Portfolio Review

2/21/2011


Upgrades . . .

Bard ($98; BCR), a maker of surgical and diagnostic devices, enjoys strong cash-flow trends. In the 12 months ended September (December-quarter numbers are not yet available) per-share cash provided by operations rose 18%, while free cash flow jumped 23%. Buybacks have lowered the share count by more than 5% over the past year. Future repurchases should help support per-share earnings, up 10% in 2010 but expected to accelerate to 14% this year. At 17 times trailing earnings, shares trade 15% below their five-year history and 12% below the peer-group average. Bard is being initiated as a Buy and a Long-Term Buy.


In 2010, money manager BlackRock ($206; BLK) managed 83% revenue growth and a 53% increase in per-share profits excluding special items. Acquisitions contributed to the top-line growth, and a combination of improving equity markets and market-beating investment performance boosted fee income. BlackRock's operating results are sensitive to stock-market movements, and the stock is not likely to buck the trend if the market corrects. But the year-ahead outlook is bright, with Wall Street projecting sales and per-share-profit growth of 13%. Estimates are trending higher. BlackRock is being initiated as a Buy and a Long-Term Buy.


Lam Research ($54; LRCX), a maker of machines used to build semiconductors, is expected to more than double its per-share profits in fiscal 2011 ending June, supported by revenue growth of 53%. Cash provided by operations more than quintupled in the six months ended December, and after reducing its share count by 2.3% over the last six months, Lam seems likely to continue investing in its own shares. Despite its excellent operating momentum, Lam trades at 10 times trailing earnings, a 31% discount to the average semiconductor-equipment stock in the S&P 1500 Index and 25% below the company's three-year average. Lam is being initiated as a Buy.

. . . and downgrades

AmerisourceBergen ($37; ABC) is being removed from the Buy and Long-Term Buy lists. The stock trades within 1% of its all-time high, set in January and reached again in February. At 17 times trailing earnings, the stock is no longer cheap. The Overall score has slipped to 69 from 85 at the start of the year, hurt by slowing operating momentum. Investors tracking our Buy List or Long-Term Buy List should sell Amerisource, which has risen 105% since we first recommended it in July 2009.


We are dropping Microsoft ($27; MSFT) from the Buy List because of disappointing operating momentum, weak earnings-estimate trends, and sluggish share-price action. Microsoft remains cheap at 11 times trailing earnings, 31% below the five-year average. But the stock could tread water in the near term, considering concerns over corporate execution and sluggish personal-computer sales. In related news, Microsoft struck a deal with Nokia ($9; NOK) to license its Windows Phone software for the Swedish company's smartphones. Microsoft remains a Long-Term Buy.


In the December quarter, Rogers Communications ($35; RCI) grew per-share profits 5% to $C0.64 per share excluding special items, missing the consensus. Operating revenue grew 3% to $C3.15 billion. Rogers boosted its quarterly dividend 11% to $0.355 per share, payable April 1. Average revenue per wireless user slipped 2% to $C61.72. Despite its weakening operating momentum, the Canadian cable giant's long-term outlook remains intact. We are removing Rogers from the Buy List, though the stock will remain a Long-Term Buy.

Earnings report

Agilent Technologies ($43; A) said January-quarter earnings rose 58% to $0.60 per share excluding special items, topping the consensus by $0.03. Revenue increased 25% to $1.52 billion as all three segments — life sciences, chemical analysis, and electronic measurement — generated at least 18% growth. Orders surged 33% to $1.63 billion. Looking ahead to the April quarter, Agilent issued revenue and per-share-profit targets above the consensus. Agilent is a Focus List Buy and a Long-Term Buy . . . Comcast ($24; CMCSa) shares surged after the company reported December-quarter profits of $0.35 per share excluding special items, up 21% and $0.03 above Wall Street's forecast. Revenue increased 7% to $9.72 billion, also exceeding the consensus. Comcast added 698,000 net subscribers, versus 701,000 net adds in the year-ago quarter. In addition to revealing plans to accelerate stock buybacks, Comcast raised its quarterly dividend 19% to $0.1125 per share, payable April 27. Comcast is a Long-Term Buy.

Financial review

J.P. Morgan Chase ($47; JPM) wants to move the $6.4 billion Madoff lawsuit to a federal district court and out of bankruptcy court. Irving Picard, the trustee assigned to recover losses for investors victimized by Bernie Madoff's Ponzi scheme, says the bank earned millions of dollars in fees, while ignoring signs of the fraud. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.


It's not yet clear what course NASDAQ OMX Group ($28; NDAQ) will take following news of two planned mergers, one between the Toronto and London stock exchanges and another joining NYSE Euronext ($38; NYX) and Deutsche Borse. CEO Bob Greifeld said NASDAQ would only consider deals that cut costs, rather than simply establish a larger platform for stock listings. NASDAQ is a Buy and a Long Term Buy.

Corporate roundup

Research In Motion ($65; RIMM) is designing software that would let applications made for Google's ($624; GOOG) Android run on its forthcoming PlayBook tablet. Research In Motion is a Buy and a Long-Term Buy . . . An Ecuadoran court fined Chevron ($96; CVX) up to $18 billion in a long-running feud over toxic dumping. However, the fine could be unenforceable because Chevron owns few assets in the country that the government could seize to force payment. Chevron is rated A (above average).

Rank Changes
BlackRock ($206; BLK), Bard ($98; BCR), and Lam Research ($54; LRCX) are being initiated as Buys. BlackRock and Bard are also joining the Long-Term Buy List. AmerisourceBergen ($37; ABC) is being dropped from the Buy List and Long-Term Buy List. Microsoft ($27; MSFT) and Rogers Communications ($35; RCI) are being dropped from the Buy List. The Vanguard Short-Term Investment-Grade ($10.75; VFSTX) fund now carries a 14.3% weighting on our Long-Term Buy List.

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