Portfolio Review

12/5/2011


Retail wrap-up

Warm weather, steep discounts, and midnight openings lured millions of Americans to walk off their turkey dinners over the holiday weekend. Retailers' revamped Web sites allowed millions more to shop while planted on the couch. And the proliferation of smartphones let the most industrious snap up one retailer's online deals while prowling the aisles of a competitor's store.

In the four days beginning with Thanksgiving, retailers experienced a 16% sales jump, according to the National Retail Federation. Shoppers spent nearly $400 on average, with 38% spent online. Department stores reported some of the strongest online growth. MasterCard ($358; MA) said the number of transactions at U.S. merchants jumped 17% on Black Friday, ahead of the 5% gains posted in each of the last two years. With some of the splashiest promotions now over, the big question is whether retailers can maintain their momentum. The NRF projects retail sales for the last two months of the year will rise 3%, down from a 5% advance in 2010.

Elsewhere, India signaled it will open up its tightly controlled $450 billion retail market to foreign companies. Prime Minister Manmohan Singh said foreign retailers will be allowed to own up to 51% of supermarkets and other stores that sell multiple brands. India's move, assuming it withstands sharp criticism from local retailers and political opponents, should benefit Wal-Mart Stores ($58; WMT), which already operates wholesale outlets there. MasterCard is a Focus List Buy and a Long-Term Buy. Wal-Mart Stores is a Long-Term Buy.

Technology update

IBM ($181; IBM) has dethroned Hewlett-Packard ($27; HPQ) as the world's largest server company, said research firm Gartner. IBM sold $3.85 billion worth of servers in the September quarter for a 30% share, easing past H-P's 29% slice with Dell ($15; DELL) a distant third at 15%. Global server sales rose 5% to $12.97 billion in the quarter.

However, damage caused by flooding in Thailand could crimp the production of computers and storage devices. The global supply of hard disk drives could fall 35% short of demand in the December quarter due to flooding in Thailand, reported DigiTimes. Citing its long-term relationship with suppliers, H-P said it should "get more than our fair share of drives." H-P expects supply constraints to begin easing
by April, though some hard-drive makers based in Taiwan worry that production might not return to normal for up to 24 months. IBM is a Buy and a Long-Term Buy. H-P is a Long-Term Buy. Dell is rated A (above average).

Deals under fire

AT&T ($28; T) is reportedly in talks with Leap Wireless ($8; LEAP) to sell off some of T-Mobile USA's spectrum and customer accounts, potentially shedding up to 40% of assets owned by its takeover target. But that still might not be enough to save AT&T's pending acquisition, originally valued at $39 billion. The Federal Communications Commission has warned that the deal could hurt competition and cause a slew of job losses. The U.S. Justice Department has sued to block the takeover, with the trial set to begin in February. Even AT&T seems pessimistic, setting aside $4 billion in the December quarter in case it must pay the deal's breakup fee. AT&T is rated B (average).


Google ($583; GOOG) seeks approval from European regulators to acquire Motorola Mobility Holdings ($39; MMI). The European Union Commission set a Jan. 10 deadline to decide on the $12.5 billion deal announced in August. Google is a Focus List Buy and a Long-Term Buy.


A U.S. federal judge blocked a $285 million settlement between Citigroup ($25; C) and the Securities and Exchange Commission regarding the sale of bad mortgage loans. The settlement was "neither reasonable, nor fair, nor adequate, nor in the public interest," said the judge, who set a trial date for July. Citigroup is rated C (below average).

Corporate news

Standard & Poor's lowered the credit ratings on 15 large banks by one notch. Banks affected include Bank of America ($5; BAC), Citigroup ($25; C), J.P. Morgan Chase ($29; JPM), Goldman Sachs ($89; GS), Morgan Stanley ($13; MS), and Wells Fargo ($24; WFC). The action was widely expected, and some investors expressed relief that the downgrades were not more severe. S&P also slapped Bank of America and Morgan Stanley with a lower short-term debt rating, increasing the banks' costs for overnight borrowing. J.P. Morgan Chase is a Long-Term Buy. Wells Fargo is rated B (average). Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley are rated C (below average).


UnitedHealth Group ($46; UNH) said it expects 2012 per-share earnings between $4.55 and $4.75, versus the consensus of $4.75 at the time of the announcement. UnitedHealth's guidance excludes the pending takeover of XLHealth, expected to close in the first half of 2012 and boost earnings that year. UnitedHealth, the biggest U.S. health insurer, looks to add up to 300,000 Medicare Advantage members and up to 1.15 million total patients next year, nudging its membership above 35 million. The company reiterated its 2011 per-share-profit estimate of $4.52 to $4.57, roughly in line with the consensus. UnitedHealth Group is a Buy and a Long-Term Buy.


J.P. Morgan Chase's ($29; JPM) asset-management unit won approval from Beijing officials to launch a $1 billion private-equity fund denominated in yuan, reported The Wall Street Journal. J.P. Morgan has neither confirmed nor denied the news. J.P. Morgan Chase is a Long-Term Buy.


Newmont Mining ($65; NEM) said protestors stole equipment and set fire to a piping warehouse in Peru. The protesters worry that Newmont's $4.8 billion gold mine in Northern Peru will taint their water supply. Newmont is a Buy and a Long-Term Buy.

Oracle thrives

Oracle ($30; ORCL) has solid operating momentum, reflecting new product offerings, robust license sales, and contributions from acquisitions. Over the last three months, Oracle shares have risen 7%, well above the S&P 1500 Technology Sector Index's 2% gain and the broader index's 1% decline. Yet despite the operational and price momentum, the shares look cheap, trading at 13 times trailing earnings, 36% below their five-year average.

Shrugging off market concerns about Oracle's ability to sell its pricey software despite a weak economy, the company has managed sales growth of at least 11% and per-share-profit growth of at least 26% in each of the last six quarters. New software-license sales — a key metric that gauges the potential for steady maintenance revenue — jumped 17% in the August quarter. Wall Street expects per-share earnings to increase 9% in both fiscal 2012 ending May and fiscal 2013, conservative targets in our view. Oracle is a Focus List Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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