. Under the most likely scenario, Fitch said the banks will be forced to take back 35% of the loans, absorbing a $27 billion loss. J.P. Morgan is a Buy and Long-Term Buy. Wells Fargo is rated B (average). Bank of America and Citigroup are rated C (below average).


Travelers ($49; TRV) was awarded more than $262 million in an asbestos-coverage reinsurance case that stretched back 17 years. Travelers is a Focus List Buy and a Long-Term Buy.

Eye on television

Regulators heard final arguments regarding Comcast’s ($17; CMCSa) proposal to acquire a 51% stake of NBC Universal from General Electric ($15; GE). Consumer advocates want an outright rejection of the deal, while rivals seek conditions that would ensure their access to NBC networks and programming. Eyeing the blossoming market of online video, DirecTV ($37; DTV) wants to keep Comcast from blocking access to NBC’s TV shows on the Web. Comcast and NBC remain confident that the deal will close by the end of the year.

The pay-TV industry lost subscribers in the June quarter, the first such quarterly decline, according to research firm SNL Kagan. Reasons cited for the downturn include the prolonged economic slump and growth in online content. Of course, not all companies experienced declines. Comcast and DirecTV reported net U.S. subscriber additions of 477,000 and 100,000, respectively, in the June quarter. Both Comcast and DirecTV are rated Focus List Buy and Long-Term Buy. General Electric is rated B (average).

Health-care update

Stryker ($43; SYK) agreed to pay $150 million in cash to purchase Gaymar Industries, which makes therapeutic mattresses and temperature-management products. Gaymar generated sales of $77 million last year. Stryker is a Buy and a Long-Term Buy . . . Hospira ($51; HSP) announced that both its chief executive officer and chief operating officer plan to retire. The CEO will stay on as executive chairman after his successor is hired. Hospira is rated B (average) . . . Johnson & Johnson ($58; JNJ) recalled contact lenses in Europe and Asia. It also received a warning letter from U.S. regulators over the marketing of two orthopedic products. J&J is rated B (average) . . . Pfizer ($16; PFE) said cancer drug Sutent failed, in a late-stage trial testing its efficacy against lung cancer, to meet its primary goal of improving survival. Sutent is approved to treat kidney cancer and some gastrointestinal tumors. Pfizer is rated B (average).

  RANK CHANGES

Medtronic ($31; MDT) was lowered to a B rating from an A rating.


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