Portfolio Review

9/27/2010


RIM delivers strong results

Heading into Research In Motion’s ($47; RIMM) release of August-quarter results, short interest in the stock had doubled since mid-April on concerns that the Blackberry maker was ceding its dominant smart-phone position to rivals Apple ($284; AAPL) and Google ($513; GOOG). When investors sell short, they sell borrowed shares, planning to purchase them back later at lower prices. As such, high short interest reflects a lack of confidence in a company.

RIM bucked that negative sentiment, as August-quarter earnings grew 42% to $1.46 per share, topping the consensus by $0.11. Revenue, up 31% to $4.62 billion, also beat the consensus. While analysts warned of weak initial sales for Torch, RIM’s latest smart phone, management described the launch as the most successful in the company’s history. For the November quarter, RIM projected revenue and profits well ahead of consensus estimates.

The news was not entirely encouraging. RIM added 4.5 million subscribers in the quarter, below the 4.9 million added in the May quarter and short of company targets. However, RIM said subscriber additions strengthened toward the end of the August quarter and into the November quarter. And while fears of slowing momentum in the U.S. are legitimate, RIM continues to deliver strong sales growth in Latin America and Asia. For the quarter, 52% of the revenue came from outside of the U.S.

RIM’s stock rallied modestly on the earnings news. But the disagreement among analysts is worth noting. Estimates for RIM’s per-share profits in fiscal 2011 ending February range from $4.87 to $6.43. That wide range of sentiment reflects a lot of uncertainty about RIM’s prospects, as well as a lot of potential for outperformance. Key to future results are new products supposedly on the way. According to published reports, RIM could soon introduce a tablet computer powered by a new operating system. RIM is also reportedly developing a new smart phone that features a touchscreen and a faster processor than the one used in Torch. Research In Motion remains a Buy and a Long-Term Buy.

Technology roundup

In the August quarter, Oracle ($27; ORCL) earned $0.42 per share excluding special items, up 38% and $0.05 above Wall Street’s forecast. Revenue jumped 48% to $7.50 billion, versus the $7.27 billion consensus, lifted by the Sun Microsystems acquisition. Sales of new software licenses rose 25%. Oracle said it plans to boost spending on research by about 20% to $4 billion and launch more combined hardware-software systems in the year ending May 2011. Oracle’s stock surged to a nine-year high on the news. Oracle is a Long-Term Buy.


Microsoft ($25; MSFT) raised its quarterly dividend 23% to $0.16 per share, payable Dec. 9, and received approval to sell up to $6 billion of new debt. The shares rose when the company first hinted earlier this month of plans to borrow and boost the dividend but gave back some of their gains after the official announcement, suggesting that Wall Street expected a richer dividend hike from Microsoft, which didn’t raise its payout last year. With the dividend increase, Microsoft yields 2.5%, well above the average of 2.0% for dividend-paying technology stocks in the S&P 500 Index. Microsoft is a Buy and a Long-Term Buy.


Intel ($19; INTC) reportedly slashed prices for some microprocessors by 50% and for certain chipsets by 15%. The moves come as Intel seeks to lower inventory and stimulate demand. Intel, yielding 3.3%, is a Buy and a Long-Term Buy.


Texas Instruments ($26; TXN) raised its quarterly dividend 8% to $0.13 per share, payable Nov. 22, the 7th consecutive year it has increased the payout. The company also approved a new $7.5 billion stock-repurchase program, on top of $1.3 billion remaining on an existing program at the end of June. Together, the two programs allow for the buyback of nearly 30% of the company’s shares. Texas Instruments has reduced its share count by 9% over the last eight quarters and 31% over the last 27 quarters, and more buybacks seem likely in the year ahead. Separately, Texas Instruments tightened its September-quarter forecast, with its most conservative targets projecting growth of 26% for revenue and 57% for per-share earnings. Texas Instruments is a Long-Term Buy.


IBM ($132; IBM) made two moves to expand its analytics business, which analyzes data to help clients identify trends. First, IBM agreed to purchase data specialist Netezza ($28; NZ) for $1.78 billion in cash. IBM’s offer translates to $27 per share, a 33% premium to the stock’s average closing price in the 20 days before the announcement. Netezza shares now trade above IBM’s bid in anticipation of a competing offer. IBM also said it would acquire OpenPages, a privately held company that develops risk-management and compliance systems, for an undisclosed sum. IBM is a Focus List Buy and a Long-Term Buy.

Corporate report

Shares of GameStop ($19; GME) bounced after the video-game retailer said it plans to repurchase $300 million of stock and retire $200 million of debt. GameStop has bought back 8% of its stock in the last two quarters. The company is preparing for a battle as rivals jockey to attract holiday shoppers. Unlike last year, GameStop is actively adjusting prices to compete with promotions offered at Wal-Mart Stores ($54; WMT) and other retailers. GameStop is a Buy. Wal-Mart is a Long-Term Buy.


An FDA panel was split on whether to force Abbott Laboratories ($52; ABT) to withdraw Meridia from the market on concerns that the weight-loss drug can increase the risk of heart problems and strokes. Abbott expects the drug, approved in 1997, to generate less than $100 million in revenue this year, accounting for about 0.3% of company sales. In other news, Abbott reiterated its 2010 profit target, projecting growth of 11% to 12%, in line with the consensus. Also, Abbott is voluntarily recalling some versions of its baby formula Similac because of possible insect contamination. Abbott Labs is a Buy and a Long-Term Buy.


Colleen A. Goggins, head of Johnson & Johnson’s ($62; JNJ) troubled consumer-products unit, resigned just hours after U.S. lawmakers said they would widen their probe into repeated recalls of Tylenol and other consumer medications. Separately, J&J is in advanced talks to buy the 82% of Dutch vaccine maker Crucell ($33; CRXL) it doesn’t already own. J&J has reportedly offered $2.3 billion, a number dismissed by at least one major shareholder as too low. J&J is rated B (average). 

August-quarter earnings

Shares of Adobe Systems ($27; ADBE) plunged 19% after the company issued a cautious outlook for the November quarter. Adobe said earnings grew 54% to $0.54 per share excluding special items in the August quarter, and revenue rose 42%. Adobe Systems is rated C (below average).


Best Buy ($38; BBY) earned $0.60 per share, up 62% and $0.16 ahead of the consensus. Revenue rose 3% to $11.34 billion, though same-store sales were roughly flat. The electronics retailer raised its sales and profit guidance for fiscal 2011 ending February, projecting sales growth of 5% and per-share-profit growth of at least 13%. Best Buy is rated A (above average).


FedEx’s ($84; FDX) profits surged 107% to $1.20 per share but missed the consensus estimate by $0.01.  Revenue grew 18%. The shipping giant projected per-share-profits of $4.80 to $5.25 for fiscal 2011 ending May, up from previous guidance but disappointing relative to the $5.19 consensus at the time of the announcement. FedEx is rated B (average).

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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