Portfolio Review

11/7/2011


CF Industries ($168; CF) reported per-share profits of $5.16 excluding special items in the September quarter, up from $1.10 in the year-ago quarter and above the consensus estimate of $4.74. Revenue increased 53% to $1.40 billion on 52% growth at the nitrogen unit and a 57% rise in phosphate sales. Tight global supplies and strong restocking demand sparked at least 33% gain in realized prices for all of CF's major products. CF is a Focus List Buy and a Long-Term Buy.


In the September quarter, Exxon Mobil ($76; XOM) grew earnings per share 48% to $2.13, easing past the consensus by a penny. Cash from operations rose 15%, marking the seventh consecutive quarter of growth. Higher prices offset a 4% decline in oil-equivalent production. Capital and exploration spending slipped 2% to $8.62 billion. Exxon Mobil is a Focus List Buy and a Long-Term Buy.


MasterCard ($359; MA) shares rallied after the company said per-share profits jumped 43% to $5.63 in the September quarter, well ahead of Wall Street's $4.81 target. Net revenue grew 27% to $1.82 billion, also exceeding the consensus. Global purchase volume rose 17%, and management said the troubles in Europe haven't had a significant impact on the company's business. MasterCard is a Focus List Buy and a Long-Term Buy.

BMC, Newmont remain on Buy List

BMC Software ($34; BMC) topped consensus estimates for both revenue and per-share earnings in the September quarter. But shares tumbled on a 16% decline in total bookings and reduced guidance for fiscal 2012 ending March. Management cited weakness in the U.S. public sector and Europe but primarily blamed its performance on the departure of several veterans on its sales team.

Its problems are self-inflicted, BMC stressed, not the fault of rivals swooping in to lure away clients. To address the attrition, BMC said it is hiring aggressively and adjusting its compensation structure. But the sales staff has become too small and unseasoned to bring in the volume of deals the company expected, and that weakness will likely linger in coming quarters.

BMC remains in an attractive niche, as businesses still seek to expand mainframe capacity while keeping costs under control. BMC says it also landed several new customers for its cloud-based products in the quarter. However, the sales turnover could lead investors to question the competitiveness of BMC's products.

For now, BMC remains a Buy and a Long-Term Buy, partly because of its ability to generate cash. It has delivered year-to-year growth in operating cash flow in eight of the last 10 quarters, including a 27% increase in the September quarter. The balance sheet holds $1.13 billion in net cash, equal to about 19% of the share price. The sell-off leaves shares at 11 times trailing earnings, 45% below their three-year average and 19% below their peer group. Excluding the net cash, BMC's P/E is just nine.


Newmont Mining's ($66; NEM) September-quarter earnings rose 19% to $1.29 excluding asset impairments, topping the consensus by $0.05. Revenue grew 6%. Operating cash flow jumped 48%. Average realized gold prices rose 39% to $1,695 per ounce for the quarter, offsetting lower copper prices and reduced gold and copper production.

Guidance was somewhat disappointing, as Newmont raised the specter of lower-than-expected grades of ore and higher-than-expected costs. Newmont also raised its gold price-linked dividend, declaring a payment of $0.35 per share in the December quarter, up 17% from the September-quarter payout and more than double the year-earlier dividend.

The case for Newmont hinges on two trends: production and gold prices. Newmont expects gold production of 5.1 million ounces to 5.3 million ounces this year, with a bias toward the low end of the range, down from 5.4 million ounces last year. The company projects "flattish" production next year but a rise to 7 million ounces a year by 2017, as new mines and acquired properties come into play. Several newer properties are likely to begin paying off in 2013 or 2014, and the company's target seems achievable, though somewhat optimistic.

Gold trades at $1,742 per ounce, up 24% so far in 2011. Newmont's results (and share price) depend heavily on gold prices. The company says a $100 move in per-ounce gold prices equates to a $0.70 change in per-share operating cash flow. Newmont trades at a wide discount to its historical norms on most valuation metrics, but a return to a trailing P/E of 25 or 30 seems unlikely. Still, even if the P/E drops to the 12-month average of 13, Newmont would trade at $80 in early 2013 if it can meet the 2012 consensus profit target of $6.18. While we intend to monitor Newmont's ability to restart production growth, the stock remains a Buy and a Long-Term Buy.

Pay-TV update

Shares of DirecTV ($45; DTV) and DISH Network ($24; DISH) fell after rivals Time Warner Cable ($64; TWC) and Cablevision Systems ($15; CVC) combined to lose a net 147,000 video customers in the September quarter. The disappointing results renewed concerns that customers are cutting cable cords and migrating to the Internet. However, so-called "over-the-top" products from Google ($579; GOOG) and Apple ($397; AAPL) have yet to gain much traction.

Instead, cable providers face increased pressure from traditional telephone companies, with AT&T ($29; T) and Verizon Communications ($36; VZ) adding a combined 307,000 television subscribers in the September quarter.

Comcast ($23; CMCSa) earned $0.33 per share in the September quarter, up 6% but $0.06 below the consensus. Boosted by the NBC Universal deal, revenue surged 51% to $14.34 billion, while operating cash flow jumped 28% to $4.57 billion. The company's subscriber trends impressed analysts. Comcast shed 165,000 video subscribers, fewer than expected and an improvement from 275,000 customers lost in the year-ago quarter. It also added 394,000 Internet or voice customers.

DirecTV was expected to post results Nov. 3 and DISH on Nov. 7, both too late for our publishing deadline. DirecTV is a Focus List Buy and a Long-Term Buy. DISH is a Buy and a Long-Term Buy. Comcast is a Long-Term Buy. AT&T is rated B (average). Verizon Communications is rated C (below average).

Corporate roundup

Hewlett-Packard ($26; HPQ) will retain its personal-computer business, said Meg Whitman, marking the first major decision of her tenure as CEO. The company estimated the spin-off would have resulted in $1.5 billion in one-time expenses, plus roughly $1 billion in annual costs from lost branding opportunities and purchasing power. Shares rose on news of the decision. H-P is still weighing the future of its WebOS division, which produced software for the short-lived TouchPad tablet. But the company plans to make new tablets that will run on Windows 8, Microsoft's ($26; MSFT) forthcoming mobile operating system. H-P is a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy.


Flooding in Thailand has disrupted production for suppliers of hard drives and car parts. Apple ($397; AAPL) is preparing for a shortage of disk drives, likely affecting its line of Mac computers. Meanwhile, Ford Motor ($11; F) and Toyota Motor ($65; TM) have stopped production at some factories in response to parts shortages. Apple is a Focus List Buy and a Long-Term Buy. Ford is rated B (average). Toyota is rated C (below average).


Bowing to consumer and competitive pressures, Bank of America ($6; BAC) abandoned plans to charge customers a monthly $5 fee for debit-card usage. Its decision came days after rivals including J.P. Morgan Chase ($33; JPM) and Wells Fargo ($25; WFC) canceled similar plans due to poor performance of their pilot programs. J.P. Morgan is a Long-Term Buy. Wells Fargo is rated B (average). Bank of America is rated C (below average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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