Portfolio Review

11/15/2010


Retail review

In October, same-store sales for an index of 28 retailers followed by Thomson Reuters rose 1.6%, the lowest gain since April but in line with market expectations.

Ross Stores ($64; ROST) said October sales at stores open for more than a year rose 4% on top of a 9% gain last year. The consensus estimate projected a 0.8% increase. For the October quarter, total sales grew 7% to $1.87 billion. The discounter hiked its October-quarter guidance and now sees per-share profits of $1.01 to $1.02, up 20% to 21%. Shares jumped 5% on the news. Ross is a Focus List Buy and a Long-Term Buy.


TJX ($46; TJX) reported flat same-store sales for October, exceeding the consensus, which had forecasted a 0.9% decline. Total sales rose 5% to $1.8 billion for the month, as higher store traffic more than offset a smaller average receipt per visit. Management expects per-share earnings for the October quarter to reach the high end of its guidance of $0.89 to $0.91, equating to growth of 12%. TJX is a Buy and a Long-Term Buy.


Its domestic growth constrained, Wal-Mart Stores ($55; WMT) continues to search for new opportunities abroad. The retail giant is mulling a bid for Matahari’s Hypermart, Indonesia’s second-biggest chain of hypermarkets (retail outlets that combine supermarkets with department stores), expected to fetch $800 million to $1 billion in an auction. In other news, Wal-Mart said it will consider bidding for a majority stake in African retailer Massmart rather than pursuing an outright takeover. Finally, Japanese regulators are reportedly probing Wal-Mart’s 2007 takeover of retail chain Seiyu regarding possible insider trading. Wal-Mart is a Long-Term Buy.

Technology update

Global smart-phone sales jumped 90% in the September quarter, according to research firm IDC. Apple’s ($319; AAPL) iPhone ranked second with a 17% share of quarterly sales, while Research In Motion’s ($56; RIMM) BlackBerry fell to third with a 15% share, down from 20% a year ago. Within the U.S., RIM’s smart-phone share slipped 3 percentage points to 37% of all subscribers, ahead of Apple’s slice — holding at 24% — and the hard-charging Google ($627; GOOG) Android, gaining nearly seven percentage points to 21%.

RIM’s position weakened further when Dell ($14; DELL) announced plans to switch 25,000 of its employees from the BlackBerry to its own line of smart phones powered by Microsoft’s ($27; MSFT) Windows software. Dell added that it will try to persuade its business customers to do the same. Apple is a Focus List Buy and a Long-Term Buy. RIM and Microsoft are rated Buy and Long-Term Buy. Google is rated A (above average). Dell is rated B (average).


Strong corporate demand for semiconductors powered shares of Altera ($34; ALTR) to a nine-year high in early November and has helped Intel’s ($21; INTC) stock advance 20% since the end of August. The Semiconductor Industry Association expects semiconductor sales to grow 33% to $300.5 billion this year and another 6% in 2011. Altera is a Focus List Buy and a Long-Term Buy. Intel is a Buy and a Long-Term Buy.


Microsoft ($27; MSFT) raised its forecast for holiday-season sales of its new controller-free Kinect gaming system to 5 million units — or roughly $750 million in revenue — from a September estimate of 3 million. Gamers can plug the Kinect device into their Xbox console and play games using hand movements and vocal commands.

Separately, CEO Steve Ballmer sold 49.3 million shares of Microsoft, about 12% of his stake. Ballmer said he sold stock for the first time in seven years to diversify his holdings and plan for taxes, adding that the sale should not be interpreted as a lack of confidence in the company. Ballmer plans to sell up to another 25.7 million shares by the end of the year. Microsoft is a Buy and a Long-Term Buy.

Bank dividend update

The Federal Reserve is preparing to outline the criteria banks must meet in order to raise dividend payments for the first time since the financial crisis. Not all banks are likely to meet the standards immediately, nor are payout ratios expected to return to levels seen before the meltdown.

The Fed has already permitted a handful of banks, including J.P. Morgan Chase ($41; JPM) and Goldman Sachs ($169; GS), to begin repurchasing shares again. J.P. Morgan Chase is a Buy and a Long-Term Buy. Goldman Sachs is rated B (average).

News digest

Baxter International ($51; BAX) raised its quarterly dividend 7% to $0.31, payable Jan. 5. Baxter is a Long-Term Buy . . . Seeking to break into a major shale field in the eastern U.S., Chevron ($85; CVX) agreed to pay $3.2 billion cash and assume $1.1 billion in debt to acquire natural-gas company Atlas Energy ($32; ATLS). Chevron is rated A (above average) . . . Boeing ($70; BA) denied a report that its 787 Dreamliner suffered yet another delay and maintains it will still deliver the jet in the March quarter. Boeing is rated B (average).

Oracle, SAP, H-P tiff gets ugly

Another week, another twist in a tangled plotline fit for midday television as tech giants Oracle ($29; ORCL), Hewlett-Packard ($44; HPQ), and SAP ($52; SAP) find themselves caught up in a web of theft, seduction, and betrayal.

SAP, an Oracle rival in both the marketplace and the courtroom, has admitted its TomorrowNow unit stole corporate information from Oracle. However, the size of the financial award remains in dispute. In his testimony, CEO Larry Ellison estimated the value of the property pilfered by the German software developer at about $4 billion. SAP claims the damages are closer to $40 million. Oracle seeks $2 billion. According to one report, SAP has offered to pay Oracle $120 million to keep the U.S. software giant from pursuing punitive damages.

Oracle is still trying to track down Hewlett-Packard’s new CEO, former SAP chief Leo Apotheker, to serve him with a subpoena to testify in the case. H-P has refused to accept the subpoena on his behalf.

Oracle added Apotheker to its witness list for the case only after H-P hired him. That act drew criticism from another of H-P’s recent hires — incoming Chairman Ray Lane, a former executive at Oracle who reportedly clashed with Ellison.

Much of TomorrowNow’s thefts appear to have occurred during Apotheker’s tenure as CEO of SAP. But the executive has never been directly connected to the illegal activity, although Ellison claims to have proof. Lane is among those who credit Apotheker with putting an end to the thefts.

While the high-level feuding makes for good news stories, its impact on company operations is difficult to assess. Corporate copyright-infringement tussles generally end with cash settlements and charges against earnings, with little long-term effect on company operations. However, this salacious trading of accusations could weigh on the shares of all participants until the rhetoric calms down — or until the next big scandal breaks. H-P remains a Buy and Long-Term Buy. Oracle retains its Long-Term Buy rating.

Rank Changes
No changes were made this week in Dow Theory Forecasts.


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