Portfolio Review

11/28/2011


Energy update: The spill in Brazil

Chevron ($96; CVX) claimed responsibility for an underwater well leaking off Brazil's coast. Drilling in 4,000 feet of water, Chevron said it underestimated the pressure of oil and natural gas locked in a reservoir. A sudden surge triggered the blowout preventer, closing the well, though a small amount of oil is still seeping through the ocean floor. Brazilian officials estimate that 200 to 330 barrels oil a day escaped from the well during an eight-day period. By comparison the BP ($42; BP) disaster in the Gulf of Mexico gushed up to 60,000 barrels a day last year. Chevron vowed to clean up the environmental mess and investigate the accident.

Nevertheless, Brazil's government criticized Chevron's efforts, hit the company with a $28 million fine, and said lawsuits could be forthcoming. The political consequences could be far more costly. Brazil accounted for less than 1% of Chevron's 2010 oil production but figures to be a major player in the booming deepwater-exploration industry. Chevron is a Focus List Buy and a Long-Term Buy.


Exxon Mobil ($77; XOM) angered Iraqi officials by securing contracts in the Kurdish region in the north of the country. Iraq has declared such deals illegal, jeopardizing Exxon's existing development contracts in the south. Exxon Mobil is a Focus List Buy and a Long-Term Buy.

Dealmakers

UnitedHealth Group ($44; UNH) announced plans to purchase XLHealth, a managed–care provider for Medicare recipients with special needs. Terms of the all-cash deal weren't disclosed, though Bloomberg reported that bidders for XLHealth were considering offers of $1.5 billion to $2 billion. XLHealth, with 111,000 members, is expected to generate more than $2 billion in revenue next year. UnitedHealth Group is a Buy and a Long-Term Buy.


Gilead Sciences ($36; GILD) agreed to purchase Pharmasset ($134; VRUS) for $11 billion in cash, a rich 89% premium to the stock's closing price prior to the announcement. Gilead is placing a big bet on Pharmasset's promising portfolio of hepatitis C drugs, a market that could increase more than sixfold to $20 billion by 2020. Pharmasset generated $897 million in sales during fiscal 2011 ended September but has yet to turn a profit. Gilead Sciences is rated A (above average).

Corporate roundup

Caterpillar ($91; CAT) reported that its dealers saw 31% higher sales of construction machinery in the three months ended October. Growth accelerated in North America but slowed slightly in Europe, Africa, and the Middle East. Caterpillar has a broader product line than farm-equipment maker AGCO ($43; AGCO), but the news suggests demand for machinery is holding up. AGCO said North America accounted for 19% of sales in the nine months ended September, while Europe, Africa, and the Middle East represented 53%. AGCO is a Focus List Buy. Caterpillar is rated A (above average).


Semiconductor maker Applied Materials ($11; AMAT) warned of a slowing economy as it issued January-quarter guidance that fell short of Wall Street expectations. In the October quarter, Applied Materials said earnings per share plunged 42% to $0.21 excluding special items, $0.02 above the consensus. Applied Materials is rated A (above average).


Shares of CF Industries ($149; CF) and other fertilizer stocks sank on weak corn prices. The fortunes of fertilizer stocks are highly linked to those of corn, a fertilizer-intensive crop. The U.S. Department of Agriculture also trimmed its 2011 forecast for the U.S. corn crop by 1%. CF is a Focus List Buy and a Long-Term Buy.


A pair of pension funds filed a lawsuit claiming J.P. Morgan Chase ($30; JPM) and Goldman Sachs ($91; GS) misled investors regarding failed brokerage MF Global Holdings' exposure to European sovereign debt. J.P. Morgan is a Long-Term Buy. Goldman Sachs is rated C (below average).


Newmont Mining ($65; NEM) announced the end of a strike at a mine in Indonesia. The strike lasted less than three days and did not affect production. Workers at a separate Indonesian mine operated by Freeport-McMoRan Copper & Gold ($36; FCX) have been on strike since the middle of September. Newmont is a Buy and a Long-Term Buy. Freeport-McMoRan is rated A (above average).

Apple update

Apple ($369; AAPL) said $2.7 billion in sales are at risk if it loses a lawsuit filed by Motorola Mobility Holdings ($39; MMI) in Germany. Motorola Mobility claims that some Apple devices violate one of its patents for the synchronization of email accounts. Apple claims the technology is not covered by patent. In the U.S., the International Trade Commission found Apple did not violate patents held by S3 Graphics involving the compression of transmitted data.

Separately, Asian suppliers said Apple is drawing down inventories of iPad 2 components in anticipation of the iPad 3, reported DigiTimes. Reportedly, some suppliers have already begun shipping iPad 3 parts. In other news, global inventory levels of Google's Android-based tablets are trending higher, said researcher IDC, due to the launch of a pair of tablets, Amazon.com's ($189; AMZN) Kindle Fire and Barnes & Noble's ($17; BKS) Nook. If the inventory does not clear over the holiday season, price cuts could occur in the new year. Apple and Google are both Focus List Buys and Long-Term Buys. Amazon.com is rated C (below average).

Stick with St. Jude

St. Jude Medical ($36; STJ), a maker of implantable cardioverter defibrillators (ICDs) and other medical devices, has delivered per-share-profit growth of at least 10% in each of the last 20 quarters. During that period, sales increased at an annualized rate of more than 11%, with per-share profits rising at a 16% clip. However, a company can subsist only so long on yesterday's growth.

Cardiac rhythm management (CRM) devices, and ICDs in particular, account for more than half of St. Jude's revenue. The company's U.S. CRM sales fell more than 9% in the September quarter, and U.S. hospitals are reportedly performing fewer cardiac procedures this year. In addition, concerns about the safety of St. Jude's ICDs have some investors worried. However, St. Jude continues to post solid sales overseas, lifted by new products not yet approved in the U.S. Wall Street expects sales to rise 6% and per-share profits nearly 10% next year, and the company seems capable of double-digit profit growth over the long haul.

St. Jude plowed about 13% of its sales into research in the September quarter, and the company's pipeline is rich with new technologies. At 11 times trailing earnings, St. Jude trades at a 25% discount to both the median maker of health-care equipment in the S&P 1500 Index and its own three-year average. St. Jude, which began paying a dividend this year and is aggressively repurchasing its shares, should reward investors with a two- to four-year time horizon. The stock retains its Long-Term Buy rating.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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