Portfolio Review

1/31/2011


Upgrades & downgrades

We are adding J.P. Morgan Chase ($45; JPM) to the Focus List. Shares trade at eight times the 2011 estimate, in line with the average diversified financial services company in the S&P 1500 Index. Yet J.P. Morgan continues to establish itself as the class of the financial sector.

The stock rallied on December-quarter results, underscoring the strength of the bank's performance. Revenue from new mortgage loans climbed 24%, and J.P. Morgan sees rising demand for new credit in 2011. The mortgage fiasco could cast a cloud over the banking group this year, but J.P. Morgan says its $3 billion reserve should easily cover expected losses of $1.2 billion from repurchasing faulty mortgages in 2011. J.P. Morgan is also a Buy and a Long-Term Buy.


Exxon Mobil ($79; XOM) is being added to the Focus and Buy lists. Exxon's Quadrix® scores for Momentum and Quality have risen substantially since July. So has the share price, up 32% during that period. A solid Value rank of 71, coupled with surging earnings estimates, suggests the stock can soar higher. Considering Exxon's track record and competitive position, the shares still seem cheap at less than 12 times the 2011 estimate. December-quarter profits, due Jan. 31, are expected to be up 24% to $1.58 per share on 9% sales growth. Earning an Overall score of 95, Exxon Mobil is also a Long-Term Buy.


Travelers ($56; TRV) is being dropped from the Focus List but remains a Buy and Long-Term Buy. The stock no longer represents one of our very favorite picks in the financial sector. Its Quadrix Overall score has slipped to 77, hurt by weaker operating momentum. However, the shares remain attractively valued at nine times trailing earnings, 21% below the average for property-and-casualty insurers in the S&P 1500 Index. Travelers' appealing valuation and aggressive efforts to plow cash into dividends and buybacks make the stock a solid candidate for total returns in 2011 and 2012.

Shares rallied after Travelers reported operating income of $1.89 per share for the December quarter, down 11% but $0.21 above the consensus. Net written premiums rose 1%. In related news, the company authorized a $5 billion stock-repurchase program, in the wake of $5 billion repurchased last year.


We are dropping Lubrizol ($107; LZ), a maker of additives for industrial polymers and motor oil, from the Focus List. Share-price action has turned sluggish in recent months, reflecting slightly disappointing results for the September quarter. Lubrizol will release December-quarter results Feb. 2, and those results will determine whether the stock remains a Buy. Wall Street sees Lubrizol growing per-share profits 12% to $2.19 on 9% higher revenue for the quarter. We will also watch for a rebound in Lubrizol's operating cash flow, down for three consecutive quarters. For now, Lubrizol's valuation remains compelling, with shares trading at 11 times trailing earnings. Lubrizol is a Buy and a Long-Term Buy.


We are dropping Abbott Laboratories ($48; ABT) from the Buy List. The stock no longer qualifies as a top 12-month pick, reflecting a tough environment for the year ahead and the market's discouraging reaction to decent December-quarter results. Profits grew 10% to $1.30 per share excluding special items, $0.01 above the consensus. Revenue, advancing 13% to $9.97 billion, also exceeded Wall Street expectations. Pharmaceuticals paced growth, with revenue up 23%. Arthritis drug Humira, generating 19% of Abbott's revenue for the quarter, posted 13% higher sales.

Abbott expects per-share profits to rise 9% to 11% this year, but the midpoint of the guidance is below the consensus. The shares seem cheap — at 12 times trailing earnings they trade 31% below their five-year average — given the company's track record and operating momentum. But worries regarding Abbott's reliance on Humira could limit the stock in the near term. Abbott Labs remains a Long-Term Buy.

