Portfolio Review

7/4/2011


Buy Bed Bath & Beyond

Bed Bath & Beyond ($58; BBBY) has recovered well from the economic slowdown, as evidenced by six consecutive quarters of at least 10% sales growth and 27% per-share-profit growth. The retailer operates more than 1,100 stores that sell home products, focusing on linens, hard goods, and consumables.

In the May quarter, Bed Bath & Beyond earned $0.72 per share, up 38% and 14% above the consensus. Operating cash flow jumped 50% and sales rose nearly 10%, with same-store sales up 7.0%. The retailer augments its top-line growth with expanding profit margins and buybacks that have reduced the share count by 5% over the last year. Bed Bath & Beyond expects per-share profits to increase 15% to 20% in fiscal 2012 ending February, and consensus estimates are rising.

At less than 16 times projected current-year earnings, Bed Bath & Beyond trades at a slight discount to the average specialty store despite unusually well-defined growth potential. The stock earns a Quadrix® Overall score of 95, with at least 94 in both sector-specific scores. Bed Bath & Beyond is being initiated as a Buy and a Long-Term Buy.

Madoff pricetag rises

The trustee for victims of Bernard Madoff's ponzi scheme now seeks $19 billion from J.P. Morgan Chase ($40; JPM), up from his previous claim for $5.4 billion. The lawsuit alleges J.P. Morgan ignored signs of fraud while earning hundreds of millions of dollars in fees from Madoff's business. The amended complaint says J.P. Morgan should have become aware of the suspicious transactions after being contacted by an investigator for another firm around 1997.

In other news, J.P. Morgan dropped more than 1,000 lawsuits to recover credit-card debt, according to The Wall Street Journal. Additionally, J.P. Morgan plans to open up to 2,000 branches in the next five years, as it tries to break into areas dominated by Wells Fargo ($27; WFC) and Bank of America ($11; BAC).

In related news, Bank of America agreed to pay $8.5 billion to settle claims brought by a group of investors, including BlackRock ($189; BLK) and MetLife ($42; MET), over mortgage-backed bonds bought ahead of the U.S. housing collapse. Bank of America will take $14 billion in charges in the June quarter to cover this settlement as well as future mortgage-related claims. J.P. Morgan Chase and BlackRock are rated Buy and Long-Term Buy. MetLife and Wells Fargo are rated B (average). Bank of America is rated C (below average).

May-quarter earnings

Oracle ($32; ORCL) earned $0.75 per share in the May quarter excluding special items, up 25% and $0.04 above the consensus. Sales grew 13% to $10.78 billion, as new software licenses surged 19% to $3.74 billion. Revenue from hardware products slipped 6% to $1.16 billion, which Oracle attributed in part to the discontinuation of money-losing products it inherited from Sun Microsystems.

Oracle, known for its aggressive acquisition strategy, said it has slowed its dealmaking pace, citing current valuations as too rich. Days later, Oracle agreed to buy Pillar Data Systems, a privately held storage company in which Oracle CEO Larry Ellison is the largest investor. By comparison, Dell ($16; DELL) says acquisitions remain a critical component of its push into data storage and servers. Oracle is a Focus List Buy and a Long-Term Buy. Dell is rated A (above average).


Nike ($90; NKE) shares surged after the company said per-share profits rose 17% to $1.24 in the May quarter, exceeding the consensus by $0.08. Revenue grew 14% to $5.77 billion, and Nike also raised long-term revenue guidance for its namesake brand. Nike is being upgraded to B (average) from C (below average).

Corporate roundup

Apple ($335; AAPL) and Intel ($21; INTC) received approval from the U.S. Justice Department to bid on wireless patents held by Nortel Networks, a bankrupt maker of telecommunications equipment. One estimate values Nortel's portfolio — containing more than 6,000 patents, including some related to fourth-generation wireless data technology — at $1.5 billion. Google ($494; GOOG) has already offered $900 million. In other news, there has been plenty of chatter over Apple's forthcoming iPhone and potential partnership with China Mobile ($46; CHL), which had 600 million customers in May. One report has ApApple is a Focus List Buy and a Long-Term Buy. Intel is a Buy and a Long-Term Buy. Google is rated B (average).ple beginning production of a new smartphone in August, while analysts debate the date of its arrival, with some seeing a September launch.


Shares of MasterCard ($310; MA) and Visa ($87; V) rallied on news that federal regulations for debit-card swipe fees will not be as onerous as investors had feared. The Federal Reserve will cap interchange fees at $0.21, plus a conditional charge of a penny and 0.05% of each transaction for fraud prevention. The previously proposed limit was $0.12 per transaction; banks currently charge about $0.44. MasterCard is a Focus List Buy and a Long-Term Buy. Visa is rated A (above average).


African retailer Massmart, now majority-owned by Wal-Mart Stores ($53; WMT), vowed to create 15,000 jobs in South Africa over the next five years. During that time, Wal-Mart plans to boost Massmart's spending on food and consumer products by $8.7 billion, primarily through local suppliers. Massmart operates about 288 stores spread across 14 nations. Wal-Mart Stores is a Long-Term Buy.


DISH Network's ($29; DISH) $1.38 billion takeover offer was accepted by TerreStar, a bankrupt company that owns 20 megahertz of broadband spectrum. A final hearing on the deal is slated for July 7. DISH is a Buy.


Rising rates charged by railroad companies such as CSX ($26; CSX) have drawn complaints from customers and attracted the scrutiny of federal regulators. Seeking to erode that pricing power, shippers have proposed a requirement that rival railroads link their tracks together. CSX is a Focus List Buy and a Long-Term Buy.


An implantable device made by St. Jude Medical ($47; STJ) to treat migraine headaches was found effective in a clinical study. But shares slipped on concerns that the results might not be sufficient to win over U.S. regulators. The device has already been approved in Europe, and St. Jude sees the potential U.S. market exceeding $1 billion. St. Jude Medical is a Long-Term Buy.


Accenture ($60; ACN) will be added to the S&P 500 Index after the close of trading on July 5. Accenture is rated A (above average).

Rank Changes

Bed Bath & Beyond ($58; BBBY) is being initiated as a Buy and Long-Term Buy. Vanguard Short-Term Investment-Grade ($10.76; VFSTX) now accounts for 9.9% of the Buy List and Focus List and 11.8% of the Long-Term Buy List.


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