Portfolio Review

9/26/2011


4 upgrades

AGCO ($41; AGCO) is being initiated as a Buy. The company manufactures tractors, combines, and other agricultural equipment. AGCO earns a Quadrix Overall score of 95 and even higher sector-specific ranks. At 11 times trailing earnings, shares trade 46% below their five-year average and 20% below their peer-group median.

In each of the last four quarters, AGCO has posted sales growth of at least 18% and widened its operating profit margins. Strong commodity prices have kept farmers' incomes high, and AGCO appears likely to extend its recent growth trend, with Wall Street expecting per-share-profit growth of 26% in the second half of 2011.


Chevron's ($98; CVX) Overall score of 98 is supported by an attractive valuation, strong operating momentum, and rising profit estimates. Shares trade at less than nine times trailing earnings, 10% below the three-year average and 12% below the median for integrated oil and gas stocks in the S&P 1500 Index. Despite the discount to its peers, Chevron offers superior fundamentals. It has reeled off seven straight quarters of higher cash provided by operations and holds $6.44 billion, or $3.21 per share, in cash net of long-term debt. Yielding 3.2%, Chevron is being added to the Buy and Long-Term Buy lists.


We are upgrading Google ($547; GOOG) to Buy and Long-Term Buy. The shares have recovered most of the ground they lost after Google announced in August the $12.5 billion acquisition of Motorola Mobility Holdings ($38; MMI). The deal adds uncertainty to Google, which has little experience with hardware, but indicates the opportunity management sees in mobile communications.

Google has delivered eight straight quarters of higher operating cash flow, including 43% growth in the first half of 2011. The stock seems modestly valued at less than 17 times trailing earnings, 50% below its five-year average. The consensus projects per-share profits will rise 20% this year.


UnitedHealth Group ($50; UNH), a managed-care provider, is being upgraded to a Buy and a Long-Term Buy. With an Overall score of 90, the stock ranks in the top half of our research universe for all six category scores. Cash from operations climbed 14% in the 12 months ended June, allowing the company freedom to hike the quarterly dividend 30%, shrink the share count 4%, and more than triple net cash. Health-care reform uncertainties could weigh on the shares, but UnitedHealth has shown it can adapt, and overall spending on health care is likely to keep rising along with trends in medical costs.

Stick with Walter, CSX

Walter Energy ($66; WLT) slashed its sales forecast for metallurgical coal to 5.2 million tons for the last six months of 2011, slightly above first-half production levels but short of its earlier target, 5.9 million tons. Walter now expects per-share profits of $1.00 to $1.16 for the September quarter, a far cry from Wall Street's projection of $3.22. Walter blamed the lower production in part on difficult geology at an Alabama mine, record rainfall in British Columbia, and a temporary plant shutdown. Given the severe sell-off, a bounce would not surprise us, and Walter remains a Focus List Buy for now.


Walter's report didn't help shares of railroads such as CSX ($20; CSX), which also came under pressure when Alpha Natural Resources ($27; ANR) slashed its guidance for metallurgical coal production. Alpha cited unexpectedly weak demand in Asia, an issue that could presage demand issues with other commodities and industrial goods. Coal accounted for 32% of CSX's revenue in the first half of 2011, while industrial products and materials generated another 27%. We are keeping CSX as a Focus List Buy and Long-Term Buy but will be watching the stock closely.

Corporate roundup

Bed Bath & Beyond ($59; BBBY) said August-quarter earnings per share jumped 33% to $0.93, exceeding the consensus by $0.09. Same-store sales grew 5.6%, while total revenue advanced 8%. The retailer's operating profit margins widened by more than two percentage points in the quarter. For the November quarter, management expects per-share profits to rise 11% to 18%, versus Wall Street's target of 16%. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy.


Newmont Mining ($70; NEM) announced plans to strengthen the link between its quarterly dividend and gold prices — as long as gold remains above $1,700 an ounce. Under the new dividend policy, an average realized gold price of $1,700 will result in a quarterly dividend of $0.425, versus the previous projected dividend of $0.40 for that gold price. Newmont is a Buy and a Long-Term Buy.


Apple's ($413; AAPL) share of tablet-computer shipments increased to 68% in the June quarter, while Google's ($547; GOOG) slice slipped to 27%, said industry tracker IDC. However, Apple's share could shrink to 50% in the December quarter because of cheaper alternatives powered by Google's Android operating system. Its shares streaking to an all-time high, Apple is a Focus List Buy and a Long-Term Buy.


Agilent Technologies ($35; A) said it expects revenue for fiscal 2011 ending October to grow 22% to $6.65 billion, matching the consensus estimate. Agilent is a Focus List Buy and a Long-Term Buy.

Rank Changes

Intel ($22; INTC) is being added to the Focus List. IBM ($175; IBM) is dropping from the Focus List but remaining a Buy and a Long-Term Buy. Microsoft ($27; MSFT) is being added to the Buy List. AGCO ($41; AGCO) is being initiated as a Buy. Chevron ($98; CVX), Google ($547; GOOG), and UnitedHealth ($50; UNH) are being added to the Buy List and the Long-Term Buy List. Apache ($95; APA), Dover ($51; DOV), J.P. Morgan Chase ($32; JPM), and Hewlett-Packard ($24; HPQ) are being dropped from the Buy List but remain Long-Term Buys. BASF ($64; BASFY) is being dropped from the Long-Term Buy List. Vanguard Short-Term Investment-Grade ($10.71; VFSTX) now accounts for 22.0% of the Buy List and 22.6% of the Long-Term Buy List.


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