Portfolio Review

5/30/2011


Upgrades . . .

Alliance Data Systems ($89; ADS) is being added to the Focus List. With more than 900 clients, Alliance offers direct-marketing services, customer-loyalty programs and private-label credit cards. All three of Alliance's segments generated double-digit sales growth in 2010, and much of that momentum should extend through 2011. Consensus estimates project earnings per share of $1.65 in the June quarter, up 20% on 8% revenue growth. The stock has rallied 25% this year yet still appears cheap relative to peers and its own history. A return to the five-year average trailing P/E ratio of 22 seems unlikely any time soon. But shares would fetch $106 at 15 times the $7.10 consensus estimate for 2011 per-share earnings.


DISH Network ($29; DISH) is being added to the Buy and Long-Term Buy lists. The stock sports Quadrix scores of 80 for Momentum, 81 for Value, 85 for Earnings Estimates, and 96 Overall. In 2002, U.S. regulators shot down a merger between DISH and DirecTV ($49; DTV). But in the past year, regulators approved Comcast's ($24; CMCSa) merger with NBC Universal and are reviewing AT&T's ($31; T) proposed $39 billion takeover of T-Mobile USA. "I don't discount any possibility," of a merger, DISH CEO Joseph Clayton said. "We're looking at anything that will help enhance shareholder value."      

DISH targets lower-income consumers, partly explaining why it has lagged DirecTV's stellar performance. But DISH has managed to turn around its business in the past year. Cash provided by operations rose 12% on 8% sales growth in the 12 months ended March. DirecTV is a Focus List Buy and a Long-Term Buy. Comcast is a Long-Term Buy. AT&T is rated B (average).

. . . & Downgrades

Advance Auto Parts ($62; AAP) was dropped from the Focus and Buy lists on the May 20 Hotline. The auto-parts retailer posted disappointing results for the April quarter, and its Quadrix Overall score has dipped to 78. But Advance Auto reiterated its outlook for fiscal 2012 ending January, citing strong industry fundamentals. The shares have fallen 14% from the all-time high set in the days leading up to the report. At 13 times expected fiscal 2012 earnings, the stock trades 12% below the average for automotive retailers in the S&P 1500 Index. Advance Auto still appears to have solid two- to four-year potential and remains a Long-Term Buy.


While we select Buys based on 12-month potential, we don't lock ourselves into that holding period because things change. Medical-device maker Bard ($110; BCR) has risen 13% since we initiated coverage in the Feb. 21 issue, but we are no long confident in continued gains. The shares have benefited from a shift into defensive names. However, in the wake of that rise, Bard no longer looks cheap at 19 times trailing earnings, roughly in line with its peer-group average. The Quadrix® Value score has dipped to 46, with the Overall score down to 68. The company's failure to raise profit guidance in the wake of solid March-quarter earnings adds an element of uncertainty to Bard, and we are dropping the stock from the Buy List, Long-Term Buy List, and Monitored List. Subscribers should sell Bard.


Varian Medical Systems ($67; VAR) has performed well for us, rising 33% since we added it to the Long-Term Buy List in the March 4, 2010, issue. But while the maker of medical-imaging products should continue to deliver double-digit profit growth this year and next year, the stock's Quadrix Overall score has dropped to 59. The stock has not behaved well recently, slumping after a failed attempt at new highs in early May. At 19 times projected earnings in fiscal 2011 ending September, Varian shares already reflect the expected growth, and the Forecasts is ready to take profits. Varian is being dropped from the Long-Term Buy List and the Monitored List and should be sold.

Stock reviews

Apple ($332; AAPL) shares, once seemingly immune to the market's downward shifts, have slipped 5% so far this month. The Nasdaq 100 Index put some pressure on Apple when it cut the stock's weighting to 12.3% from 20.5% on May 2. Mutual funds with more than $370 billion in assets use the Nasdaq 100 as a benchmark and may have had to adjust their holdings. Adding to the trouble, a May 20 explosion at a Chinese plant that manufactures products for Apple and Dell ($15; DELL) has halted production, potentially crimping iPad 2 shipments. A Chinese newspaper reported that some retailers in the country are running out of iPads and the black-market price has risen in recent days. However, at least two other facilities make the iPad, and Apple plans to add more. Apple trades at less than 14 times projected earnings for fiscal 2011 ending June, a 5% discount to the average computer hardware stock in the S&P 1500 Index. Apple, which has historically commanded a substantial premium to most peers, is a Focus List Buy and a Long-Term Buy. Dell is rated A (above average).


Abbott Laboratories ($53; ABT) has rallied 11% this year, but it still trades at less than 12 times estimated 2011 per-share earnings, a 10% discount to the average pharmaceutical stock in the S&P 1500 Index. One reason for the valuation: Investors worry how Abbott will fare when blockbuster rheumatoid arthritis drug Humira (19% of 2010 revenue) loses patent protection in 2016. To soften the blow, Abbott has boosted its research-and-development spending 55% over the last two years. In other news, the U.S. Food and Drug Administration approved a test to help hepatitis C patients undergoing antiviral therapy. Abbott's HIV-drug portfolio could get a lift after a nine-country study found that AIDS treatments make HIV patients far less infectious. Abbott sells three HIV treatments. Yielding 3.6%, Abbott Laboratories is a Long-Term Buy.


Intel ($23; INTC), addressing investors at its annual meeting, boasted that it is making more profit from smartphones and tablet computers than any other semiconductor company. Intel also hinted that it could be looking to gain more business from Apple, possibly producing the iPhone's processor. Intel shares have rallied 14% since the release of strong March-quarter results. Intel is a Buy and a Long-Term Buy.

Corporate roundup

AutoZone ($293; AZO) earned $5.29 per share in the May quarter, up 28% and $0.30 above the consensus estimate. U.S. same-store sales increased 5.3%, on top of a 7.1% gain last year. AutoZone's commercial business grew sales 23% to $267 million. Shares rallied on the results. AutoZone is a Buy and a Long-Term Buy.


BlackRock ($193; BLK) sold $1.5 billion of bonds to help fund its $2.5 billion repurchase of an equity stake held by Bank of America ($11; BAC). In other news, BlackRock's quantitative unit lost a $778 million equity account it had managed for a Connecticut pension plan. The unit has reportedly suffered $18.9 billion in outflows in the past six months. BlackRock is a Buy and a Long-Term Buy. Bank of America is rated C (below average).


Citing strong prospects for coal exports and intermodal cargo, CSX ($76; CSX) sees per-share earnings rising at an annualized rate of 18% to 20% through 2015. CSX plans to keep its dividend-payout ratio at 30% to 35% of earnings, in line with the current ratio, suggesting the dividend should roughly grow with per-share income. CSX is a Focus List Buy and Long-Term Buy.

Rank Changes

Alliance Data Systems ($89; ADS) is being added to the Focus List. DISH Network ($29; DISH) is being initiated as a Buy and a Long-Term Buy. Bard ($110; BCR) is being dropped from the Buy and Long-Term Buy Lists and being dropped from coverage. Varian Medical Systems ($67; VAR) is being dropped from the Long-Term Buy List, and from coverage. On the May 20 hotline, we dropped Advance Auto Parts ($62; AAP) from the Focus List and Buy List.


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