Portfolio Review

8/1/2011


June-quarter earnings update

By the numbers, June-quarter earnings look solid so far. As of July 25, 185 S&P 500 Index companies had declared June-quarter earnings, of which 73% had topped the consensus. The index's per-share profits are on pace to post 18% year-to-year growth in the June quarter and for the year.

However, the best way to determine whether earnings (and guidance) truly topped expectations is to watch the performance of a stock or index. Through that lens, the news is inconclusive. Since Alcoa ($15; AA) unofficially kicked of June-quarter earnings season after the market closed on July 11, the S&P 500 Index has risen less than 1%.

Of course, while broad-market trends are worth watching, of more import to investors is the news from individual stocks. As the table below indicates, most of our recommendations that have declared June-quarter earnings delivered solid results.

Below, we present June-quarter results for recommended companies:

Alliance Data Systems ($100; ADS) said its core earnings per share rose 27% to $1.75 in the June quarter, topping the consensus by $0.06. Sales grew 11% to $740 million on growth across all three primary segments. Alliance Data projected 2011 profits of $7.20 per share, up 23% and above the consensus at the time of the announcement. Alliance Data is a Focus List Buy.


Dover's ($65; DOV) earnings from continuing operations jumped 44% to $1.31 per share in the June quarter, well above the consensus estimate of $1.15. Revenue surged 21% to $2.16 billion. Citing robust demand in its energy and infrastructure end markets, Dover hiked its full-year forecast for both sales and earnings per share. Dover is a Focus List Buy and a Long-Term Buy.


In the June quarter, Hess ($73; HES) earned $1.78 per share, up 55% but $0.16 below Wall Street's forecast. Total revenue surged 27% to $9.81 billion but fell short of the consensus. Including its hedges, Hess realized an average price of $97.20 per barrel for crude oil, up 50% from year-earlier levels. Total production fell 10% to 372,000 barrels of oil equivalent per day, primarily because Hess suspended operations in Libya and sold some natural-gas assets. Hess is a Focus List Buy and a Long-Term Buy.


NASDAQ OMX Group ($24; NDAQ) said June-quarter earnings per share rose 19% to $0.62 excluding special items, $0.02 above the consensus. Net exchange revenue increased 7% to $416 million. NASDAQ raised its 2011 expense target, partly on higher costs for information security. Citing rich valuations, CEO Robert Greifeld cast doubt on NASDAQ making a splashy acquisition. NASDAQ is a Buy and a Long-Term Buy.


Aflac ($45; AFL) said per-share operating profits climbed 16% to $1.56 in the June quarter, topping Wall Street's estimate by $0.02. Including $668 million of investment losses and a gain on derivative transactions, Aflac earned $0.60 per share. Sales rose 2%, well short of expectations. Aflac issued 2011 guidance roughly in line with the consensus. The insurer has been selling off debt securities from troubled European countries, and such investments now represent 2.8% of Aflac's portfolio, down from 4.1% at the end of March. Aflac is a Buy and a Long-Term Buy.


BMC Software ($51; BMC) grew June-quarter earnings per share 16% to $0.72 excluding special items, exceeding the consensus by $0.04. Revenue rose 9% to $502 million and bookings surged 39%. BMC Software, which raised its profit guidance for fiscal 2012 ending March, is a Buy and a Long-Term Buy.


Corning's ($17; GLW) per-share profits fell 17% to $0.48 excluding special items, yet topped the consensus by a penny. Revenue jumped 17% to $2.01 billion. Reflecting weaker expectations for television sales, Corning trimmed its 2011 forecast for the global glass market. At just eight times projected 2011 earnings, Corning shares already reflect plenty of bad news. For now, the stock remains a Buy and a Long-Term Buy.


Microsoft ($28; MSFT) grew per-share profits 35% to $0.69 in the June quarter, exceeding the consensus by $0.11. Sales climbed 8% to $17.37 billion. Growth in server software, the Office business software suite, and Xbox gaming systems offset a 1% decline at the Windows unit. Microsoft is a Long-Term Buy.


Rogers Communications ($39; RCI) earned C$0.85 per share in the June quarter excluding special items, up 8% and topping the consensus by 4%. Operating revenue crept 3% higher to C$3.12 billion. Shares slipped 3% on the results but are up 12% for the year. Rogers is a Long-Term Buy.


Texas Instruments' ($32; TXN) per-share profits fell 10% to $0.56 in the June quarter but still exceeded the consensus by $0.03. Revenue slipped 1% to $3.46 billion, hurt by a 23% decline for the wireless segment as the company wound down a type of chip no longer in demand. TI is a Long-Term Buy.


