Portfolio Review

12/12/2011


Corporate roundup

Construction at Newmont Mining's ($67; NEM) Conga gold mine in Peru has resumed after protests forced activity to stop for nearly a week. After the demonstrations became increasingly violent, the Peruvian government declared a state of emergency Dec. 5. Protestors have dispersed, but many still worry that the $4.8 billion Conga project will taint their water supply. Newmont owns a majority stake in Conga, slated to begin production in 2015. Newmont is a Buy and a Long-Term Buy.


Apple ($391; AAPL), waging a far-reaching patent war, earned a split in the courts over the last week. A U.S. judge rejected Apple's request to suspend the sale of Samsung smartphones and tablets. But Australia extended the ban on Samsung tablets for at least one week. Meanwhile, the International Trade Commission postponed its decision on a separate Apple complaint filed against Taiwanese phone-maker HTC until Dec. 14. Apple is a Focus List Buy and a Long-Term Buy.


Verizon Wireless, 55%-owned by Verizon Communications ($38; VZ), agreed to pay $3.6 billion for wireless-spectrum licenses owned by Comcast ($23; CMCSa), Time Warner Cable ($63; TWC), and Bright House Networks. Verizon has sought spectrum as it builds its fourth-generation network, and this purchase will give it access to 259 million Americans. Comcast will receive $2.3 billion in the deal, more than 50% above its purchase price. Comcast shares rallied, as did those of DISH Network ($27; DISH), which now stands as one of the few remaining companies with a store of unused wireless spectrum. Comcast is a Long-Term Buy. DISH is a Buy and a Long-Term Buy. Verizon Communications is rated B (average).


Chevron ($104; CVX) has pledged to invest $3 billion in Brazil over the next three years. But relations between the oil giant and Brazil continue to deteriorate. Chevron is prohibited from drilling new wells in Brazil while the government conducts its probe, likely to take at least three months. Given the relatively small size of the spill, Chevron says Brazil is overreacting and characterizes officials' behavior as "puzzling." In other news, Chevron might invest up to $40 billion in a Middle East project that would inject steam to access 5 billion barrels of oil currently too heavy to pump out.  Chevron is a Focus List Buy and a Long-Term Buy.


St. Jude Medical ($37; STJ) shares jumped 4% Dec. 5 on news that a device for treating heart failure met safety and effectiveness goals in a clinical study. The device, which was slated for review by a Federal Drug Administration panel Dec. 8, is made by CardioMEMS, of which St. Jude owns 19%. St. Jude bounced back from a 7% decline Dec. 2, part of a broad sell-off over an announcement that Florida's Medicare administrator will audit some heart and orthopedic surgeries before approving payment. Subsequent news stories confused this audit with a separate plan involving 11 states and half of the U.S. population. St. Jude is a Long-Term Buy.


Entergy ($72; ETR) announced a $1.78 billion deal to exit the power-transmission business. Entergy will spin off its transmission unit into a new company called Mid South TransCo that will then merge with ITC Holdings ($72; ITC). ITC, already the nation's largest independent electricity transmitter, will also assume $1.78 billion of Entergy debt. Following the deal, Entergy shareholders will own 50.1% of ITC. Entergy earns an A ranking in our Utility Update and is part of our Top 15 Utilities portfolio.


Wilting under political pressure, India has halted plans to open up its retail market to foreign companies. India had considered allowing foreign firms to own up to 51% of retailers that sold more than one brand of products, potentially a huge opportunity for Wal-Mart Stores ($59; WMT). Wal-Mart is a Long-Term Buy.

Corn prices stall CF — for now

CF Industries ($147; CF) shares are highly sensitive to corn prices, which are highly sensitive to government-issued reports on the U.S. corn crop. But The Wall Street Journal says these reports have become increasingly unreliable. The paper's study found that U.S. harvest estimates have been more inaccurate in the past two years than during any other two-year period in the past 15 years. In other news, analysts at Morgan Stanley ($17; MS) see U.S. corn shipments falling 21% to 1.45 billion bushels in the 2011-2012 season, which would mark the lowest volume since at least the mid-1980s. Corn futures have declined, anticipating higher exports from South America.

While CF shares tend to rise and fall with corn prices in the near term, the supply and demand dynamics are more complicated. Will China and other developing nations increase their imports in response to lower prices, potentially driving those prices higher? Will foreign producers step up activity, requiring the purchase of more fertilizer? CF Industries has experience dealing with the vagaries of global corn prices, and its valuation of six times projected 2012 earnings, 52% below the industry median, already reflects a lot of uncertainty. CF remains a Focus List Buy and a Long-Term Buy. Morgan Stanley is rated C (below average).

AutoZone has gas in the tank

AutoZone ($338; AZO) earned $4.68 per share in the November quarter, up 24% from a year earlier and $0.24 above the consensus. Per-share profits have risen at least 20% in 12 straight quarters. Sales rose 7% in the November quarter, paced by nearly 23% growth in the commercial business. U.S. same-store sales increased 4.6%. The commercial business accounted for 14.5% of AutoZone's parts sales in the quarter, up from 12.7% in the year-earlier period.

Concerns about a decline in Americans' driving have some industry watchers worried. The Federal Highway Administration said Americans drove 29.8 billion fewer miles in the nine months ended September than they did a year earlier, and high gasoline prices seem a likely culprit. This trend could affect auto retailers' profits over the long term. But with the average car on U.S. roads at a record 10.6 years old, demand for replacement parts should remain strong for at least the next year or two.

AutoZone, which operates more than 4,800 auto-parts stores in the U.S. and Mexico, generates higher gross and operating profit margins than any other automotive retailer in our Quadrix research universe. The company also aggressively buys back its own shares, reducing the share count by 10% over the last year and 31% over the last three years. The combination of profit growth, high margins, and aggressive stock buybacks has attracted investors' attention and helped drive the retailer's shares up 24% so far this year.  But despite those gains, AutoZone still trades at 15 times projected earnings for fiscal 2012 ending August, a reasonable valuation considering Wall Street expectations for per-share-profit growth of 14% in fiscal 2012 and 15% in fiscal 2013. AutoZone is a Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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