Portfolio Review

5/16/2011


Quarterly earnings

DirecTV ($50; DTV) earned $0.85 per share in the March quarter, up 44% and topping the consensus estimate of $0.71. Revenue increased 13% to $6.32 billion, also above the consensus. For the U.S. business (81% of the quarter's revenue), net subscriber additions rose 84% and average revenue per subscriber edged 4% higher. DirecTV continues to benefit from the emerging middle class in Latin America (18%), where net subscriber additions surged 93% and average revenue per subscriber jumped 12%. Management now sees roughly 30% higher revenue for Latin America in 2011, versus the 20% growth it had forecasted in December. DirecTV is a Focus List Buy and a Long-Term Buy.

BMC Software's ($54; BMC) March-quarter earnings per share rose 20% to $0.78 excluding special items, a penny above the consensus. Advancing 14% to $562 million, revenue exceeded the consensus on 24% growth from licensing. Bookings jumped 21%. For fiscal 2012 ending March, BMC projected per-share-earnings growth of 7% to 11%, exceeding the 8% consensus at the time of the announcement. The midpoint of BMC's guidance for fiscal 2012 operating cash flow is $850 million, versus $765 million last year. BMC Software is a Buy and a Long-Term Buy.

For the March quarter, CVS Caremark ($37; CVS) said per-share earnings slipped 5% to $0.57 excluding acquisition-related costs in the March quarter but beat the consensus by $0.02. Revenue increased 9% to $25.88 billion. The pharmacy-benefit management (PBM) unit (49% of revenue for the quarter) grew sales 18%, while retail-pharmacy (51%) revenue crept 4% higher. Same-store sales increased 2.6% for the quarter. In other news, CVS said it received a subpoena from U.S. regulators concerning public disclosures it made in 2009 on its PBM and Medicare prescription business. Management reaffirmed its commitment to the PBM, purchased for $27 billion in 2007, but the investigation adds to the growing sentiment that CVS should divest the business. Caremark is rated B (average).

Cisco Systems ($18; CSCO) reported flat per-share profits of $0.42 in the April quarter, excluding special items, to top the consensus by $0.05. Cisco projects July-quarter revenue will lag expectations, with per-share profits of $0.37 to $0.39, below the $0.41 consensus. Sales climbed 5%. Cisco Systems is rated B (average).

Disney's ($44; DIS) per-share profits edged 2% higher in the March quarter to $0.49 but fell $0.07 short of the consensus. Revenue advanced 6% to $9.08 billion, as a 12% gain from its largest unit, media networks, offset a 13% decline in studio entertainment. Disney is rated B (average).

Mergers and deals

Microsoft ($26; MSFT) agreed to purchase Skype Technologies for $8.5 billion. Skype, Microsoft's biggest acquisition to date, has 170 million active users who make audio and video calls through the Web. The company generated $860 million in revenue last year but posted a loss of $7 million. Many question whether Microsoft will generate sufficient return from the purchase to justify the price. But Microsoft has long been criticized for hoarding cash ($38.24 billion, or $4.49 per share, in net cash before the deal), and the Skype purchase represents a change in strategy for a company struggling to build a presence in new markets using its own products. Microsoft is a Long-Term Buy.

In weighing Wal-Mart Stores' ($56; WMT) proposed $2.4 billion bid for a 51% stake in retailer Massmart, South African regulators will likely focus on protecting workers from job cuts and suppliers from cheap imports. Massmart operates primarily in South Africa but has a presence in 13 other African counties and has warned that Wal-Mart might scuttle the deal if officials impose procurement quotas. South Africa seeks to balance Wal-Mart's growth potential against powerful unions that promised the "mother of all boycotts" should the deal be approved. The hearing is expected to last until May 16. Wal-Mart Stores is a Long-Term Buy.

Walter Energy ($123; WLT) signed a lease for roughly 75 million tons of recoverable coking coal reserves in Alabama from a Chevron ($104; CVX) subsidiary. The stock fell 6% May 11, caught up in a broad-based sell-off of energy and materials stocks. Walter remains a Focus List Buy. Chevron is rated A (above average).

Corporate roundup

J.P. Morgan Chase ($45; JPM) is in "advanced discussions" with the U.S. Securities and Exchange Commission to settle a probe into how it bundled and sold mortgage-backed securities. J.P. Morgan maintained its estimate that potential losses from legal proceedings could top out at $4.5 billion above established reserves. Separately, J.P. Morgan, Bank of America ($12; BAC), Citigroup ($44; C), Wells Fargo ($29; WFC), and Ally Financial offered to pay a combined $5 billion to settle probes launched by the federal government and all 50 states investigating their foreclosure processes. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy. Wells Fargo is rated B (average). Bank of America and Citigroup are rated C (below average).

Intel ($23; INTC) boosted its quarterly dividend — the second hike in the last six months — to $0.21 per share, payable in the September quarter. The new dividend represents 1k6% growth from the May payment and a 33% increase from year-earlier levels. Intel is a Buy and a Long-Term Buy.

McDonald's ($80; MCD) said global same-store sales rose 6.0% in April, ahead of the 3.4% consensus. McDonald's credited its menu of McCafe beverages for helping to drive a 4.0% gain in U.S. same-store sales. McDonald's is rated A (above average).

Citigroup ($44; C) shares fell after the company completed a 1-for-10 reverse stock split. Citigroup is rated C (below average).

Energy review

Oil prices have dipped 13% from their April high above $113 per barrel in April, provoking a modest retreat in energy stocks. Hess ($77; HES) shares have fallen 10% in May, while shares of both Exxon Mobil ($81; XOM) and Apache ($123; APA) are down at least 7%. Industrial conglomerate Dover ($67; DOV) has fallen 3% so far this month, hurt by its own energy exposure. About 12% of Dover's 2010 revenue came from the oil, gas, and power markets.

Despite recent price action, energy's long-term prospects remain intact. More importantly, we have found energy stocks with solid Quadrix scores, attractive valuations, and the ability to outperform expectations.

In other news, Exxon is in talks to sell a 25% stake in its deepwater project off the coast of Angola to PT Pertamina, Indonesia's state-owned energy company, which bid $3.5 billion. Both Apache and Dover are Buys and Long-Term Buys. Exxon Mobil and Hess are both Focus List Buys and Long-Term Buys.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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