Portfolio Review

5/23/2011


NASDAQ backs off from big board

NASDAQ OMX Group ($26; NDAQ) and IntercontinentalExchange ($120; ICE) withdrew their hostile $11.3 billion bid for NYSE Euronext ($35; NYX) after receiving word from U.S. regulators that the proposed deal was unlikely to survive antitrust scrutiny. U.S. officials worried that the combination would inhibit competition in the trading and listing of stocks. German exchange Deutsche Boerse said it will proceed with its own pending acquisition of NYSE.

NASDAQ is competing in an industry undergoing rapid consolidation. In the exchange business, mergers allow companies to slash costs and improve economies of scale. With NYSE out of the picture, NASDAQ could set its sights on the London Stock Exchange, which is struggling to complete its own proposed acquisition of the Toronto Stock Exchange. While LSE's market value of about $3.9 billion is less than half NYSE's size, since 2006 LSE has twice rejected unsolicited takeover offers from NASDAQ. NASDAQ is a Buy and a Long-Term Buy.

Stick with Aflac

Aflac ($51; AFL) shares dropped after the insurer told analysts to expect per-share-profit growth of 8% this year, below the 12% consensus. The company also said it expected 2012 profit growth of 0% to 5%, below the 7% consensus. In other news, Aflac took a $77 million loss on the sale of securities issued in Ireland and Tunisia, the latest effort to reduce risk in its investment portfolio. Aflac's profit guidance sounds unduly conservative, and at less than nine times the lowered 2011 profit target, the shares already reflect plenty of bad news. Aflac remains a Focus List Buy and Long-Term Buy.

April-quarter earnings

Agilent Technologies ($51; A) said April-quarter earnings per share rose 72% to $0.74 excluding special items, topping the consensus by $0.09. Revenue increased 32% to $1.68 billion on growth of 60% from chemical analysis, 39% from life sciences, and 19% from electronic measurement. Agilent credited the growth to its strong presence in emerging markets. Agilent also boosted its July-quarter profit and sales guidance above consensus estimates. The midpoint of Agilent's sales guidance implies 18% growth, and the company expects per-share profits of $0.71 to $0.73, up 31% to 35%. Shares surged on the results. Agilent is a Focus List Buy and a Long-Term Buy.


Hewlett-Packard ($37; HPQ) earned $1.24 per share in the April quarter excluding one-time costs, up 14% and $0.03 above the consensus. Revenue crept 3% higher to $31.63 billion, also exceeding the consensus estimate. But the company's forecasts for the July quarter and the year ending October fell short of Wall Street expectations. Management blames its disappointing outlook on the earthquake in Japan, sluggish sales for personal computers, and weak operating profit margins in the services unit. Results were released a day ahead of schedule following the leak of an email sent by CEO Leo Apotheker to top managers that stressed cost controls in anticipation of a tough July quarter. H-P may remain in the penalty box in the near term. But the sell-off appears overdone, as the stock now sells at its lowest trailing P/E ratio in at least 19 years. For now, H-P remains a Buy and a Long-Term Buy.


Dell's ($16; DELL) April-quarter earnings per share jumped 83% to $0.55 excluding special items, topping the consensus by $0.12. Revenue edged 1% higher to $15.02 billion, as higher sales to businesses offset a 7% decline in sales to consumers. The company's guidance for fiscal 2012 ending January topped Wall Street's expectations. Dell is rated A (above average).

Corporate roundup

DuPont ($52; DD) secured a 92% stake in Danisco through a tender offer, enough to complete its $6.49 billion acquisition of the Danish maker of food ingredients and enzymes. DuPont is rated A (above average).


Seeking to curb costs by $1 billion, Cisco Systems ($17; CSCO) is expected to slash up to 4,000 jobs, or roughly 5% of its work force, in coming months. Cisco Systems is rated B (average).


Intel ($24; INTC) plans to sell up to 10 million shares of Clearwire ($4; CLWR), a wireless-service provider. Intel is a Buy and a Long-Term Buy.

Dividend news

AmerisourceBergen ($42; ABC) raised its quarterly dividend 15% to $0.115 per share, payable June 6. Amerisource is rated B (average).


Citigroup ($42; C) announced that it will restart its quarterly dividend at $0.01 per share, payable June 17. The bank had suspended the payout during the financial crisis in 2009. Citigroup added that it will likely wait until 2012 to increase the payout. Citigroup is rated C (below average).


CA ($23; CA) raised its quarterly dividend 25% to $0.05 per share, its first increase since 1997. CA is rated A (above average).

Health-care review

Johnson & Johnson ($66; JNJ) may have to pay about $1 billion to settle a U.S. investigation into the possible improper marketing of antipsychotic drug Risperdal, reported The Wall Street Journal. J&J has said a settlement could result in a “material impact” on June-quarter results, but without providing details. J&J is rated B (average).


Stryker ($64; SYK) agreed to acquire Orthovita ($4; VITA) for roughly $316 million in cash and the assumption of debt. Orthovita, with $95 million in revenue last year, provides synthetic bone grafts and biosurgery products that control bleeding. Stryker is a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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