December-quarter earnings

Varian Medical Systems ($72; VAR) delivered impressive December-quarter results, with per-share earnings up 27% to $0.80 and sales up 7% to $580 million. Consensus estimates had projected per-share earnings of $0.73 on sales of $585 million. For the fiscal year ending September, the maker of X-ray and radiation-therapy systems reiterated sales-growth guidance of 10% to 11%. Reflecting improved margins and the December-quarter profit surprise, Varian lifted guidance for per-share earnings to $3.39 to $3.45 — slightly above the consensus. Varian Medical Systems, though not cheap at 21 times its full-year guidance, remains a Buy and Long-Term Buy based on its share-price and operating momentum.


Hess ($77; HES) said December-quarter earnings slipped 2% to $1.20 per share, excluding charges related to an equity investment and dry-hole costs, missing the consensus by $0.05. Revenue and non-operating income climbed 2% to $8.69 billion, easily surpassing the consensus. Results benefited from higher commodity prices and a 1% bump in production. Hess is a Buy and a Long-Term Buy.


Texas Instruments ($34; TXN) earned $0.64 per share in the December quarter excluding special items, up 23% and a penny better than the consensus. Revenue advanced 17% to $3.53 billion, boosted by growth across all segments. Orders slipped 4% to $3.13 billion. TI is a Focus List Buy and a Long-Term Buy.


CSX ($70; CSX) said December-quarter earnings rose 48% to $1.14 per share, exceeding the consensus by $0.04. Revenue increased 21% to $2.82 billion — also ahead of the consensus — on 13% higher volume. CSX is a Focus List Buy and Long-Term Buy.


In the December quarter, Stryker ($58; SYK) grew per-share profits 13% to $0.93 per share excluding special items, topping the consensus by $0.02. Sales increased 9% to $2.00 billion on 5% growth from orthopedic implants and a 15% gain for the medical and surgical business. Stryker is a Long-Term Buy.


General Electric ($20; GE) grew per-share profits 33% to $0.36 in the December quarter, topping Wall Street's forecast by $0.04. Revenue ticked 1% higher to $41.38 billion, as growth for technology infrastructure, NBC Universal, and home and business solutions offset weakness at the energy and finance units. GE is rated B (average).

Corporate roundup

Newmont Mining ($56; NEM) said it hit the high end of its 2010 production forecast by mining 5.4 million ounces of gold, up slightly from 2009 levels. Copper production soared 45% to 327 million pounds. Newmont said average realized gold prices rose 25% for the year, while copper prices jumped 32%. Newmont is a Focus List Buy and a Long-Term Buy . . . Wal-Mart Stores ($57; WMT) pledged to promote and lower the prices of healthier foods in its stores. The five-year plan targets lowering sodium, trans fats, and added sugars in products packaged under its private label. Wal-Mart is a Long-Term Buy . . . Google ($620; GOOG) co-founder Larry Page will replace Eric Schmidt as CEO on April 4. Google will retain Schmidt as its executive chairman and grant him $100 million in stock and options. Google is rated A (above average).

Dividends and buybacks

Intel ($22; INTC) declared a quarterly dividend of $0.18 per share, payable March 1, reflecting a 15% hike announced in November. Intel also approved a $10 billion share-repurchase program, on top of $4.2 remaining from a previous buyback plan. Combined, the programs allow for the buyback of nearly 12% of Intel's outstanding shares at current prices. Separately, after Intel offered new concessions, the European Union approved the company's acquisition of McAfee ($48; MFE) for $7.68 billion. Intel is a Buy and a Long-Term Buy . . . Bank of America ($14; BAC) said it plans to raise its quarterly dividend, slashed to a penny during the financial crisis, in the second half of 2011. Bank of America is rated C (below average).

 

Rank Changes
Exxon Mobil ($79; XOM) is being added to the Focus and Buy lists, while J.P. Morgan Chase ($45; JPM) is being added to the Focus List. Lubrizol ($107; LZ) and Travelers ($56; TRV) are being dropped from the Focus List but remain Buys and Long-Term Buys. Abbott Laboratories ($48; ABT) is being dropped from the Buy List but remains a Long-Term Buy.

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