Portfolio Review

10/3/2011


Technology update

As many had speculated, Hewlett-Packard ($24; HPQ) hired Meg Whitman to replace Leo Apotheker as CEO. In less than a year on the job, Apotheker struggled to recast H-P's image from a stodgy hardware giant into a major player in software and services. With shares down 44% for the year, investors have heaped criticism on both Apotheker and H-P's board, which has tried to distance itself from his hiring. Whitman, a member of the board for the last eight months, built eBay ($33; EBAY) into a giant online retailer as the CEO there, but she lacks experience in enterprise hardware.

H-P said it still plans to go forward with the $12 billion acquisition of software company Autonomy ($39; AUTNF) and will determine the fate of its personal-computer unit later this year. H-P, modestly valued at six times the lowest Wall Street estimate for fiscal 2012 earnings, is a Long-Term Buy. eBay is rated B (average).


Oracle ($30; ORCL) now claims it incurred $1.16 billion in damages from Google ($539; GOOG), down from the $6.1 billion it had originally sought in a copyright- and patent-infringement lawsuit. In August 2010, Oracle said Google's Android operating system infringed on Java patents acquired from Sun Microsystems. The trial is scheduled to start Oct. 31.

Separately, U.S. senators questioned Eric Schmidt, Google's executive chairman, in a hearing triggered by complaints that the company abuses its market position as the world's largest Internet search engine. Competitors argue that Google unfairly steers search users toward its own products and services. Schmidt insisted Google is not manipulating its search results to place Google-owned companies ahead of rivals.

Finally, Microsoft ($22; MSFT) signed Samsung Electronics, the largest maker of Google's Android devices, to a patent-licensing deal. Microsoft will collect royalties on Samsung's Android-based smartphones and tablets. The companies will also develop mobile devices to run on Microsoft's Windows.  Oracle is a Focus List Buy and a Long-Term Buy. Google is a Buy and a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy.


Apple ($399; AAPL) shares dipped on reports the company had cut December-quarter orders by up to 25% for some manufacturers that supply parts for its iPad 2 tablet. Such a reduction could hint at weakening demand, though there are also more bullish explanations, such as a shift to other suppliers or a decision to slow production of the iPad 2 in anticipation of a newer model. Researcher Gartner sees the iPad dominating sales this holiday season, though the device could find a worthy challenger in Amazon.com's ($224; AMZN) new Kindle Fire tablet priced at $199, versus the iPad starting price of $499.

In other news, Apple has scheduled a media event on Oct. 4, when it is expected to unveil a new iPhone. DigiTimes reported that a defect in the iPhone 5's touch panel could limit initial shipments, originally targeted to be up to 26 million units in the December quarter, though the supplier in question said it expected to deliver on schedule. The iPhone has an 89% retention rate, more than twice the stickiness of its nearest competitor, according to a survey conducted by UBS. Apple is a Focus List Buy and a Long-Term Buy. Amazon.com is rated C (below average).

We'll wait for Walter

Walter Energy's ($68; WLT) stock has been choppy since the company gave an earnings warning Sep. 21. Since then, shares have fluctuated on concerns that end markets for metallurgical coal could suffer from a further slowdown in the global economy. At this point, demand for lower-quality metallurgical coal appears to be weaker than the higher-grade coal Walter produces.

The threat of weaker prices will remain a concern, but the bigger issue for Walter is its ability to get production back on track. Walter blamed the disappointing guidance on one-time production delays. Shortfalls aren't unusual for coal miners, given the highly uncertain nature of the industry. But Walter is losing credibility among investors after three quarters of disappointing results.

Given the lack of operating momentum, Walter is not a typical Forecasts recommendation. But the stock seems capable of reaching $80 if the company can stabilize production in the December quarter and early 2012. Walter is a Focus List Buy.

Corporate roundup

Newmont Mining ($63; NEM) shares dipped as gold prices fell in late September to their lowest level since July. Gold sells for $1,642 per ounce, down 13% from the all-time closing high of $1,895 set Sept. 5 but up 18% for the year. With Newmont's dividend now directly tied to the price of gold realized each quarter, these fluctuations affect more than just the company's profits. Meanwhile, copper futures sunk to their lowest level in a year in late September. Because of copper's wide use in industrial and consumer products, a decline could signal a slowdown in economic activity. But copper prices remain 64% above the average price during the last recession. Newmont is a Buy and a Long-Term Buy.


DISH Network ($28; DISH) announced the pricing terms of its Blockbuster Movie Pass, a streaming-video service for satellite-TV subscribers. DISH will also offer DVD rentals through the mail, hoping to scoop up consumers irritated by Netflix's ($127; NFLX) decision to raise prices. Netflix has warned that it now expects to lose one million of its roughly 25 million subscribers in the September quarter. DISH's Blockbuster unit said it has added 500,000 subscribers (some paying fees, others on free trials) in the past month.

CEO Joseph Clayton, a noted dealmaker, said DISH could consider a partnership or outright takeover of a wireless carrier, possibly Sprint Nextel ($3; S) or Clearwire ($2; CLWR). DISH is looking to take advantage of wireless spectrum it acquired earlier this year. Meanwhile, headwinds threaten to capsize the auction for Hulu, an online-video site. Concerns include uncertainty over digital-rights contracts, disappointment over the bid prices, and a wavering commitment from Hulu owners to sell. During the first round of bidding, DISH reportedly submitted the high offer of roughly $1.9 billion. DISH is a Buy.


Cleared by the Australian government, Chevron ($94; CVX) and its partners officially approved development of the Wheatstone liquefied natural gas (LNG) project, estimated to cost $28.4 billion. Chevron expects to begin exporting LNG by 2016. Chevron is also working on the $37 billion Gorgon project, also in Western Australia, scheduled to begin production in 2014. Chevron is a Buy and a Long-Term Buy.


MasterCard ($338; MA) and Visa ($89; V) are expected to raise their debit-card fees to the maximum allowed, $0.23, even on small purchases, said an analyst at Janney Montgomery Scott. Merchants currently pay about $0.08 on a $2 transaction. The move could alienate retailers and force a shift back to credit cards. In June, the Federal Reserve mandated that debit-card swipe fees remain below $0.24 on an average transaction. MasterCard is a Focus List Buy and a Long-Term Buy. Visa is rated A (above average).

Industrial review

Differing views have emerged in the industrial sector as a wave of companies updated their outlooks. FedEx ($71; FDX) shares slumped after management expressed pessimism about a U.S. recovery and slashed its profit guidance for fiscal 2012 ending May. FedEx said it earned $1.46 per share in the August quarter, up 22% on 11% revenue growth. Meanwhile, rival UPS ($64; UPS) took a more upbeat view, reaffirming its 2011 forecast of 17% to 23% profit growth. Neither FedEx nor UPS expects a double-dip recession. UPS is rated C (below average). FedEx is rated B (average).


United Technologies ($73; UTX) also appeared bullish in announcing its biggest acquisition ever — a pending $18.4 billion cash deal for aircraft-components maker Goodrich ($121; GR). That price represents a 47% premium to Goodrich's market value prior to rumors of a takeover. United Technologies plans to issue $4.6 billion in new shares, assume $1.9 billion in Goodrich debt, and fund the balance of the deal with its own debt. United Technologies is rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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