Portfolio Review

11/22/2010


Retail roundup

In October, U.S. retail sales rose 1.2% from September levels, the strongest growth since March, bolstered by a 5.0% gain in automobile sales. Excluding automobiles, retail sales increased 0.4%, lagging the growth seen in August and September. At $373.1 billion, monthly retail sales have climbed to their highest level since August 2008 . . . Advance Auto Parts’ ($65; AAP) September-quarter profits surged 49% to $1.03, topping the consensus by $0.12. Helped by the net addition of 122 new stores, revenue jumped 11% to $1.41 billion, also exceeding analyst forecasts. Same-store sales advanced 9.9%, more than doubling the 4.7% gain in the same quarter last year. Advance Auto Parts is a Focus List Buy and a Long-Term Buy . . . TJX ($45; TJX) earned $0.92 per share in the October quarter, up 14% and a penny above the consensus. Revenue advanced 5% to $5.53 billion on growth across all businesses. Same-store sales increased 1%, following a 7% gain in the same quarter last year. However, management issued a conservative outlook for the January quarter. TJX sees same-store sales falling 1% to 3% and projects per-share earnings of $0.89 to $0.94, versus the consensus of $0.94 at the time of the announcement. TJX is a Buy and a Long-Term Buy . . . Wal-Mart Stores ($54; WMT) grew October-quarter earnings per share 10% to $0.90 excluding a tax benefit, matching the consensus estimate. Sales rose 3% to $101.24 billion on 9% higher international sales and 3% growth at Sam’s Club stores. Excluding fuel, U.S. same-store sales slipped 0.7%, the sixth decline in as many quarters. For the January quarter, Wal-Mart sees per-share profits of $1.29 to $1.33, implying at least 8% growth and exceeding the consensus of $1.28 at the time of the announcement. Wal-Mart is a Long-Term Buy.

Technology review

Cisco Systems ($19; CSCO) said its profits rose 17% to $0.42 per share excluding special items in the October quarter, two cents above the consensus. Revenue jumped 19%. But a bleak sales forecast for the January quarter ignited new fears of weak technology spending, putting pressure on technology stocks, including major Cisco supplier Altera ($32; ALTR). Some analysts identified the problems as specific to Cisco and not indicative of troubles for the broader sector. Cisco is rated B (average). Altera is a Focus List Buy and a Long-Term Buy.

Research In Motion ($56; RIMM) shares rallied when the company best known for BlackBerry smart phones vowed to keep the price of its newest gadget, the PlayBook tablet computer, under $500. That price should keep RIM competitive with Apple’s ($302; AAPL) iPad, which costs $499 for the base model and $829 for a version with more storage and connectivity options. The PlayBook, which RIM claims is “three to four times faster” than the iPad, will go on sale in North America in the March quarter.

BlackBerry’s low cost and instant-messaging feature has helped make it the top smart phone in some emerging markets, including Latin America, while Apple’ iPhone and Google’s ($584; GOOG) Android gain share in the U.S. and Europe. Research In Motion is a Buy and a Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy. Google is rated A (above average).

Microsoft ($26; MSFT) appears to be experiencing shortages of its new Windows Phone 7, which reportedly sold 40,000 units on its Nov. 8 launch. By comparison, Microsoft sold 1 million hands-free Kinect devices, used in conjunction with the Xbox game system, in its first 10 days on the market. That pace puts the company on track to exceed its target of 5 million units by the end of the year.

Separately, Motorola ($8; MOT) filed a lawsuit claiming multiple Microsoft products infringe on 16 patents held by the mobile-phone maker. Last month, Microsoft sued Motorola for using Google’s Android operating system, which Microsoft claims violates its own smart-phone patents.

In other news, Motorola said it would split into two publicly traded companies in January 2011. Early this year, Motorola announced plans to separate its mobile and home-devices unit from the segment that focuses on corporate business and wireless-network equipment, but did not provide a deadline for the split. Microsoft is a Buy and a Long-Term Buy. Motorola is rated C (below average).

Dividend and buyback news

AmerisourceBergen ($31; ABC) boosted its quarterly dividend 25% to $0.10 per share, payable Dec. 6. Amerisource, a distributor of drugs and other medical products, has raised its dividend at least 25% in each of the last five years. Shares of Intel ($21; INTC) rallied when the semiconductor company increased its quarterly distribution 15% to $0.18 per share, payable in the March quarter. Amerisource and Intel are rated Buy and Long-Term Buy.

The Federal Reserve issued guidelines for major U.S. banks seeking to restore dividends cut or suspended during the financial crisis. As they did during the stress tests performed in 2009, banks must show that they are capable of absorbing losses in the event of an economic downturn. Additionally, they must repay the government or replace federal investments with preferred or common stock before repurchasing stock or raising the dividend.

Wells Fargo ($27; WFC) and J.P. Morgan Chase ($40; JPM) currently make quarterly distributions of $0.05 per share, while Bank of America’s ($12; BAC) quarterly dividend is set at a penny. Citigroup ($4; C) hasn’t paid a dividend since early 2009. Goldman Sachs ($165; GS) has already been permitted to repurchase shares, as has J.P. Morgan, which might prefer to stick with that strategy for now. After meeting with CEO Jamie Dimon, one analyst said J.P. Morgan seemed inclined to buy back more stock before restarting dividend growth. J.P. Morgan is a Buy and a Long-Term Buy. Goldman Sachs and Wells Fargo are rated B (average). Bank of America and Citigroup are rated C (below average).

Teck Resources ($47; TCK) boosted its semiannual dividend 50% to $0.30, payable Jan. 4. Teck is rated B (average).

Corporate roundup

Sigma-Aldrich ($62; SIAL) said Dr. Jai P. Nagarkatti, its chairman and CEO, has died of a heart attack. He was 63. Sigma’s board selected Rakesh Sachdev, who most recently held several positions including chief financial officer, as its new CEO. Sigma-Aldrich is a Long-Term Buy.

Regulators have accelerated the pace of their review of Comcast’s ($20; CMCSa) pending deal to acquire a 51% stake in NBC Universal. At least one U.S. senator has urged the Federal Communications Commission to block the merger, though it’s more likely that the deal will go through, with Comcast subject to tough distribution restrictions. Comcast is a Long-Term Buy.

Defense Secretary Robert Gates seeks to slash $100 billion in military spending over the next five years, with much of the savings used to modernize weapons. But rather than plowing that money back into the defense budget, which exceeds $700 billion a year, some officials have proposed to use that money to reduce the federal deficit. Budget worries continue to weigh on shares of defense contractors, such as Boeing, General Dynamics ($66; GD), and Lockheed Martin ($69; LMT). General Dynamics is rated A (above average). Lockheed Martin is rated B (average).

Boeing ($63; BA) once again delayed test flights of its 787 Dreamliner jet, this time after an electric panel caused a fire in the rear of the plane. Boeing is rated B (average).

Pushing further into mining products, Caterpillar ($80; CAT) agreed to acquire Bucyrus International ($89; BUCY) for $7.6 billion, or $92 per share, a 32% premium to the stock’s closing price prior to the announcement. Caterpillar is rated C (below average).

Disney ($37; DIS) said September-quarter earnings dipped 2% to $0.45 per share excluding special items, missing the consensus by a penny, as revenue slipped 1% to $9.74 billion. Disney is rated B (average).

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