Portfolio Review

10/4/2010


Altera added to buy lists

Altera ($30; ALTR) is being initiated as a Buy and a Long-Term Buy. The company supplies semiconductors that manipulate digital signals for electronic devices. Despite concerns about weakening demand for microprocessors, Altera raised its guidance for September-quarter revenue and now projects year-over-year growth of 80% to 87% on broad strength in all four of its end markets, particularly communications. Altera has reported accelerating growth of sales, operating profits, and free cash flow in each of the last three quarters.

The stock earns an Overall score of 99, a Reranked Overall score of 99, and a 12-Factor Sector score of 98. The 12-Factor Sector and Reranked Overall scores measure stocks relative to other stocks in their sector, while the traditional Quadrix® Overall score ranks stocks relative to our research universe of more than 4,000 companies.

Altera shares are not a screaming bargain at 13 times expected 2010 earnings — in line with the semiconductor group. However, Altera trades at a big discount to historical norms as measured by several valuation ratios.

RIM unveils new PlayBook

Research In Motion ($47; RIMM) has unveiled PlayBook, its long-awaited tablet computer. RIM did not announce a price for the device but said it would hit U.S. stores in early 2011, too late for the holiday selling season. The PlayBook uses a new operating system designed by QNX Software Systems, acquired by RIM earlier this year. An important distinction from Apple’s ($287; AAPL) iPad, the PlayBook will support Adobe Systems’ ($26; ADBE) Flash, frequently used for Web videos and applications. Following the news, at least one analyst speculated Apple will introduce a second-generation iPad by June 2011.

Launched in April, the iPad generated $2.17 billion in sales during the June quarter, 12% of Apple’s total revenue. Not to be outdone, Hewlett-Packard ($42; HPQ) said it will package its tablet PC with the Photosmart eStation printer for $399. H-P’s device is equipped with Wi-Fi but features a smaller screen and shorter battery life than the iPad.

In other news, the launch of Apple’s iPhone 4 in China drew 200,000 preorders in its first weekend. That’s twice the number its predecessor sold in China in its first six weeks last year. Research In Motion and H-P are rated Buy and Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy.

J.P. Morgan may bill FDIC

In a series of letters to the Federal Deposit Insurance Corp. (FDIC), J.P. Morgan Chase ($39; JPM) warned that it could seek more than $6 billion in claims related to the banking assets of Washington Mutual purchased from the regulator in 2008 for $1.88 billion. The letters came after Deutsche Bank National Trust sued J.P. Morgan for up to $10 billion over the poor performance of WaMu mortgages.

It’s unclear whether J.P. Morgan or the FDIC would be responsible if the courts find in favor of the trust. For the September quarter, the bank is projected to post profits of $0.88 per share, up 7%, despite a 14% decline in revenue. J.P. Morgan is a Buy and a Long-Term Buy.

Technology update

Oracle ($27; ORCL) CEO Larry Ellison said his company expects to buy semiconductor makers to extend its push into hardware. Oracle also targets makers of industry-specific software, which should help differentiate Oracle from rival SAP ($50; SAP). Oracle has completed more than 65 acquisitions in the last five years. Oracle is a Long-Term Buy . . . Microsoft ($25; MSFT) leveraged its prized AAA credit rating in issuing $4.75 billion of debt maturing in three, five, 10, or 30 years. The three-year bonds pay a coupon rate of 0.875%, the lowest rate since at least 1995, according to Dealogic. Microsoft is a Buy and a Long-Term Buy.

Corporate roundup

As part of Comcast’s ($18; CMCSa) deal to acquire a majority stake in NBC Universal, French conglomerate Vivendi sold an 8% stake in NBC to General Electric ($16; GE) for $2 billion. Vivendi will part with its remaining 12% interest for $3.8 billion once GE completes its transaction with Comcast. Comcast is a Focus List Buy and a Long-Term Buy.

Abbott Laboratories ($52; ABT) agreed to pay at least $450 million to Reata Pharmaceuticals for the international rights to develop and market an experimental kidney-disease drug. As part of the deal, Abbott will also acquire a minority equity stake in the closely held company. The drug, called bardoxolone, could begin late-stage clinical trials by early 2011. In other news, Abbott’s Xience V stent proved more effective at preventing heart attacks than a similar product sold by Boston Scientific ($6; BSX). In a study sponsored by Abbott, patients with the Xience V stent were 30% less likely to suffer a heart attack or other major stent failure. Abbott is a Buy and a Long-Term Buy.

Walgreen’s ($34; WAG) stock jumped more than 11% after reporting August-quarter profits of $0.54 per share excluding costs related to acquisitions and restructuring, up 15% and $0.10 ahead of the consensus. The drugstore chain’s revenue climbed 7%, while same-store sales rose 1.5%. Walgreen is rated A (above average).

Dividend and share news

AmerisourceBergen ($31; ABC) plans to launch a $500 million share-repurchase program after it completes a current program with roughly $98 million remaining. As of Sep. 23, Amerisource, a distributor of pharmaceuticals and other medical products, had spent about $470 million on buybacks since the start of October 2009. Amerisource is a Buy and a Long-Term Buy . . . Rogers Communications ($38; RCI) agreed to repurchase about $103 million of its Class B nonvoting shares, representing about 0.5% of outstanding shares. The average purchase price was $35.82 per share, a 5% discount to the common stock’s price at the time of the transaction. Rogers is a Focus List Buy and a Long-Term Buy . . . CSX ($56; CSX) raised its quarterly dividend 8% to $0.26 per share, payable Dec. 15 and marking the railroad company’s eighth hike in the past five years. CSX is a Focus List Buy and Long-Term Buy . . . Lockheed Martin ($72; LMT) hiked its quarterly dividend 19% to $0.75 per share, payable Dec. 31, the eighth consecutive annual increase. Lockheed Martin is rated B (average) . . . McDonald’s ($75; MCD) raised its quarterly dividend 11% to $0.61, payable Dec. 15, the 34th consecutive year it has boosted the payout. McDonald’s is rated A (above average) . . . Motorola ($9; MOT) will ask shareholders to approve a reverse stock split, most likely on the portion of the company left after the planned spin-off of Motorola Mobility, the phone and TV set-top box businesses. Motorola is rated C (below average).

  RANK CHANGES

Altera ($30; ALTR) is being initiated as a Buy and a Long-Term Buy. Vanguard Short-Term Investment-Grade ($10.88; VFSTX) now represents 22.0% of the Buy List and 26.4% of the Long-Term Buy List.


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