Portfolio Review

1/3/2011


Corporate roundup

Julius Genachowski, chairman of the Federal Communications Commission, recommended conditions for approval of Comcast's ($22; CMCSa) pending acquisition of NBC Universal. To preserve competition in the pay-TV market, Genachowski said Comcast must let subscribers watch competitors' online video and must also sell its programming to rivals. Comcast has suggested it finds these terms reasonable, although the five FCC commissioners have yet to officially endorse the proposals.

Comcast also reportedly sent a letter to the FCC promising discounted rates on high-speed Internet service and computer equipment to low-income families with children in high school. No date for a vote on the merger has been set, though Comcast now expects to complete the deal in January. Comcast is a Long-Term Buy.


Apple ($325; AAPL) reportedly raised its March-quarter target for global shipments of the iPhone, projecting up to 21 million units, more than the 19 million originally forecast. Apple is expected to report shipments of 15.5 million iPhones in the December quarter.

Apple is expected to release three versions of its iPad 2, equipped to run on Wi-Fi and networks operated by AT&T ($29; T) and Verizon Communications' ($36; VZ). Both the iPad and iPhone have become targets of a lawsuit alleging that they transmit personal information to advertisers without user consent. Apple is a Focus List Buy and a Long-Term Buy. AT&T and Verizon are rated B (average).


J.P. Morgan Chase ($43; JPM) earned about $5.2 billion in investment-banking fees in 2010, down 6% from 2009 levels but still enough to rank first among banks, though its market share slipped to 7.8% from 9.0% in 2009. In all, Wall Street banks earned $66 billion from investment banking last year, up 8%. J.P. Morgan is a Buy and a Long-Term Buy.


Johnson & Johnson ($62; JNJ) suspended trials involving a new generation of painkillers because of concerns that the experimental drugs could cause joint damage. Over the summer, AstraZeneca ($46; AZN) and Pfizer ($18; PFE) ended separate trials of their own versions of the drug, designed to arrest production of nerve growth factor, a protein believed to contribute to pain. AstraZeneca is rated A (above average). J&J and Pfizer are rated B (average). 


Exxon Mobil's ($73; XOM) newly acquired XTO Energy unit paid $650 million for natural-gas assets in Arkansas. Exxon Mobil is rated A (above average).


Boeing ($65; BA) has resumed test flights of its 787 Dreamliner, following an electrical fire that broke out on a plane in November. Boeing will release a revised delivery schedule in January; analysts speculate that deliveries won't begin until mid-2011, more than three years after the original target date. Boeing is rated B (average).


SAP ($50; SAP) was ordered to pay Oracle ($32; ORCL) about $16.5 million of interest on a $1.3 billion legal award; Oracle had sought more than $211 million. SAP has already paid Oracle $120 million in legal fees. Oracle is a Long-Term Buy.    


Hewlett-Packard ($42; HPQ) won a National Aeronautics and Space Administration contract worth up to $2.5 billion for technology products and services, of which most are currently provided by Lockheed Martin ($70; LMT). H-P is a Buy and Long-Term Buy. Lockheed is rated B (average).

Holiday retail review

U.S. retail sales excluding automobiles increased nearly 6% between Nov. 5 and Dec. 24, according to MasterCard SpendingPulse. Spending on clothing set the pace with 11% growth, while jewelry gained 8% and electronics just 1%, hurt by low prices on TVs and consumers' reluctance to plunk down big dollars on new products.

Despite the robust results, Americans remain burdened by rising gasoline prices and persistent weakness in the housing and labor markets. In December, consumer confidence, as measured by the Conference Board, fell short of economists' projections and November's results.

The snowstorm that buried much of the East Coast could dampen shopping in the week after Christmas, which typically accounts for 15% of the season's sales. In the first two days following Christmas, the storms cost retailers an estimated 10% of sales, which totaled about $10 billion, according to ShopperTrak.

Don't lump Altera with struggling Xilinx

Altera ($36; ALTR) shares, which set a 10-year high this month and have risen 19% since September, have shrugged off many of the cyclical concerns weighing on other semiconductor stocks. The company's closest rival, Xilinx ($29; XLNX), trimmed its December-quarter sales guidance, likely reflecting an inventory correction in the U.S. and European communications markets.

Some of that weakness could spread to Altera. However, Xilinx has more exposure to those slow-growth regions than Altera, which has greater exposure to China's fast-growing wireless market. Both stocks rebounded after initially dipping on Xilinx's warning, partly because Xilinx says it expects renewed sales growth in communications in the March quarter.

Both companies sell programmable logic devices (PLDs), semiconductors shipped blank to clients, who then tailor the chips' programming to fit their needs. Unlike Xilinx, Altera enjoys solid trends in operating momentum and earnings estimates. Altera's free cash flow has more than tripled over the last four quarters, and the company has beaten analyst profit estimates by a wide margin over the last year. At 17 times trailing earnings, the stock trades 21% below its five-year average P/E. Earning a Quadrix® Overall score of 99, Altera remains a Focus List Buy and a Long-Term Buy.

GE better, but still not a Buy

A pair of dividend hikes in 2010 has restored some investor confidence in General Electric ($18; GE). Management expects 30% annual growth in India as the country tries to strengthen its infrastructure, and the company plans to pump more than $2 billion into China by 2012. GE also plans to repurchase $3 billion of preferred shares from Berkshire Hathaway ($80; BRKb), casting aside a lifeline that once buffered the conglomerate against financial troubles. But vestiges of the crisis linger for GE, and we would not buy the stock.

Profits from continuing operations and free cash flow are trending higher in 2010, but sales continue to slip, declining in eight consecutive quarters. Operations have been hurt by weak equipment sales in markets related to aviation and energy. GE Capital, the financial arm that got caught up in the 2008 meltdown, remains the company's biggest source of revenue, despite efforts to shrink the unit. GE Capital accounted for 34% of total sales in the nine months ended September.

The stock is not particularly cheap. At 17 times trailing earnings, shares trade 16% above the five-year average P/E ratio. Based on the 2011 consensus profit estimate, the stock trades in line with other industrial conglomerates in the S&P 1500. General Electric is rated B (average).

 

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

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