Portfolio Review

10/17/2011


Buy Agilent despite rival's profit warning

Shares of Agilent Technologies ($34; A) dropped after rival Illumina ($26; ILMN) warned on September-quarter results. Illumina also suspended its profit outlook, citing an "unprecedented slowdown in purchasing due to uncertainties in research funding and overall economic conditions."

Illumina develops research tools used in the genetic-analysis industry, a business that overlaps Agilent's life-sciences unit (27% of Agilent's revenue in the 12 months ended July). However, Agilent expressed confidence in its backlog and order patterns last month. Both companies share the same type of customers — academic institutions, government laboratories, and biotechnology and pharmaceutical companies — though Agilent's broad client base renders it less susceptible to the weakness in nonprofit and government research spending. Not one of the segment's 25,000 customers generates more than 2% of Agilent's life-science revenue. Since Illumina's warning, Agilent shares have bounced above their prior levels. Agilent is a Focus List Buy and a Long-Term Buy.

Technology wrap-up

Google ($543; GOOG) opened up its lead in the U.S. market for online search in September, as its share crept above 65%, according to industry researcher comScore. Yahoo's ($16; YHOO) slice slipped below 16%, while its partner Microsoft ($27; MSFT) held at 15%. Meanwhile, Google's share of U.S. smartphone operating systems rose to 44% in three months ended August, compared to 38% in the three months ended May. Apple's ($400; AAPL) share rose one percentage point to 27%, while Microsoft was roughly flat at 6%. Both Google and Microsoft are rated Buy and Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy.


The European Commission cleared Microsoft to acquire Skype, a Web-calling service with 170 million active users. The U.S. approved the $8.5 billion deal in September. In other news, Microsoft signed more than 40 content deals to enable Xbox users with cable subscriptions to watch live television through the gaming console. Kinect, Microsoft's motion-control device, will let viewers search for shows using voice commands. The deal could ease the reliance of Comcast ($23; CMCSa) and Verizon Communications ($37; VZ) on set-top boxes made by Motorola Mobility Holdings ($38; MMI), which Google has agreed to acquire for $12.5 billion. Comcast is a Long-Term Buy. Verizon is rated C (below average).


Hewlett-Packard's ($26; HPQ) appetite for big software acquisitions has been satiated as the company digests the $12 billion Autonomy deal, said new CEO Meg Whitman. Separately, H-P is reconsidering plans to divest its $40 billion personal-computer business, reported The Wall Street Journal. Without the PC segment, H-P could lose purchasing power with components makers and reduce the efficiency of its supply chain. Whitman has said she plans to decide on the business's fate by the end of the month. H-P has also reportedly completed the first round of bidding for its mobile-hardware business. H-P is a Long-Term Buy.


Oracle ($31; ORCL) attempted to defuse chatter that it might bid for H-P by saying any big acquisition would be a distraction for management. Instead, Oracle will turn its attention toward in-house growth options, such as a cloud-computing service that lets clients access applications over the Web. Oracle also agreed to pay about $200 million to settle claims that it had overcharged the U.S. government for nine years. Separately, Oracle's lawsuit against Google over the rights to the Java programming language will likely be postponed, said the judge presiding over the patent case. Oracle is a Focus List Buy and a Long-Term Buy.


BMC Software ($36; BMC) shares fell on rumors that a key sales executive is leaving the company and that the enterprise business could post disappointing results. The sell-off leaves shares attractively valued at less than 12 times trailing earnings, 48% below their three-year average and 15% below the median P/E for systems-software stocks in the S&P 1500 Index.

BMC's products run corporate data centers. Its software boosts efficiency, a prized benefit for companies struggling to prop up earnings through cost savings. Last month, Oracle reported strong results, though Cisco Systems ($17; CSCO), Dell ($16; DELL), and Emerson ($46; EMR) have said both companies and governments are tightening their technology budgets. Wall Street's September-quarter expectations seem conservative, with BMC projected to earn $0.81 per share, down 1% on 8% higher revenue. Scheduled to announce results Oct. 26, BMC Software is a Buy and a Long-Term Buy. Cisco and Dell are rated A (above average). Emerson is rated B (average).

Corporate update

CSX's ($21; CSX) Quadrix® Overall score has slipped to 79 from 93 at the end of July, largely the result of weak revision trends for analyst profit estimates. The consensus still projects healthy growth in the September quarter, with per-share earnings forecasted to rise 25% on 12% higher revenue. But analysts have been concerned by CSX's exposure to cost pressures and a macroeconomic outlook that appeared to unravel in recent months.

However, rail traffic has proved resilient, with U.S. carloads rising 1% in September. The latest weekly data is also positive, with carload volume setting a three-year high and intermodal volume reaching its highest level in four years. That growth is supported by higher transported volumes of petroleum, metal products, automobiles, and coal. Those numbers have contributed to the 12% rally in CSX shares this month. Solid results and/or strong guidance when CSX reports September-quarter earnings Oct. 18 could give the stock an additional bounce and potentially boost the Quadrix Earnings Estimates score. For now, CSX remains a Focus List Buy and Long-Term Buy.


AGCO ($38; AGCO) plans to spend $55 million through 2012 to expand three plants in Brazil, the world's largest producer of coffee and beef. AGCO, a maker of agricultural equipment, is also considering building a facility in Argentina. AGCO is a Buy.


CF Industries ($147; CF) plans to book a $22 million after-tax charge in the September quarter, stemming from the closure of a methanol plant. Late last year, CF Industries halted methanol production at the Oklahoma complex that houses the plant, focusing its efforts on maximizing ammonia production. CF Industries is a Focus List Buy and a Long-Term Buy.


PepsiCo ($61; PEP) earned $1.31 per share in the September quarter, up 7% and a penny above the consensus. Revenue rose 13% to $17.58 billion, boosted by 4.5% higher volumes, price increases, and the acquisition of a Russian beverage company. PepsiCo is rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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