Portfolio Review

2/28/2011


Tech review

Riding the popularity of its iPad tablet, Apple ($339; AAPL) took a 17% slice of the mobile-computer market in the December quarter, ahead of Hewlett-Packard's ($43; HPQ) 16% share, according to market researcher DisplaySearch. H-P remains the world's biggest maker of personal computers, while Apple ranks eighth excluding tablets. DigiTimes reported that to accommodate the iPad's explosive growth, Apple has secured about 60% of the touch-screen display market, limiting the supply for other tablet makers.

Meanwhile, regulators in the U.S. and Europe are reviewing Apple's iPad subscription service for possible antitrust violations. Apple's conditions for digital subscriptions sold through its iTunes App Store include banning links to publisher Web sites and restricting prices offered outside of the Apple store, while taking a 30% cut of subscription revenue. Apple is a Focus List Buy and a Long-Term Buy. H-P is a Buy and Long-Term Buy.


Microsoft ($27; MSFT) has experienced renewed interest from application developers since forming its smartphone partnership with Nokia ($9; NOK), though it has far to go before catching the dominant players. Microsoft's Windows Phone operating system's share of new projects rose to 4% in the first four days after the announcement, versus 1% in the four days leading up to the agreement, said analytics company Flurry.

Apple held a 69% share of apps that began development in the four days after the deal, followed by Google's ($610; GOOG) 25% share and Research In Motion's ($67; RIMM) 2% share. In other news, unit sales of Microsoft's Xbox rose 15% in January. The company said Xbox was the only video-game console that grew sales for the month. Microsoft is a Long-Term Buy. RIM is a Buy and a Long-Term Buy. Google is rated A (above average).


Indian officials reassured Research In Motion that efforts to monitor corporate e-mails are broad, not specific to the Canadian company. RIM previously told India that it was incapable of unlocking the encrypted e-mails. Since then, India has sought to gain access to e-mails through the telecommunication companies that provide BlackBerry services.


In an effort to boost production of semiconductors, Intel ($22; INTC) said it will begin construction of a $5 billion factory in Arizona in the middle of this year. Intel plans to increase capital spending to $8.7 billion to $9.3 billion in 2011, up at least 67%. Intel is a Buy and a Long-Term Buy.


IBM ($162; IBM) sold the last of its stake in computermaker Lenovo, about $265 million in shares, at a discount of 3.7% to the market price. IBM originally took a 19% equity stake in Lenovo in 2005 as part of the $1.25 billion divestment of its personal-computer business to the Chinese company. IBM is a Focus List Buy and a Long-Term Buy.

Earnings report

In the December quarter, DirecTV ($44; DTV) earned $0.74 per share, up 54% excluding special items and $0.12 above the consensus estimate. Revenue, jumping 11% to $6.62 billion, also exceeded expectations. DirecTV added 667,000 net new subscribers, up 79% from adds in the year-ago quarter, while average revenue per subscriber increased nearly 5%. The company also approved a $6 billion share-buyback program after spending more than $5 billion to repurchase or retire shares last year. DirecTV is a Focus List Buy and a Long-Term Buy . . . Hewlett-Packard ($43; HPQ) said January-quarter profits rose 27% to $1.36 per share excluding special items to top the consensus by $0.07. Revenue advanced 4% to $32.30 billion but missed Wall Street's forecast. Sales derived from enterprise servers, storage, and networking grew 22%, offsetting declines in the larger services (down 2%) and personal-systems (down 1%) units. H-P's April-quarter guidance for sales and per-share earnings fell short of the consensus estimate at the time of the announcement. H-P is a Buy and Long-Term Buy . . . Wal-Mart Stores ($54; WMT) grew January-quarter profits 11% to $1.34 per share from continuing operations excluding special items, exceeding the consensus by $0.03. Revenue increased 2.5% to $115.60 billion, fueled by 9% growth from the international unit. But the U.S. business remains weak, as same-store sales slid 1.8%, the seventh consecutive quarterly decline. For the April quarter, Wal-Mart projects per-share profits of $0.91 to $0.96, compared to the consensus of $0.96 at the time of the announcement. Wal-Mart is a Long-Term Buy.

Financial roundup

NASDAQ OMX Group ($28; NDAQ) shares have risen 14% so far in February, though trading has been choppy and option activity heavy. Much of the volatility stems from pending industry mergers, including a pact between rivals NYSE Euronext ($37; NYX) and Deutsche Borse, which would form the biggest exchange in the world by revenue. Economies of scale could give the resulting company a big edge in pricing power. NASDAQ has reportedly hired Bank of America ($14; BAC) to help review its options.

NASDAQ and IntercontinentalExchange ($122; ICE) have reportedly been considering their own merger, as well as a joint bid for NYSE Euronext, with NASDAQ taking the equity-trading business and Intercontinental the derivatives unit. NASDAQ is a Buy and a Long-Term Buy. Bank of America is rated C (below average).


J.P. Morgan Chase ($46; JPM) and Bank of America ($14; BAC) are experimenting with monthly fees for debit cards, teller services, and checking accounts. Many of the pilot programs target specific regions or new accounts, and fees can be waived if certain conditions are met. Banks are searching for new revenue streams after the Federal Reserve proposed to cap fees from debit transactions. J.P. Morgan's credit-card-services unit generated 12% of the bank's net income in 2010. J.P. Morgan is a Focus List Buy and a Long-Term Buy. Bank of America is rated C (below average).

Health-care update

An industry-sponsored study blamed the U.S. Food and Drug Administration for stifling innovation through its lengthy review process for medical devices. On average, reviews for medical devices took 27 months in 2008, up 75% from the average in the five-year period ended 2007. The FDA countered the criticism, saying its reviews are stringent enough to thoroughly test product safety. In other news, the FDA said it will announce guidelines for reviewing generic versions of biological drugs "very soon" . . . Johnson & Johnson's ($61; JNJ) reputation took another hit when the company announced two more product recalls, for a skin adhesive that was reportedly discolored and for injection devices that could infuse an improper dosage of rheumatoid-arthritis drug Simponi. J&J is rated B (average) . . .  Abbott Laboratories ($47; ABT) boosted its quarterly dividend for the 39th consecutive year, the latest a 9% hike to $0.48 per share payable May 16. Abbott Labs is a Long-Term Buy.

Corporate digest

Exxon Mobil ($85; XOM) will partner with Naftogaz, Ukraine's state-owned energy company, to search for shale gas deposits. In other news, Exxon said its proved reserves of oil and natural gas rose by 3.5 billion barrels of oil equivalent in 2010 — more than double its production and the largest increase since 1999. Exxon is a Focus List Buy and a Long-Term Buy.


Coca-Cola ($64; KO) raised its quarterly dividend 7% to $0.47 per share, payable April 1. Coca-Cola is rated A (above average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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