Travelers ($57; TRV) reported a per-share operating loss of $0.91 in the June quarter, versus a $1.39 profit in the year-ago quarter and a $0.64 loss projected by Wall Street. The loss reflected devastation caused by the unusually frequent and severe tornadoes and hailstorms that ripped through the U.S. during the quarter. Excluding the catastrophe losses, Travelers earned $1.65 per share. Travelers is a Long-Term Buy.


Exelon ($44; EXC) grew its per-share profits 6% to $1.05 excluding special items in the June quarter, exceeding the consensus by $0.09. Exelon raised its 2011 profit target, and the stock rose on the news. Exelon is rated A (above average) and is a member of Top 15 Utilities portfolio.

JUNE-QUARTER SALES, PROFIT GROWTH
Of our 19 recommended stocks that had reported June-quarter earnings by early July 27, most delivered double-digit profit growth and only two failed to top the consensus. A “+” means the company gave positive guidance, “-” signifies negative guidance, and “=” means guidance was reiterated.
Per-Share Earnings
June-
Quarter
Sales
Growth
(%)
Stock
Reaction
(Price Chg. Relative to S&P 500)
Company (Price; Ticker)
June
Quarter
($)
Growth
(%)
Surprise
(%)
Guidance
Abbott Labs
($52; ABT)
1.12
11
1
9
+
(0.9)
Alliance Data Sys.
($100; ADS)
1.75
27
4
11
+
(4.3)
Altera ($42; ALTR)
0.65
12
2
17
+
0.7
Apple ($403; AAPL)
7.79
122
34
82
-
2.7
BlackRock
($184; BLK)
3.00
27
3
16
none
0.5
Corning ($17; GLW)
0.48
(17)
2
17
-
(4.5) *
CSX ($25; CSX)
0.46
28
5
13
+
(1.6)
Dover ($65; DOV)
1.31
44
14
21
+
0.6
Hess ($73; HES)
1.78
55
(8)
27
-
(2.7) *
Intel ($23; INTC)
0.59
16
16
20
+
(2.1)
IBM ($183; IBM)
3.09
18
2
12
+
4.0
J.P. Morgan Chase
($41; JPM)
1.27
17
5
7
none
2.5
Microsoft
($28; MSFT)
0.69
35
19
8
=
1.5
NASDAQ OMX
($24; NDAQ)
0.62
19
3
7
-
(2.1) *
Rogers Commun.
($39; RCI)
0.85
8
4
3
none
(2.9)
St. Jude Medical
($48; STJ)
0.85
8
1
10
-
2.2
Stryker ($55; SYK)
0.90
13
0
16
none
(3.7)
Texas Instruments
($32; TXN)
0.56
(10)
6
(1)
-
0.7
Travelers
($57; TRV)
(0.91)
NM
NM
3
none
(0.3)
NM Not Meaningful because of operating losses.     * Price movements reflect performance through 12 p.m. Central time July 27, when the page went to press.

 

Bed Bath & Beyond upgraded

Bed Bath & Beyond ($60; BBBY), initiated as a Buy and a Long-Term Buy in the July 4 issue of the Forecasts, is being added to the Focus List. The home-products retailer enjoys strong operating momentum, with per-share profits up 32% over the last year and results topping the consensus by at least 11% in each of the last four quarters. Wall Street expects profit growth of 20% in fiscal 2012 ending February and 15% in fiscal 2013, with analyst estimates on the rise. At 16 times the 2012 estimate, Bed Bath & Beyond seems attractively valued relative to its growth potential.

Corporate roundup

Express Scripts ($56; ESRX) agreed to buy Medco Health Solutions ($65; MHS) for $30.3 billion in cash and stock, translating to $74.31 per share, a 33% premium to Medco's price prior to the announcement. This merger will attract regulatory scrutiny, and Medco's price, well below the bid price, reflects skepticism that the deal will get done. Express Scripts and Medco are rated B (average).


A U.S. judge rejected Oracle's ($32; ORCL) $6.1 billion estimate for damages in a patent lawsuit filed against Google ($623; GOOG) last year. The judge suggested Oracle start its estimate as low as $100 million. Oracle is a Focus List Buy and a Long-Term Buy. Google is rated B (average).


Although Intel ($23; INTC) beat Wall Street estimates for the June quarter and raised its revenue target, shares slumped on worries about the personal-computer market. Intel, supplier of about 80% of the microprocessors used in the world's PCs, scaled back its 2011 PC outlook to unit growth of 8% to 10%. Some analysts still see the target as too aggressive. Intel is a Buy and a Long-Term Buy.


Newmont Mining ($58; NEM), raised its quarterly dividend 50% to $0.30 per share, payable Sept. 29. Newmont is a Buy and a Long-Term Buy.

Rank Changes

Bed Bath & Beyond ($60; BBBY) is being added to the Focus List.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com