Portfolio Review

10/18/2010


BMC rises on merger rumors

BMC Software ($43; BMC) shares surged on a report that the company has put itself up for sale. Its $7.83 billion market value could be easily absorbed by a large tech company such as Oracle ($28; ORCL) or SAP ($52; SAP). BMC did not comment on the report.

The company, which makes business-management software and products that run data centers, looks attractive in its own right. Recurring revenue from maintenance contracts fuels a stable profit stream, and BMC’s balance sheet features net cash of $1.05 billion, or $5.73 per share. BMC remains a Buy and a Long-Term Buy.

Vanguard cuts fees

Vanguard has reduced the minimum investment required for its Admiral class of shares to $10,000 for select index funds and $50,000 for actively managed funds. The shares previously required an investment of $100,000. Importantly, the move translates to much lower expenses for many shareholders.

Admiral funds follow the same investment strategy as Vanguard’s investor-class shares, but with expense ratios roughly 18% to 50% below those of sibling funds. For example, investing $50,000 in longtime favorite Vanguard Short-Term Investment-Grade ($10.90; VFSTX), which requires a $3,000 minimum investment and charges a 0.24% expense ratio, would cost $120 per year. In contrast, the same investment in Vanguard Short-Term Investment-Grade Admiral ($10.90; VFSUX) would cost $60 because the fund charges only 0.12%.

Earnings update

CSX’s ($57; CSX) September-quarter profits jumped 48% to $1.08 per share, exceeding the consensus estimate by $0.04. Revenue climbed 16% to $2.67 billion, driven by a 54% increase from automotive merchandise and 23% from coal. Volumes rose 10%. CSX said it would buy back $646 million in shares by the end of the March quarter to complete a $3 billion stock-repurchase program. CSX is a Focus List Buy and Long-Term Buy . . . Intel ($20; INTC) earned $0.52 per share in the September quarter, up 58% and $0.02 above the consensus. Revenue advanced 18% to $11.10 billion, a result of solid corporate demand and growth of at least 20% in every geographic region except Europe. Intel’s December-quarter revenue target, $11.4 billion, implies 8% growth and exceeds the consensus estimate of $11.33 billion. Intel is a Buy and a Long-Term Buy . . . J.P. Morgan Chase ($40; JPM) earned $1.01 per share in the September quarter, up 23% and $0.13 ahead of the consensus. Revenue slipped 11%, hurt by weakness in the investment-banking and credit-card units. The bank’s lower revenue was offset by a smaller provision for credit-card losses — just $1.63 billion versus $4.97 billion in the year-earlier period. As concerns regarding loans are lifting, new storm clouds gather. J.P. Morgan and Bank of America ($14; BAC) could face a flurry of class-action lawsuits and fines over their foreclosure practices. Attorneys general in all 50 states have formed a joint investigation into the validity of signatures and documents used in foreclosure proceedings. J.P. Morgan is a Buy and a Long-Term Buy. Bank of America is rated C (below average) . . . In the September quarter, PepsiCo ($66; PEP) grew profits 13% to $1.22 per share excluding special items, in line with the consensus estimate. Citing tough economic conditions in developed countries, the company trimmed the top end of its per-share-earnings estimate for 2010. PepsiCo is rated A (above average).

Corporate roundup

A ruling made by a San Francisco federal court poses yet another threat to GameStop’s ($20; GME) used-videogame business. The licensing agreements that customers must often accept before installing software bars them from reselling the programs, the court found. The judgment diverges from legal precedent that holds the first sale doctrine, which lets buyers resell products, supersedes licensing agreements. If upheld, the ruling could not only harm GameStop but also eBay ($24; EBAY) and potentially any other company or person selling secondhand products. GameStop is a Buy. eBay is rated B (average).


Pfizer ($17; PFE) plans to pay $3.6 billion in cash to acquire King Pharmaceuticals ($14; KG), best known for its portfolio of painkillers. Pfizer is rated B (average).

Tech review

Microsoft ($25; MSFT) unveiled a lineup of nine smart phones that will run on its Windows operating system. A $100 million advertising blitz will accompany the phones, which incorporate popular Microsoft products and services such as Windows Office, Xbox Live gaming, and the Bing search engine. Sold by AT&T ($28; T) and T-Mobile, the phones will hit Europe Oct. 21 and reach U.S. stores Nov. 8. Early reviews are positive for what represents a critical launch for Microsoft. Microsoft is a Buy and a Long-Term Buy. AT&T is rated B (average).


Motorola ($8; MOT) filed a trade complaint and three lawsuits against Apple ($299; AAPL), claiming the iPad, iPhone, and MacBook computers violate 18 of its patents. Apple is also fighting a jury verdict that ordered the company to pay $626 million to Mirror Worlds in a patent lawsuit over how documents are digitally displayed. Apple is a Focus List Buy and a Long-Term Buy. Motorola is rated C (below average).


The United Arab Emirates said Research In Motion’s ($49; RIMM) BlackBerry smart phone now complies with local laws, averting a threatened Oct. 11 ban. The country has about 500,000 BlackBerry users. India gave RIM until Jan. 31 to devise a solution that will let the country monitor all BlackBerry services, including encrypted e-mails. The government currently has manual access to BlackBerry instant messages. Research In Motion is a Buy and a Long-Term Buy.

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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