Portfolio Review

11/29/2010


October-quarter earnings

Ross Stores ($65; ROST) earned $1.02 per share in the October quarter, up 21% and in line with the consensus estimate. Revenue rose 7% to $1.87 billion, while same-store sales increased 3% on top of an 8% gain last year. Despite the solid growth, management cautioned about a challenging holiday season ahead and maintained earlier guidance that same-store sales would be flat to down 1%. Shares slipped from the 52-week high set the day before the announcement, but they remain up 50% for the year. Ross is a Focus List Buy and a Long-Term Buy.


In the October quarter, Hewlett-Packard's ($43; HPQ) profits surged 17% to $1.33 per share excluding special items, topping Wall Street's forecast by $0.06. Rising 8% to $33.28 billion, H-P's revenue also beat the consensus. H-P reported sales growth across all business segments, led by a 25% jump at the storage-and-servers unit. The company gave guidance for the January quarter and the year ending October that exceeded Wall Street expectations for per-share profits and revenue at the time of the announcement. Hewlett-Packard is a Buy and Long-Term Buy.


Dell ($14; DELL) grew profits 96% to $0.45 per share excluding special items, exceeding the consensus by $0.12. Revenue jumped 19% to $15.39 billion on growth across all business segments and geographic regions. For the January quarter, Dell said it expects steady demand from government and corporate clients, along with favorable component prices. Dell is rated B (average).

Technology review

Companies are rushing to secure corporate clients in the newest battleground for mobile technology, the tablet computer. Research In Motion's ($59; RIMM) PlayBook tablet has attracted interest from potential customers, including Manulife Financial ($15; MFC) and Sun Life Financial ($28; SLF). Although RIM trails its peers in terms of applications available on its operating system, SAP ($49; SAP) is preparing a mobile version of its business software to run on the PlayBook. Meanwhile, Apple ($313; AAPL) says that more than 65% of Fortune 100 companies are either using or testing the iPad tablet personal computer. The iPad commanded an estimated 95% share of the tablet market in the October quarter. And there has been talk of Apple launching a thinner iPad in the first half of 2011. Apple is a Focus List Buy and a Long-Term Buy. Research In Motion is a Buy and a Long-Term Buy.


The market for tablet PCs could reach 100 million units by 2013, according to Digitimes Research, though they are unlikely to grow as popular as smart phones. Smart-phone shipments are expected to reach 800 million in 2013, well above the 440 units forecasted for 2011. In comparison, shipments for notebook PCs are forecasted to reach 300 million by 2013. The tablets appear to be chipping away at the PC market, said one analyst who projects that the 70 million tablets likely to be produced next year will prevent the sale of 28 million PCs.


In closing arguments, an Oracle ($28; ORCL) attorney asked for at least $1.7 billion in damages in connection with a SAP copyright-infringement case. The jury must now decide on the award. Oracle originally sought $2 billion, while SAP, which has admitted guilt, reportedly offered $120 million. Leo Apotheker, CEO of SAP at the time of the theft and current chief at Hewlett-Packard ($43; HPQ), did not appear at the trial, and Oracle chose not to submit his videotaped deposition. Oracle is a Long-Term Buy. H-P is a Buy and Long-Term Buy.

Eurozone rumblings

Ireland applied for a reported $110 billion in aid from the European Union and the International Monetary Fund, though negotiations remain in the early stages and that figure could change. Beset by budgetary and banking woes, Ireland has faced pressure from European governments worried that troubles there would spread.

Until now, Ireland had resisted asking for aid because it would be forced to relinquish control of tax and spending policies. For instance, Ireland's corporate tax rate of 12.5% draws foreign companies to set up headquarters there. Meanwhile, Greece's government, bailed out this spring, still faces a revenue shortfall and could be forced to shut down as soon as Nov. 30.

Financial review

The 35 largest U.S. banks face a shortfall of $100 billion to $150 billion, according to a report by Barclays ($17; BCS). By the time new global financial regulations go into effect in 2015, the report concluded, banks should be able to close that gap without needing to raise much equity by issuing stock.

More pressing in the near term are concerns over who will be left on the hook for subprime mortgages and mortgage-backed securities, estimated to ultimately generate at least $700 billion in losses. Government-sponsored entities Fannie Mae and Freddie Mac claim that banks misrepresented the quality of mortgages packaged into the securities, and those banks should bear the losses. Fannie and Freddie have used their leverage — they own or guarantee roughly half of all U.S. mortgages — to return more than $13 billion in faulty mortgages to banks and could push back another $17 billion.

Meanwhile, Bank of America ($11; BAC), J.P. Morgan Chase ($39; JPM), and Wells Fargo ($27; WFC) are reportedly hammering out an agreement to settle complaints that the banks improperly foreclosed on homes. Separately, capital levels required by the Federal Reserve could force banks to hold off raising their dividends until the June quarter. J.P. Morgan is a Buy and a Long-Term Buy. Wells Fargo is rated B (average). Bank of America is rated C (below average).

Health-care roundup

Baxter International ($51; BAX) agreed to make an up-front $30 million payment to acquire blood disorder-related assets of Archemix, a biopharmaceutical company. Additional milestone payments could reach $285 million. Baxter is a Long-Term Buy . . . Citing manufacturing problems, Johnson & Johnson ($64; JNJ) issued yet another recall, this time for roughly 4 million packages of children's Benadryl allergy tablets and about 800,000 bottles of junior-strength Motrin caplets. The drug giant says the problems do not threaten patient safety. J&J, plagued by a series of embarrassing recalls in recent months, is rated B (average) . . . In a study, Merck's ($36; MRK) Vytorin, designed to lower cholesterol, reduced the risk of heart attacks in patients with chronic kidney disease. Merck plans to seek regulatory approval for the drug's expanded use. Merck is rated B (average).

Corporate digest

Lockheed Martin ($69; LMT) won a $3.49 billion defense contract for 31 F-35 Joint Strike Fighters. Lockheed is rated B (average).


Nike ($86; NKE) hiked its quarterly dividend 15% to $0.31 per share, payable Dec. 30, marking the ninth consecutive year of raising the distribution. Nike is rated B (average).


National Oilwell Varco ($61; NOV) increased its quarterly dividend 10% to $0.11 per share, payable Dec. 17. National Oilwell Varco is rated B (average).


Wells Fargo ($27; WFC) agreed to pay Citigroup ($4; C) $100 million to settle a lawsuit relating to Wells Fargo's swooping in to purchase Wachovia in 2008. Citigroup had initially sought $60 billion in damages. Wells Fargo is rated B (average). Citigroup is rated C (below average).

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

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