Portfolio Review

3/28/2011


Japan-related corporate report

Aflac ($53; AFL) maintains that it can handle the expected surge in claims caused by the earthquake and resulting tsunami in Japan. No doubt, these claims will weigh on short-term results. But the disaster could eventually produce higher revenue for Aflac and other insurers. Life-insurance sales set a record high in Japan following the 1995 earthquake in Kobe. Aflac shares have bounced 10% from their March 15 low to within 2% of where they traded before the disaster. In related news, ratings agency Moody's doesn't expect insurers to face significant long-term losses on Japanese securities. This represents good news for Aflac, whose Japan unit had a $78.4 billion investment portfolio at the end of 2010. Aflac is a Focus List Buy and a Long-Term Buy.


Shares of Apple ($341; AAPL) fell in the wake of the tragedy, at least in part over worries about component shortages. Apple can likely line up surrogate suppliers for some of the components used in its iPad 2 tablet, such as the memory microchips. But it may have trouble finding alternatives for the device's electronic compass, display glass, and unusually thin battery.

Apple buys futures contracts on parts and arranges large buys in advance, which suggests that whatever Apple's supply issues, it is probably better off than its rivals. The company is slated to launch the iPad 2 in 25 countries on March 25. Apple is a Focus List Buy and a Long-Term Buy.


Plenty of competition nips at Apple's heels. The XOOM tablet, newly released by Motorola Mobility Holdings ($26; MMI), stands to benefit from any prolonged iPad 2 shortage. And Research In Motion's ($62; RIMM) long-awaited PlayBook tablet will debut April 19, with three models priced from $499 to $699, in line with iPad 2. Best Buy ($31; BBY) has already begun accepting orders for the tablet. More than 20,000 stores will carry the PlayBook — double the penetration of the iPad.

In other news, RIM and wireless carriers are sparring for control of the customer data, revenue, and applications sprouting from mobile payments, as more consumers make purchases with a swipe of the smartphone. Wireless carriers seek to store the data on a phone's removable network-access card, while RIM seeks to keep the information in the device itself. Slated to report February-quarter results March 24, after the Forecasts went to press, RIM is a Buy and a Long-Term Buy. Best Buy is rated B (average).

Stick with Ameriprise

On March 24, a mediator will rule on more than $400 million in claims filed against Securities America, a subsidiary of Ameriprise Financial ($60; AMP), for selling soured private placements. Ameriprise could spend $110 million to assist its subsidiary Securities America, according to an expert witness, although neither company has released any numbers. Ameriprise, with a stock-market value of more than $15 billion and earnings of $1.10 billion last year, can absorb the likely financial hit. However, the case does raise some questions about Ameriprise's business practices, and we will keep an eye on the situation. Ameriprise remains a Focus List Buy and a Long-Term Buy based on its profit-growth prospects and modest valuation.

Earnings review

Ross Stores ($68; ROST) grew per-share profits 18% to $1.37 in the January quarter, matching the consensus estimate. Revenue rose 8% to $2.15 billion, while same-store sales advanced 4%, on top of a 10% gain in the same quarter last year. Ross is a Focus List Buy and a Long-Term Buy . . . FedEx ($88; FDX) reported February-quarter earnings of $0.81 per share excluding special items, up 7% but a penny short of the consensus. However, the company issued May-quarter profit guidance that exceeded Wall Street expectations. FedEx is rated B (average).

Financial roundup

Major U.S. banks raced to assure investors of higher dividends in the months ahead, following the completion of stress tests conducted by the U.S Federal Reserve. The tests were designed to measure the banks' capacity to withstand another economic downturn. Although the Fed capped dividend payments at 30% of expected earnings, the number of banks pledging higher payouts suggests the industry is regaining its financial footing. Turn to page eight to learn the plans of J.P. Morgan Chase ($45; JPM), a Focus List Buy and Long-Term Buy. Below, we recap the actions of J.P. Morgan's peers.


Bank of New York Mellon ($29; BK) plans to hike its quarterly dividend 44% to $0.13 per share and repurchase $1.3 billion in shares, roughly 4% of its stock count. Bank of New York is rated B (average).


Citigroup ($4; C) said it would reinstate its quarterly dividend at $0.01 per share in the June quarter and announced a 1-for-10 reverse stock split, effective May 6. Citigroup is rated C (below average).


Goldman Sachs ($161; GS) said it will repurchase the $5 billion of preferred shares it issued to Warren Buffett's Berkshire Hathaway ($85; BRKb) in September 2008. In other news, Goldman dismissed a report that embattled CEO Lloyd Blankfein could be planning to resign by the end of 2011. Berkshire is rated B (average). Goldman is rated C (below average).


U.S. Bancorp ($26; USB) approved a 150% increase of its quarterly dividend to $0.125, payable April 15. It also authorized the repurchase of 50 million shares, nearly 3% of shares outstanding. U.S. Bancorp is rated B (average).


Wells Fargo ($32; WFC) announced a special dividend of $0.07 per share, on top of its regular $0.05 dividend, both payable March 31. Wells Fargo also approved a plan to repurchase 200 million shares, nearly 4% of its share count, and issued $2.5 billion of debt. Wells Fargo is rated B (average).

News digest

DirecTV ($45; DTV) could lose more than $600 million in revenue if the National Football League cancels the upcoming season, though the direct earnings hit should be minimal. However, NFL Sunday Ticket is one of DirecTV's biggest draws and strongest marketing tools, and the lack of NFL games could have a negative effect on subscriber growth. If no football games take place, DirecTV would still have to pay roughly $1.1 billion in programming fees associated with NFL Sunday Ticket, with an unspecified portion of those fees refundable in 2012. DirecTV is a Focus List Buy and a Long-Term Buy.


The U.S. issued Exxon Mobil ($83; XOM) a deep-water drilling permit for the Gulf of Mexico, making it the fourth company cleared for work in the region since last year's oil leak. Exxon is a Focus List Buy and a Long-Term Buy.


Samsung Electronics, which generated 24% of Lam Research's ($51; LRCX) 2010 revenue, said it expects sales for its system semiconductors to jump 43% this year. Shares of Lam Research, rated a Focus List Buy, rallied on the news.


AT&T ($28; T) agreed to purchase T-Mobile USA from Deutsche Telekom for $39 billion in cash and stock in a deal that would merge the second- and fourth-largest U.S. mobile carriers. AT&T is rated B (average).


IBM ($158; IBM) agreed to pay $10 million to settle allegations that it had been bribing officials in South Korea and China for more than a decade. IBM is a Focus List Buy and a Long-Term Buy.


Cisco Systems ($17; CSCO) initiated a quarterly dividend of $0.06 per share, payable April 20. Cisco Systems is rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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