Portfolio Review

12/27/2010


Technology earnings

Strong operating results by a couple of technology heavyweights eased concerns over corporate spending after Cisco Systems' ($20; CSCO) disappointing performance last month shook investors.

For the November quarter, Oracle ($32; ORCL) said per-share profits increased 33% to $0.51 excluding special items, beating the consensus by a nickel. Revenue advanced 47% to $8.58 billion, boosted by the acquisition of Sun Microsystems and double-digit growth at the software and services units. For the February quarter, Oracle targets sales growth of at least 31%, ahead of the consensus at the time of the announcement. Shares rallied on the results. Oracle is a Long-Term Buy.


Research In Motion ($58; RIMM) said per-share profits surged 58% to $1.74 in the November quarter, exceeding the consensus by $0.09. Revenue jumped 40% to $5.49 billion, also beating expectations. RIM added 5.1 million net new subscribers, growing its base of BlackBerry accounts to more than 55 million. Management said its PlayBook tablet computer, slated for release in the March quarter, is generating strong interest from corporate clients. RIM is a Buy and a Long-Term Buy.

Communications update

As soon as next August, DirecTV ($39; DTV) plans to roll out addressable ads, tailored commercials aimed at individual homes where subscribers fit advertisers' criteria. The U.S. market for addressable ads could grow to $11.5 billion by 2015. Studies have found that viewers are less likely to change the channel when shown targeted ads. DirecTV is also reportedly testing a new product that would package its satellite-TV services with Verizon Communications' ($35; VZ) wireless broadband. In other news, DirecTV paid $605 million to increase its ownership stake in SKY Brasil to 93% from 74%. DirecTV is a Focus List Buy and a Long-Term Buy. Verizon Communications is rated B (average).


Not to be outdone, Comcast ($22; CMCSa) is testing a new service that would combine television with the Internet through a set-top box that allows subscribers to watch online video, live TV, and on-demand and recorded programming, all while browsing selected Internet sites, including social networks. As for the ongoing U.S. review of Comcast's pending merger with NBC Universal, executives hope that any online conditions set by regulators will be narrowly tailored. The deal will not be approved by year-end, but the companies hope to gain approval in January. Comcast is a Long-Term Buy.

Corporate roundup

A consortium organized by Microsoft ($28; MSFT) that includes Apple ($324; AAPL), Oracle ($32; ORCL), and EMC ($23; EMC) bought 882 patents from Novell ($6; NOVL) for $450 million. How those companies will use the patents is unclear, though the deal underscores the steps technology companies are taking to protect themselves from lawsuits related to intellectual property. In other news, Microsoft says more than 1.5 million mobile phones using its Phone 7 operating system sold in the first six weeks after the program's launch, meeting the company's expectations. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy. Oracle is a Long-Term Buy. EMC is rated A (above average).


Seeking to upgrade its third-generation network, AT&T ($29; T) agreed to purchase $1.93 billion of wireless spectrum from Qualcomm ($50; QCOM), enough to cover 300 million people in the U.S. Qualcomm had spent $683 million on the spectrum between 2003 and 2008 for its failed mobile-TV service. AT&T and Qualcomm are rated B (average).


TJX ($44; TJX) plans to close its chain of A.J. Wright clothing stores, which targeted less-affluent shoppers and generated 4% of the company's sales but less than 1% of profits in the nine months ended October. The discounter said it will shutter 71 stores and convert the remaining 91 locations into one of its three other U.S. chains: T.J. Maxx, Marshalls, or HomeGoods. TJX is a Buy and a Long-Term Buy.


Walgreen ($39; WAG) reported per-share profits of $0.62 in the November quarter, up 19% from year-ago results that excluded restructuring charges. The consensus estimate was $0.54. Revenue advanced 6% to $17.34 billion, while same-store sales climbed 0.8%. Prescription sales increased 5%. Walgreen, which rallied on the results, is rated A (above average).


The U.S. sued BP ($44; BP), Transocean ($69; RIG), and Anadarko Petroleum ($68; APC) for their role in the worst offshore oil spill in the country's history. Halliburton ($40; HAL), contracted to perform the cement work, was noticeably absent from the lawsuit. To help pay for its share of the liabilities, BP agreed to sell another $775 million in assets, part of its larger plan to divest up to $30 billion by the end of 2011. In other news, a Swiss court blocked Transocean's plan to return $1 billion in dividends to shareholders. BP and Transocean are rated B (average). Anadarko and Halliburton are rated C (below average).

Investors' stockings stuffed with buybacks, dividends . . .

U.S. companies spent $92 billion repurchasing their own stock in the September quarter, up 71% from the June quarter. Dividends are also on the rise. Baxter International ($50; BAX) announced a stock buyback of up to $2.5 billion, enough to repurchase 8% of outstanding shares at current prices. Baxter is a Long-Term Buy . . . Stryker ($54; SYK) hiked its quarterly dividend 20% to $0.18 per share, payable Jan. 31, and announced a new $500 million share-repurchase program. Stryker is a Long-Term Buy . . . AT&T ($29; T) raised its quarterly dividend 2% to $0.43 per share, payable Feb. 1. The company also authorized the repurchase of up to 300 million shares, representing 5% of outstanding shares. AT&T is rated B (average) . . . Bristol-Myers Squibb ($26; BMY) increased its quarterly dividend 3% to $0.33 per share, payable Feb. 1. Bristol-Myers is rated B (average) . . . Freeport-McMoRan ($116; FCX) declared a special dividend of $1 per share to be paid Dec. 30. The company also approved a two-for-one stock split that will take place in February. Freeport is rated A (above average) . . . Honeywell ($54; HON) raised its quarterly dividend 10% to $0.3325, payable in the March quarter. Honeywell is rated C (below average) . . . Pfizer ($17; PFE) boosted its quarterly dividend 11% to $0.20 per share. Pfizer is rated B (average) . . . General Electric ($18; GE) increased its quarterly dividend 17% to $0.14, payable Jan. 25, its second hike of the year. GE is rated B (average).

. . . but regulators hand out coal

The European Union is reviewing Intel's ($21; INTC) pending $7.68 billion acquisition of McAfee ($46; MFE). Intel has said that it plans to embed McAfee's security features into its semiconductors, used in about 80% of the world's personal computers. But regulators appear concerned that Intel, by owning McAfee, would cripple competition in the security-software market. The EU's deadline is Jan. 12, and though the agency rarely blocks deals, it could extend its investigation until Intel proposes concessions. The U.S. Federal Trade Commission has already approved the deal. Intel, trading at 11 times expected 2010 earnings, is a Buy and a Long-Term Buy.


AstraZeneca's ($46; AZN) shares slumped after U.S. regulators asked for more data on Brilinta, a blood-thinning drug candidate already approved in Europe. Separately, AstraZeneca will take a $445 million charge as it ends development of motavizumab, an experimental drug intended to treat an infant lung disease. AstraZeneca is rated A (above average).


The Federal Reserve has proposed limiting debit-card swipe fees that banks charge to retailers. The potential restrictions — capping interchange fees at $0.12 per transaction, versus the 2009 average of $0.44 — were harsher than anticipated. Shares of MasterCard ($217; MA) and Visa ($68; V) fell on the news. MasterCard and Visa are rated B (average).

Rank Changes
Agilent Technologies ($41; A) is replacing Laboratory Corp. ($89; LH) on the Buy List and Long-Term Buy List.


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