Portfolio Review

9/5/2011


Apple still strong after Jobs leaves

Apple’s ($390; AAPL) share-price resilience in the face of the Aug. 24 resignation of iconic co-founder and CEO Steve Jobs suggests investors remain confident the tech giant can continue to produce gadgets people want.

Tim Cook, Apple’s chief operating officer and the man who has handled most of the day-to-day responsibilities of running Apple since Jobs began his latest medical leave in January, will take over the company. Cook has historically kept a low profile despite his influential post, and he is unlikely to duplicate the bold, larger-than-life persona that turned Jobs into a cult figure. However, 56-year-old Jobs was diagnosed with pancreatic cancer in 2004 and had a liver transplant two years ago. In the wake of those much-publicized health problems, Jobs’ resignation and the choice of successor were not surprising.

Cook is known for his expertise in operations, not product development, and many industry watchers wonder who will take the creative lead at Apple in Jobs’ absence. Jobs, who retains the post of chairman, wrote in his resignation letter, “I believe Apple’s brightest and most innovative days are head of it.”

Industry experts almost universally praise Apple’s deep roster of creative minds. While Jobs’ resignation does add some long-term uncertainty, Cook and other executives moving into larger roles inherit an extremely healthy company and will have the opportunity to prove they can keep the juice flowing. Apple shares have risen nearly 4% since the announcement of Jobs’ resignation, suggesting that the market is willing to give the technology giant some time to prove it can still deliver.

While Apple may be losing its public face, it still boasts an impressive portfolio of products and robust growth potential. The consensus projects per-share-profit growth of 82% in fiscal 2011 ending September and 16% in 2012. The iPhone 5 is expected to launch in October, and a new version of the iPad tablet computer will reportedly hit the market next year.

Apple has $76.16 billion in cash and long-term investments, and some analysts expect the company to begin making acquisitions in an effort to acquire new technology. However, Jobs eschewed the large acquisitions undertaken by many tech rivals. And with Jobs continuing as chairman, it is uncertain how far the company will stray from its roots.

At 12 times projected earnings of $32.11 per share in fiscal 2012 ending September, Apple looks cheap relative to the growth it can deliver. The price already reflects plenty of Jobs-related uncertainty, and the stock remains a Focus List Buy and a Long-Term Buy.

Irene’s financial force less than expected

Hurricane Irene caused at least 44 deaths, and more than a million people were still without power as of Aug. 31. The storm chewed up more than 1,000 miles of U.S. coastline, and portions of the Eastern Seaboard remain flooded. Damage estimates continue to rise — a common trend after national disasters — and the figure of $20 billion has surfaced, though most prognosticators still expect less than $10 billion in damages.

However, as monstrous weather events go, Irene’s effects on our Monitored stocks should be surprisingly small. Service disruptions will affect Eastern railroads CSX ($22; CSX) and Norfolk Southern ($68; NSC), but the slowdown should be temporary.

Discount chains such as Wal-Mart Stores ($53; WMT) and home-improvement retailers such as Home Depot ($34; HD) did brisk business in advance of the storm, while sellers of apparel and other discretionary goods reported lower store traffic. Insurers such as Travelers ($50; TRV) will take a hit, but not as bad as many feared before the storm’s landfall, with most estimates of total insured damages no higher than $5 billion.

Portions of the East Coast shut down for a couple days, and we can expect plenty of charges against September-quarter earnings as companies account for the lost business. But with life getting back to normal in most of the storm-slammed areas — and the prospect of billions of dollars of spending on everything from building materials to furniture over the next few months — Irene could have been a lot worse for U.S. businesses.

BofA’s struggles continue

Add the Federal Deposit Insurance Corp. to the list of entities unhappy with Bank of America’s ($8; BAC) $8.5 billion settlement with mortgage-security investors. While institutional investors BlackRock ($166; BLK) and the Federal Reserve Bank of New York agreed to the deal, many other investors and state governments see the payment as insufficient. The FDIC stopped short of criticizing, saying it lacked enough information to evaluate the settlement. Some critics seek to send their dispute to federal court.

Bank of America faces large liabilities beyond the contested settlement and has taken steps to raise capital. The bank sold about half of its stake in China Construction Bank ($15; CICHY) for $8.3 billion, netting a $3.3 billion gain and reportedly seeks to sell a unit that buys mortgages from third parties. Legendary investor Warren Buffett’s Berkshire Hathaway ($72; BRKb) also provided a cash infusion of $5 billion.

While Bank of America shares rose on the Buffett news, investors should think twice about buying the common shares — Buffett certainly didn’t buy them. For his $5 billion, Buffett received preferred stock paying 6% and warrants to buy 700 million common shares at $7.14 per share, 12% below the current price. While the additional capital makes Bank of America somewhat safer, it still earns a C (below average) rating. Berkshire is rated B (average).

Corporate roundup

Exxon Mobil ($74; XOM) has entered into a joint venture with Russian oil firm OAO Rosneft to develop oil and natural gas in the Russian Arctic. The deal, which starts with $3.2 billion, will eventually entail “tens of billions of dollars” in investment, according to a Rosneft spokesman. Such projects carry substantial risk. The Russian Arctic features both brutal weather and a lack of industrial infrastructure, and any production is probably years away. However, the potential rewards are huge, with Exxon taking a one-third interest in properties with an estimated 45 billion barrels of oil. British oil giant BP ($39; BP) tried and failed to close a similar deal earlier this year. Exxon is a Focus List Buy and a Long-Term Buy. BP is rated B (average).


Hewlett-Packard ($26; HPQ) said it would prefer spinning off its personal-computer unit to selling it. H-P, the world’s largest seller of PCs, shocked the market last month with plans to get out of the business. In other news, Oracle ($28; ORCL) accused H-P of fraud for allegedly concealing facts during negotiations regarding the Itanium microprocessor platform, and with regard to a legal settlement over Oracle’s hiring of former H-P chief Mark Hurd. Oracle itself is reportedly under federal investigation over allegations of bribery in Africa. For now, H-P is a Buy and a Long-Term Buy. Oracle is a Focus List Buy and a Long-Term Buy.


Google’s ($541; GOOG) $500 million settlement with the U.S. Justice Department for allowing Canadian pharmacies to advertise drugs in the U.S. has not ended the matter. Days later, a shareholder sued Google’s board of directors regarding the ads. Success on this front could spark many more lawsuits and set a dangerous precedent for companies that display third-party Internet advertisements. Google is rated B (average).


IBM ($173; IBM) agreed to buy i2, a firm that performs crime-prevention analytics, for an undisclosed amount. This would mark IBM’s 25th analytics acquisition in the last five years, continuing a strategy of investing heavily in services and software. IBM is a Focus List Buy and a Long-Term Buy.


The Department of Justice has sued to block AT&T’s ($28; T) proposed $39 billion acquisition of T-Mobile, a deal that would create the largest U.S. wireless provider. AT&T has promised to bring 5,000 call-center jobs back to the U.S. if regulators approve the merger. AT&T is rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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