Portfolio Review


Wyndham on Focus List, Oracle off

The economy may not be firing on all cylinders, but hotel and timeshare concern Wyndham Worldwide ($36; WYN) doesn't seem to notice. Sales growth has accelerated this year, reaching 14% in the September quarter, while per-share profits have risen by an average of 37% in each of the last three quarters. Operating cash flow jumped 38% in the nine months ended September. Solid growth should continue; Wall Street expects profits to rise 17% in 2012 and annually over the next five years.

Despite Wyndham's growth, the shares remain attractively valued. At less than 13 times the 2012 profit estimate, Wyndham trades at a 26% discount to its industry median. Wyndham also looks cheap relative to its sales, operating cash flow, and free cash flow.

Revenue per available room increased 6% in the September quarter, and demand for hotel rooms is on the rise. Wyndham's ability to raise prices provides a reason for confidence in the aggressive profit-growth targets. The 5% increase in timeshare sales for the quarter also suggests that consumers' appetite for travel remains strong, and they are willing to spend to indulge that appetite. Wyndham, already a Buy and a Long-Term Buy, is being added to the Focus List.

Oracle ($29; ORCL) shares fell after the company said it earned $0.54 excluding special items in the November quarter, up 6% but $0.03 short of Wall Street's forecast. Revenue crept 2% higher to $8.79 billion, missing the consensus of $9.23 billion. Revenue from new software licenses rose 2%, while revenue from license updates and support increased 9%. However, hardware revenue fell 14%.

The company blamed the shortfall not on slowing demand, but on trouble closing deals, specifically issues related to delays with executive approvals. The explanation makes sense. But the day after Oracle's announcement, several other tech giants saw their stocks decline, suggesting many investors worry about a dip in demand for big-ticket software and hardware. In other news, Oracle approved the repurchase of $5 billion more shares. At 11 times projected earnings in fiscal 2012 ending May, plenty of doubts are already baked into Oracle shares. The stock is no longer among our very top selections and is being dropped from the Focus List, but it remains a Buy and a Long-Term Buy.

Energy update

Brazilian federal prosecutors sued Chevron ($104; CVX) and rig operator Transocean ($40; RIG) for $10.6 billion in damages over an offshore oil spill. At least 2,400 barrels of oil escaped in four days before Chevron fixed the leak, but the total spill pales in comparison to the estimated 4.9 million barrels that gushed into the Gulf of Mexico from BP's ($42; BP) damaged well. BP has booked more $40 billion in spill-related losses since the April 2010 explosion. Brazil's fine seems bloated with political posturing. Most industry watchers do not expect the large fine to stand, because if Chevron's liability ends up anywhere close to the numbers the prosecutors seek, the country could lose lucrative oil contracts. Chevron is a Focus List Buy and a Long-Term Buy. BP is rated B (average).

Gulf Keystone Petroleum dismissed a report that said Exxon Mobil ($82; XOM) was weighing a potential $10.9 billion takeover of the British company that has discovered massive oil deposits in the Kurdish region of Iraq. Exxon Mobil is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Bed Bath & Beyond's ($62; BBBY) November-quarter earnings per share soared 28% to $0.95, exceeding the consensus by $0.07. Same-store sales increased 4.1%, while total revenue rose 7%, slightly below expectations. For the February quarter, management expects per-share profits to rise 14% to 19%, versus Wall Street's target of 16%. Bed Bath & Beyond, a seller of homefurnishings and housewares, has delivered per-share-earnings growth of at least 27% in each of the last nine quarters. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy.

The U.S. Food and Drug Administration recalled St. Jude Medical's ($33; STJ) Riata defibrillator leads. St. Jude had warned doctors in November that its Riata leads — flexible wires that allow a defibrillator to jolt a patient's heart — have a higher failure rate than was known when the company stopped selling the product last year. The device is implanted in about 79,000 U.S. patients, and it is not yet clear whether the news will result in widespread surgical procedures to remove the leads. St. Jude Medical is a Long-Term Buy.

AT&T ($29; T), conceding that regulatory hurdles became too high to leap, will drop its $39 billion bid to acquire T-Mobile USA. The company must pay a $3 billion breakup fee and forfeit some of its wireless spectrum. AT&T had originally cited its shortage of spectrum as a reason for pursuing the deal. That could make DISH Network ($27; DISH), which acquired spectrum in two separate deals earlier this year, an attractive partner or takeover target. DISH shares jumped 9% the day after AT&T's news broke. AT&T is rated B (average). DISH is a Buy and a Long-Term Buy.

FedEx ($84; FDX) earned $1.57 per share in the November quarter, up 35% excluding special items, exceeding the consensus by a nickel. Revenue grew 10% to $10.59 billion as price hikes helped offset soft volumes. The shipper reiterated its profit guidance for fiscal 2012 ending May. FedEx, which has rallied 8% since the earnings report, is rated B (average).

Growth sprouting at AGCO

U.S. farm income will probably hit a record high in 2011, and AGCO's ($42; AGCO) chief executive expects another "good year" in 2012. The consensus projects 9% profit growth in 2012, and estimates are on the rise. Growing populations in India and China are eating more meat, and thus require more grain to feed livestock. By acquiring storage-bin maker GSI Holding for $928 million, AGCO should benefit from increasing demand for grain storage.

Operating cash flow has risen in three straight quarters. For now, AGCO looks to invest in production facilities and new products, while also spending to reduce its debt and make niche acquisitions. The company expects capital spending to surge at least 17% to $325 million in 2012, with most earmarked for manufacturing expansion.

At 11 times trailing earnings, AGCO trades at an 18% discount to the median for its industry. AGCO looks even cheaper relative to its own history, including discounts of at least 31% to the five-year average for price/earnings, price/operating cash flow, and the enterprise ratio. AGCO is a Focus List Buy.

Apache still a Long-Term Buy

Independent energy producer Apache ($88; APA) has agreed to pay $560 million for a 65% state in Australian fertilizer maker Burrup Holdings, a major buyer of Apache's natural gas. This deal, however, is far from done. Burrup's minority owner, Yara International of Norway, has until Jan. 31 to decide whether to match the offer and take control of Burrup. This deal is less about entering the fertilizer business than stabilizing the market for Apache's natural gas in Australia.

Apache has fallen 7% over the last month and 26% over the last six months despite strong operating momentum. Apache's production rose 17% in the nine months ended September, and the company seems poised to continue that growth via both acquisitions and the drill bit.

At eight times trailing earnings, Apache trades at a 49% discount to its peer group and 46% below its own three-year average P/E ratio, at least in part because of worries about weakness in natural-gas prices. Natural gas makes up about half of Apache's production However, Wall Street expects per-share-profit growth of 6% next year and 10% in 2013, targets that reflect very little improvement in natural-gas prices and don't take into account Apache's potential production gains. Because of Apache's cheap valuation and attractive two- to four-year potential, the stock remains a Long-Term Buy.

Rank Changes

Wyndham Worldwide ($36; WYN) is being added to the Focus List, while Oracle ($29; ORCL) is coming off the list.

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