Portfolio Review

7/18/2011


Tech report

MasterCard ($304; MA) plans to challenge a 2007 ruling by the European Union to limit transaction fees on cross-border credit-card payments. MasterCard shares have risen 9% since the Federal Reserve announced a higher ceiling on debit-card swipe fees than many investors anticipated. The consensus estimate sees MasterCard earning $4.22 per share in the June quarter, up 21%. MasterCard is slated to report results Aug. 3. The stock is a Focus List Buy and a Long-Term Buy.

U.S. and Canadian bankruptcy-court judges cleared a consortium led by Apple ($354; AAPL) and Microsoft ($27; MSFT) to complete their $4.5 billion purchase of 6,000 patents owned by bankrupt Nortel Networks. The purchase still faces U.S. antitrust scrutiny. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Long-Term Buy.

Health-care roundup

Pfizer ($20; PFE) said it will consider selling or spinning off its nutrition and animal-health units. The two businesses generated about 8% of Pfizer's revenue last year and could fetch $16 billion to $23 billion in a sale. In other news, the European Union granted Pfizer a six-month extension for the patent on blockbuster cholesterol drug Lipitor, now set to expire in May 2012. Last year, Lipitor generated $10.7 billion in revenue, about half of that outside the U.S. Lipitor's U.S. patent expires in November of this year. Pfizer is rated B (average).

Johnson & Johnson ($67; JNJ) could face an avalanche of lawsuits from former patients who received a hip replacement taken off the market in 2009 and later recalled. About 93,000 patients received the device, and one analyst estimated that litigation costs could exceed $1 billion. The company already faces 1,000 lawsuits from patients claiming J&J sold the artificial hip joints despite knowledge of their connection to health problems. J&J is rated B (average). 

Corporate review

Five U.S. mortgage servicers including J.P. Morgan Chase ($39; JPM), Bank of America ($10; BAC), Citigroup ($39; C), and Wells Fargo ($27; WFC) are in advanced talks with U.S. officials and state attorneys general to settle claims of improperly foreclosing on homes. The total settlement could exceed $20 billion and establish federal and state funds to offer homeowners relief. In other news, J.P. Morgan agreed to purchase APAC Customer Services ($8; APAC) for $470 million in cash. J.P. Morgan Chase is a Buy and a Long-Term Buy. Wells Fargo is rated B. Bank of America and Citigroup are rated C.

Autoliv ($70; ALV) warned that a previously disclosed antitrust probe will likely have a material impact on operating results. Shares of Autoliv, the world's largest airbag maker, plunged more than 10% on the news. Autoliv is rated A (above average).

In the wake of a scandal involving News of the World, one of its British newspapers, News Corp. ($15; NWSa) withdrew its $12 billion bid to acquire the remaining 61% stake in British Sky Broadcasting. The paper allegedly hacked into phone messages for the British royal family, politicians, athletes, and civilians — including victims of the Sept. 11 terror attacks. News Corp. shares slumped and criticism mounted when the scandal broke, and the company responded by shutting down News of the World, Britain's largest Sunday newspaper. News Corp. is rated B (average).

Walgreen ($43; WAG) boosted its quarterly dividend 29% — the biggest hike in the company's history — to $0.225 per share, payable Sept. 12. It also approved up to $2 billion in share repurchases. Walgreen is rated A (above average).

Exxon has 2 months to clean up oil spill

Exxon Mobil ($82; XOM) submitted its plan to clean up an oil spill in the Yellowstone River to the U.S. Environmental Protection Agency, which has ordered the oil giant to complete its efforts by Sept. 9. On July 1, an estimated 1,000 barrels of oil leaked from a ruptured pipeline buried in the riverbed. Exxon has already begun preliminary work to clean up the river and replace the pipeline. Most of the oil is apparently concentrated within 20 miles of the original leak, though shoreline contamination extends about 240 miles downstream. Last year, the federal government accused Exxon of neglecting to maintain a different part of the pipeline.

In other news, a federal appeals court reinstated a lawsuit filed by Indonesian villagers claiming Exxon should be held liable for alleged killings and torture committed by soldiers guarding the company's natural-gas facility between 1999 and 2001. The ruling upholds a seldom-used law, dating back to 1789, that lets foreigners file U.S. lawsuits regarding violations of international law. But it conflicts with a decision made in a separate case last September involving Royal Dutch Shell ($70; RDSa) and Nigerian citizens. Exxon Mobil is a Focus List Buy and a Long-Term Buy.

Stick with our semiconductor stocks despite group's weakness

The S&P 1500 Semiconductor & Semiconductor Equipment Group Index has declined 11% over the last two months, lagging the broader index, which is down 3%. Pessimistic comments from analysts and managements weigh on the group, and it's fair to question whether the weakness will continue.

Businesses have shown a willingness to invest in technology, and U.S. tech spending is projected to grow 6% this year, according to industry researcher IDC. But cracks in the enterprise business could be forming. Hewlett-Packard ($35; HPQ) CEO Leo Apotheker, who had previously warned employees of a challenging July quarter, said big companies remain cautious about spending on technology. And last month, H-P rival Oracle ($33; ORCL) announced May-quarter hardware revenue below expectations.

Despite these concerns, June-quarter earnings estimates for our recommended semiconductor stocks — Texas Instruments ($31; TXN), Altera ($45; ALTR), and Intel ($22; INTC) — have held up. Indeed, Intel reiterated its guidance in June, just hours after IDC trimmed its 2011 forecast for personal computers.

Macroeconomic indicators suggest investors shouldn't expect much from semiconductor companies in the September quarter. But our recommended semiconductor stocks have fairly low bars to clear. The consensus sees profits at TI and Altera down at least 8% in the quarter. Expectations for 14% growth from Intel reflect management's bullishness. Altera and Oracle are rated Focus List Buy and Long-Term Buy. Intel and H-P are rated Buy and Long-Term Buy. Texas Instruments is a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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