Portfolio Review

4/18/2011


Stick with Corning . . .

Corning's ($19; GLW) shares have slipped more than 7% since we first recommended the stock last month, hurt by worries regarding its exposure to the earthquake and tsunami in Japan. Corning plans to maintain production levels at two of its Japan plants that manufacture LCD glass. At the same time, Sharp, a key customer of those plants, will curb its output of LCD panels.

Corning says it will take advantage of the slowdown in orders to build up its inventory. The inventory buildup is a risky proposal. The supply of televisions is high, and Corning could find itself holding a glut of inventory if demand weakens. However, if global demand rises, Corning could fill the supply vacuum caused by the shutdown of rival plants.

In any case, Corning's Quadrix Overall score of 97 is supported by ranks of 83 for Momentum, 89 for Value, and 94 for Quality. Shares trade at less than 10 times estimated earnings for 2011, a 35% discount to the average electronic-component stock in the S&P 1500 Index. Corning is a Buy and a Long-Term Buy.

. . . and Lam Research

Shares of Lam Research ($52; LRCX) fell after an analyst, who has consistently issued negative comments about the company, said Samsung's decision to delay orders for semiconductor equipment could affect Lam's June-quarter results. About 24% of Lam's 2010 revenue came from Samsung. However, a different analyst gave a bullish view on Lam and the entire industry, expected to benefit from 15% higher spending on semiconductor equipment in 2011 in the wake of a 143% surge in 2010.

Lam earns an Overall Quadrix score of 99. The company has grown free cash flow in five straight quarters and holds $8.11 per share in net cash on its balance sheet. Lam, trading at less than 10 times trailing earnings, remains a Focus List Buy.

March-quarter earnings

J.P. Morgan Chase ($47; JPM) earned $1.28 per share in the March quarter, up 73% and $0.12 above the consensus. Revenue fell 8% to $25.79 billion but beat Wall Street's forecast. Lower revenue for retail financial services (down 19%) and card services (down 10%) offset gains at J.P. Morgan's smaller units, such as commercial banking (up 7%) and asset management (up 13%). Delinquency trends continue to improve, with the net charge-off rate at 6.8%, down from 11.8% in the year-earlier quarter. At the end of March, J.P. Morgan had a provision of $1.17 billion for credit losses, down from $7.01 billion a year earlier on the strength of lower charge-offs and a sharp reduction in the company's loan-loss estimates. J.P. Morgan is a Focus List Buy and a Long-Term Buy.


Kicking off the March-quarter earnings season, Alcoa ($17; AA) reported per-share profits of $0.28 excluding special items, up from $0.10 in the year-ago quarter and topping the consensus by a penny. Revenue jumped 22% to $5.96 billion but fell short of Wall Street's forecast. Alcoa is rated C (below average).

NYSE rejects NASDAQ

NYSE Euronext's ($38; NYX) board turned down an unsolicited $11.3 billion bid from NASDAQ OMX Group ($28; NDAQ) and IntercontinentalExchange ($120; ICE). For now, NYSE says it will sit tight with Deutsche Boerse's $9.7 billion offer, though media reports suggest NYSE is considering paying a special dividend in an effort to encourage shareholders to support the Deutsche Boerse deal. NASDAQ's deal proposed $740 million in cost savings, well above Deutsche Boerse's $578 million estimate.

While NYSE calls NASDAQ's proposal "loosely worded" and "highly conditional," NASDAQ calls it "clearly superior." NYSE plans to hold its annual meeting April 28, but the final word could come from investors, currently being courted by both sides, in a July vote.

NYSE is not obligated to sell itself to the highest bidder. The company stresses that the Deutsche Boerse deal should create more long-term value for shareholders and have a better chance of clearing regulatory hurdles. To complete the deal, NASDAQ would also assume a heavy debt burden.

So far, Deutsche Boerse has made no move to sweeten its offer. NYSE's resistance may represent a ploy to extract a larger bid from NASDAQ or gain some form of financial assurance — in the form of a reverse breakup fee — should U.S. regulators bust the deal. NASDAQ is a Buy and a Long-Term Buy.

News roundup

Apple ($332; AAPL) is reviewing complaints that some iPad 2 tablet computers do not connect to Verizon Wireless's network, acknowledging the problem but not commenting further on the issue. In related news, a report circulated that Apple could launch an iPad 3 in the September quarter, though some component makers cast doubt on the rumor, saying they had not received notice from Apple regarding a new generation, which would cut into sales of the current device. In other news, two of India's largest wireless carriers plan to launch Apple's iPhone 4 in the world's second-biggest mobile-phone market in coming months. Apple is a Focus List Buy and a Long-Term Buy.


Newmont Mining ($57; NEM) changed its dividend policy by directly tying the quarterly distribution to gold prices. For every $100 rise in the price of an ounce of gold, Newmont will increase its quarterly dividend by $0.05 per share. Today's per-ounce value of gold between $1,400 and $1,499 would equate to a quarterly payout of $0.25 per share, well above the previous dividend of $0.15 per share. The new policy will go into effect with the June 29 dividend. Newmont also outlined its long-term target for gold production, forecasting 7 million ounces in 2017, representing annualized growth of 5% from the 5.1 million to 5.3 million ounces projected for 2011. Newmont is a Buy and a Long-Term Buy.


BlackRock ($195; BLK), with $3.6 trillion in assets under management, looks to double the size of its $300 billion U.S. retail business by the end of 2014. BlackRock, which deals primarily with institutional funds, plans to expand its selection of mutual funds and other retail products aimed at individual investors. BlackRock is a Buy and a Long-Term Buy.


MasterCard ($263; MA) added $1 billion to its existing share-repurchase program, enough to reduce the share count by 3% at current prices. So far this year, MasterCard has repurchased 3.15 million shares, shrinking its share count by more than 2%. MasterCard is a Focus List Buy and a Long-Term Buy.


More than a quarter of patients in a study developed antibodies that resisted Humira, Abbott Laboratories' ($51; ABT) blockbuster rheumatoid-arthritis drug. If that resistance reduces the drug's effectiveness for individual users over time, it could lower sales. Abbott is a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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