Portfolio Review

3/7/2011


Focus List switch

Lam Research ($55; LRCX), which makes equipment used in the production of semiconductors, is being added to the Focus List. Lam, already a Buy, earns a Quadrix® Overall score of 100. All six category scores rank in the top 25% of stocks in our research universe. The stock, up 6% so far this year, hit a three-year high in February.

Shares have been pushed higher by Lam's impressive results over the last four quarters. Sales surged 151%, helping to generate free cash flow of $636 million, up from a negative $36 million in the year-earlier period. Lam has also topped the consensus profit estimate by at least 10% in four consecutive quarters.

Despite that excellent growth, the stock trades at just 10 times trailing earnings, a 23% discount to the average semiconductor-equipment stock in the S&P 1500 Index. Wall Street sees double-digit growth for both earnings and revenue in the March and June quarters. Although Lam operates in a highly volatile and cyclical business, the stock seems capable of reaching $64 to $66 in the next 12 months.


Newmont Mining ($56; NEM) grew per-share earnings 2% to $1.16 excluding special items in the December quarter, $0.02 above the consensus. Revenue crept 1% higher to $2.55 billion. Attributable gold production decreased 7%, while copper slipped 1%. Shares sold off, most likely because of Newmont's disappointing production guidance for the year ahead, which projected a decline at its Indonesian mine.

Newmont lowered its 2011 target for gold production, projecting 5.1 million ounces to 5.3 million ounces, down 2% to 6% from 2010 levels. The company called its 2011 production guidance “a pretty good base for the next five years or so,” citing lower-than-expected production at the Boddington mine in Australia. Copper production is expected to fall between 33% and 42% in 2011 because of lower-grade ore, though such developments tend to be cyclical, and the quality of the ore could improve over time.

The company's portfolio of production assets is impressive, and Newmont stock still offers excellent capital-gains potential over the next one- and three-year periods. However, the stock no longer qualifies as one of our very favorites, so it is being dropped from the Focus List while remaining a Buy and a Long-Term Buy.

NASDAQ mulls its options

In the wake of high-profile merger deals in the past month, NASDAQ OMX Group ($28; NDAQ) is weighing a number of possibilities in the shifting landscape of market exchanges. Of the deals pending, the one most significant to NASDAQ's business is Deutsche Borse's $10 billion bid for NYSE Euronext ($37; NYX), which includes a $337 million breakup fee. But NASDAQ, no stranger to negotiating complicated deals, could muster a hostile bid for its chief rival.

NASDAQ, with a market value about half that of NYSE Euronext, probably cannot buy the exchange on its own. So it is reportedly considering CME Group ($307; CME) and IntercontinentalExchange ($127; ICE) as potential partners in a bid for NYSE Euronext. Together, NASDAQ and its partner would likely have to pay $11 billion to $12 billion to wrest the exchange away from Deutsche Borse. Regulatory approval would also pose a steep challenge.

NASDAQ could also turn to smaller acquisition targets, such as CBOE Holdings ($28; CBOE), owner of Chicago Board Options Exchange, or the Toronto Stock Exchange, which has already received a bid from the London Stock Exchange. NASDAQ could also put itself up for sale. NASDAQ is a Buy and a Long-Term Buy.

Corporate report

Apple ($349; AAPL) CEO Steve Jobs, in a rare appearance since taking medical leave earlier this year, introduced the iPad 2 tablet — thinner, lighter, and faster than its predecessor. It comes with data plans through AT&T ($28; T) and Verizon Communications ($36; VZ). Apple did not change the price of the tablet, set to ship in the U.S. on March 11 and internationally on March 25. Microsoft ($26; MSFT) will unveil a tablet running on Windows 8 in June, according to Business Insider. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Long-Term Buy. AT&T and Verizon are rated B (average).


A U.S. appeals court reversed a $1.8 billion jury award Abbott Laboratories ($48; ABT) had been ordered to pay to Johnson & Johnson ($61; JNJ). The lawsuit centered on whether Abbott's blockbuster rheumatoid arthritis drug Humira infringed on a patent held by J&J. Abbott Labs is a Long-Term Buy. J&J is rated B (average). 


Boeing ($70; BA) won a U.S. Air Force contract potentially worth about $35 billion to build a fleet of tankers that refuel planes in midflight. In the first phase of the contract, valued at $3.5 billion, Boeing is to deliver 18 tankers by 2017. The European Aeronautic Defense and Space Co. (EADS) appeared to have won the contract in 2008, but protests from Boeing sparked government auditors to cancel the award. Boeing is rated C (below average).


SAP ($60; SAP) filed to reduce the $1.3 billion it has been ordered to pay Oracle ($32; ORCL) in a copyright-infringement case to reflect “actual harm,” valued at $409 million by Oracle and $28 million by SAP. Oracle responded by saying it will seek an additional $500 million. Oracle is a Long-Term Buy.


Exxon Mobil ($85; XOM) plans to spend $33 billion to $37 billion annually on capital projects in the next several years, up from $32.2 billion in 2010. Exxon Mobil is a Focus List Buy and a Long-Term Buy.

Financial digest

J.P. Morgan Chase ($46; JPM) raised $1.22 billion for a new fund that will invest in social media, well above its initial target of $500 million to $750 million. The Digital Growth Fund reportedly seeks to acquire a 10% interest in Twitter for $450 million. In other news, legal woes stemming from the financial crisis continue to haunt U.S. banks, evident in their annual fillings released in the past week. Under a worst-case scenario, J.P. Morgan faces legal losses of up to $4.5 billion in additional fines and lawsuits not covered by its current litigation reserve. By comparison, Citigroup ($5; C) warned of a potential shortfall of $4 billion, while Goldman Sachs ($161; GS) said possible losses could reach $3.4 billion. J.P. Morgan is a Focus List Buy and a Long-Term Buy. Citigroup and Goldman Sachs are rated C (below average) . . . BlackRock ($201; BLK) hiked its quarterly dividend 38% to $1.375 per share, payable March 23. BlackRock is a Buy and a Long-Term Buy.

Rank Changes

Lam Research ($55; LRCX) is being added to the Focus List. Newmont Mining ($56; NEM) is being dropped from the Focus List but remains a Buy and a Long-Term Buy.


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