Portfolio Review

11/1/2010


Profit review

Aflac ($55; AFL) grew September-quarter profits 14% to $1.43 per share excluding gains and losses on investments and the revaluing of securities, exceeding the consensus estimate by $0.04. Rising 19% to $5.39 billion, Aflac’s revenue also topped expectations. Aflac projected per-share profits of $5.52 to $5.57 for 2010, versus the $5.52 consensus. Aflac is a Focus List Buy and a Long-Term Buy . . . In the September quarter, Baxter International ($51; BAX) posted profits of $1.01 per share, up 3% excluding special items in the year-earlier quarter and $0.04 ahead of the consensus estimate. Revenue increased 3% to $3.22 billion. For full-year 2010, Baxter sees per-share profits of $3.96 to $3.98 excluding special items, versus the consensus of $3.93 at the time of the announcement. Baxter is a Long-Term Buy . . . In the September quarter, Laboratory Corp. of America ($79; LH) grew earnings 20% to $1.47 per share excluding restructuring and other special charges, topping the consensus by $0.07. Revenue advanced 8% to $1.28 billion, helped by 2% higher testing volume and a 6% price increase. LabCorp raised its 2010 guidance for both sales and per-share profits. LabCorp is a Buy and a Long-Term Buy . . . Sigma-Aldrich ($63; SIAL) earned $0.83 per share excluding restructuring and impairment costs in the September quarter, up 19% and $0.10 above the consensus. Management raised its full-year 2010 profit forecast above the consensus estimate. Sigma-Aldrich is a Long-Term Buy . . . Texas Instruments’ ($29; TXN) September-quarter profits jumped 69% to $0.71, edging Wall Street’s forecast by $0.02. Revenue jumped 30%. The company’s sales and profit guidance for the December quarter was in line with analyst projections, and the stock dipped on the news, as Wall Street probably expected more aggressive targets. Texas Instruments is a Long-Term Buy . . . Travelers ($55; TRV) said its operating income increased 12% to $1.81 per share in the September quarter, helped by lower-than-expected catastrophe losses and easily exceeding the consensus estimate of $1.51. The casualty insurer raised its per-share-profit guidance for 2010 and now projects a decline of 6% to 9%. Travelers is a Focus List Buy and a Long-Term Buy . . . In the September quarter, Exelon ($41; EXC) earned $1.11 per share excluding special items, up 16% but a penny short of the consensus as operating revenue surged 22% to $5.29 billion. Exelon, rated A (above average), is a component of our Top 15 Utilities portfolio . . . Freeport-McMoRan ($98; FCX) grew September-quarter profits 20% to $2.49, exceeding the consensus by $0.24. Sales jumped 24%, lifted by increased production and higher metals prices. In other news, Freeport hiked its quarterly dividend 67% to $0.50 per share, payable in February. Freeport is rated A (above average).

Broadcasting update

In the September quarter, Comcast ($20; CMCSa) earned $0.32 per share, up 14% excluding special items in the year-earlier period, exceeding the consensus by $0.02. Revenue climbed 7% to $9.49 billion, supported by 421,000 net subscriber adds. Although Comcast’s base of basic-cable subscribers slipped 3%, the company increased its customer count for pricier digital-video services by 8%.

The ongoing spat between News Corp. ($14; NWSa) and Cablevision Systems ($26; CVC) over Fox’s retransmission fees has given leverage to critics of Comcast’s proposed deal for NBC Universal. DirecTV ($43; DTV), Dish Network ($20; DISH), and the American Cable Association wrote to regulators that “if Fox, an entity with no affiliation to a distribution platform, was willing to deny certain viewers access to its online content in order to gain a negotiating advantage, a vertically integrated Comcast/NBCU would have an even greater incentive and ability to take similar action.” The Federal Communications Commission is expected to approve the merger but has presented no timetable, and Comcast expects to close the deal before the end of the year. Comcast is a Long-Term Buy. DirecTV is a Focus List Buy and a Long-Term Buy. News Corp. is rated B (average).

Technology update

Hewlett-Packard ($41; HPQ) unveiled its Slate 500, a tablet computer designed to offer an experience similar to that of using a personal computer. So far, rival tablets have more closely echoed the attributes of smart-phones. At $799, the device features an 8.9-inch touch-screen, front and rear cameras, and wireless Internet access, though it cannot connect to high-speed cellular networks.

Aimed at business customers, H-P’s tablet comes equipped with Intel’s ($20; INTC) Atom processor and Microsoft’s ($26; MSFT) Windows 7 operating system. In related news, Windows 7 sold 240 million copies in the first year since its launch. An estimated 90% of the 1.4 billion personal computers in the world run on Windows. H-P, Intel, and Microsoft are Buys and Long-Term Buys.


Oracle ($29; ORCL) CEO Larry Ellison says he can prove that H-P’s incoming chief Leo Apotheker played a role in corporate theft while running German software giant SAP ($54; SAP). SAP has already admitted its guilt but disputes Oracle’s claim for $2 billion in damages. Apotheker’s first day at H-P coincides with the start of the trial on Nov. 1. H-P described Ellison’s claims as harassment. Oracle is a Long-Term Buy.

Retail roundup

Wal-Mart Stores ($55; WMT), tracking consumers via their spending patterns, says spending trails off toward the end of every month. That trend suggests high unemployment and other negative economic issues continue to dog U.S. consumers and, by extension, retailers. Wal-Mart Stores is a Long-Term Buy . . . Walgreen ($34; WAG) is reportedly exploring the sale of its pharmacy-benefits-management unit, formed in 1995 and potentially worth up to $1 billion. CVS Caremark ($31; CVS), Express Scripts ($50; ESRX), and Medco Health Solutions ($53; MHS) have allegedly expressed interest in the business. Express Scripts and Walgreen are rated A (above average). CVS and Medco are rated B (average).

Financial review

The White House, Federal Reserve, and attorneys general in all 50 states are probing procedures used by mortgage servicers to handle home foreclosures. Completing an internal review, Bank of America ($11; BAC) says it found some forms with incorrect data and misspelled names but was satisfied with the documentation’s overall accuracy. Bank of America has now resumed some of its foreclosure proceedings.

However, financial stocks are also weighted down by a second concern: Banks could be forced to repurchase up to $220 billion of mortgage-backed securities improperly bundled and sold to Fannie Mae, Freddie Mac, and private investors. One report said Bank of America could be on the hook for more than $70 billion in losses. There seems little chance for a quick resolution to the mortgage mess, putting more pressure on banks struggling to find fresh revenue streams as new regulations crimp traditional businesses. Bank of America is rated C (below average).

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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