Portfolio Review

1/17/2011


Tech review

Unveiling its latest Windows operating system, Microsoft ($28; MSFT) etched a new alliance with Arm Holdings ($23; ARMH), which designs low-powered computer processors. The announcement signaled a rift between longtime partners Microsoft and semiconductor maker Intel ($21; INTC). Both companies built their business in part on cooperation dating back to the early 1980s, pairing Intel's semiconductors with Microsoft's Windows for the personal computer. But that success has failed to translate to the mobile market, populated by lightweight operating systems that require less memory and battery consumption. Microsoft software runs less than 3% of smart-phones. For its part, Intel has gradually encroached on Microsoft's turf in the last couple years, building up its software business and collaborating with Google ($616; GOOG) on multiple projects.

Earlier this month, Intel introduced its newest semiconductor, known as Sandy Bridge, a smaller chip that features better graphics and more efficient use of power. Sandy Bridge offers a more secure platform that could ease piracy concerns for Hollywood studios, paving the way to downloading higher-resolution movies. Warner Bros. has already agreed to use the technology when it begins online distribution of more than 300 titles in high definition next month.

Intel also agreed to pay Nvidia ($20; NVDA) $1.5 billion over five years for the rights to graphic patents, ending a lawsuit between the two companies. Seeking a similarly agreeable resolution, Intel offered concessions to the European Union in an attempt to win over regulators dubious about the chipmaker's pending $7.68 billion acquisition of McAfee ($47; MFE). Regulators extended their deadline to Jan. 26. Microsoft is a Buy and a Long-Term Buy. Intel is a Buy and a Long-Term Buy. Google is rated A (above average).

Microsoft and Intel aren't the only companies charting new paths. In the opening weeks of 2011, other ties within the technology sector have been renewed or redrawn.

• Starting Feb. 10, Apple's ($342; AAPL) iPhone 4 will be available through Verizon Wireless, a venture owned by Verizon Communications ($35; VZ) and Vodafone Group ($27; VOD). By ending its exclusive agreement with AT&T ($28; T), Apple gains access to Verizon Wireless's 93 million customers. Apple is a Focus List Buy and a Long-Term Buy. AT&T and Verizon are rated B (average).

• Research In Motion ($63; RIMM) will release its PlayBook tablet computer on Sprint Nextel's ($4; S) 4-G wireless network this summer. PlayBook demos, running on a processor designed by Texas Instruments ($34; TXN), drew praise from analysts. RIM has described corporate interest in the PlayBook as “massive,” and a Wi-Fi version should be released by March. In other news, RIM wants at least 18 months to satisfy India's demands to access corporate e-mail. India can already monitor Internet, voice calls, and text messages relayed by smart phones. Research In Motion is a Buy and a Long-Term Buy. Texas Instruments is a Focus Buy and a Long-Term Buy. Sprint is rated C (below average).

• Comcast ($23; CMCSa) demonstrated a video application that lets subscribers view previously aired television shows on tablet computers, such as Apple's ($342; AAPL) iPad. The service will become available in the coming weeks. Comcast also promised that subscribers will be able to watch live shows by the end of the year. Comcast is a Long-Term Buy.

• Hewlett-Packard ($45; HPQ) introduced the first notebook personal computer for Verizon Communications' ($35; VZ) 4-G mobile network. H-P is a Buy and Long-Term Buy. Verizon is rated B (average).

Corporate news

Stryker ($58; SYK) said December-quarter revenue advanced 9% to $2.00 billion, above the consensus. That prompted Stryker, a maker of artificial joints and hospital equipment, to raise its 2010 guidance for per-share earnings to $3.31 to $3.33 excluding special items, implying growth of 12% to 13% and exceeding the consensus estimate of $3.29. For 2011, Stryker projects per-share profits of $3.65 to $3.73, versus the consensus of $3.64, on sales growth of at least 11%. Stryker is a Long-Term Buy.


St. Jude Medical ($41; STJ) said its December-quarter per-share profits should be near the top end of its previously announced range of $0.72 to $0.74, versus the $0.73 consensus. The medical-device maker also projected better-than-expected revenue, and the shares rose on the news. Good tidings from St. Jude and Stryker could presage better days for the health-equipment group. St. Jude is a Long-Term Buy.


For the December quarter, Alcoa ($16; AA) reported per-share profits of $0.21 excluding special items from continuing operations, versus $0.01 earned in the same quarter last year and the consensus of $0.19. Revenue increased 4% to $5.65 billion, helped by higher prices and increased demand for aluminum. Alcoa expects both trends to continue in 2011. Alcoa is rated C (below average).


China cleared separate joint ventures proposed by J.P. Morgan Chase ($44; JPM) and Morgan Stanley ($28; MS) to underwrite stocks in the country. J.P. Morgan plans to focus on smaller initial public offerings of $150 million or less. Chinese companies raised $74 billion through IPOs in 2010, according to Bloomberg. In other news, J.P. Morgan's CEO said the bank hopes to raise its annual per-share dividend to a range of $0.75 to $1.00 from the current $0.20, though the Federal Reserve must approve the move first. J.P. Morgan is a Buy and a Long-Term Buy. Morgan Stanley is rated C (below average).


DuPont ($49; DD) said it would pay $5.8 billion in cash and assume $500 million in debt to acquire Danisco A/S, a Danish maker of enzymes used in food, detergent, and biofuel. DuPont's bid values Danisco at a 25% premium to the stock's price before the announcement. DuPont is rated A (above average).


CVS Caremark ($35; CVS) raised its quarterly dividend 43% to $0.125 per share, payable Feb. 2. CVS Caremark is rated B (average).

All sales final as retailers close out 2011

December same-store sales rose 3.1% for an index of 28 retailers tracked by Thomson Reuters, missing the consensus estimate of 3.4%. The International Council of Shopping Centers estimates that retail sales advanced 3.8% for the Christmas period, which combines November and December — the strongest growth since 2006.

Shares of Ross Stores ($64; ROST) jumped after the discounter reported a 4% gain in December same-store sales, on top of 12% growth in the same period last year. Wall Street had projected a 0.5% decline. For the January quarter, Ross expects per-share profits of $1.32 to $1.34, well above the $1.22 consensus, implying growth of 14% to 16%. Ross is a Focus List Buy and a Long-Term Buy.

 

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