Portfolio Review


Cisco upgraded, Walter downgraded

Cisco Systems ($20; CSCO) is being upgraded to a Buy and a Long-Term Buy. The world's largest supplier of networking equipment, Cisco holds a 60% share of market for Ethernet switches and more than half of the router market. Operating cash flow has advanced in seven of the last eight quarters. Earlier this month, Cisco hiked its quarterly dividend, initiated last year, by 33% to $0.08 per share. Rising analyst estimates project earnings of $1.83 per share for the fiscal year ending July 2012, up 13%. Yet Cisco trades at just 11 times estimated fiscal 2012 profits, a 50% discount to the median for networking-equipment stocks in the S&P 1500 Index.

In the wake of another weak quarter, Walter Energy ($67; WLT) is being dropped from the Buy List, and from coverage. Operating income fell 22% to $1.34 per share in the December quarter, missing the consensus estimate by $0.25. Revenue also came up short of the consensus. The stock bounced after Walter reaffirmed expectations for the production of at least 11.5 million metric tons of metallurgical coal in 2012, up 37%. We consider the company's projection somewhat optimistic, potentially leading to further disappointments. Walter is no longer among our top selections for 12-month gains.

Retail update

Advance Auto Parts ($85; AAP) said earnings per share jumped 58% to $0.90 in the December quarter, well ahead of the consensus of $0.75. Same-store sales rose 2.9% and cash provided by operations more than tripled to $218 million. Management projects 9% to 13% growth in per-share earnings this year. Advance Auto Parts is a Buy and a Long-Term Buy.

Macy's ($37; M) earned $1.70 per share excluding special items in the January quarter, up 7% and $0.05 above the consensus. Same-store sales rose 5.2%, while total revenue grew 6% on 40% higher online sales. Macy's, which issued above-consensus profit guidance for the fiscal year ending January 2013, is a Buy and a Long-Term Buy.

Wal-Mart Stores ($60; WMT) grew per-share earnings 7% to $1.44 excluding special items in the January quarter, missing the consensus. Same-store sales increased 1.5% at Walmart U.S. and 5.4% at Sam's Club, not including gasoline. Wal-Mart's profit-growth target of 7% for the year ahead is disappointing and the stock is no longer especially cheap. But our basic thesis — improvement in the U.S., overseas growth, and a modest valuation for a cash-flow-generation machine — still applies. Wal-Mart remains a Long-Term Buy.

Earnings update

DirecTV ($45; DTV) said per-share profits jumped 38% to $1.02 in the December quarter, exceeding the consensus by $0.10. Sales grew 13% to $7.46 billion. The satellite-TV provider added 125,000 net U.S. subscribers, down 57% from year-ago additions, while average revenue per subscriber rose 5% to $101.38. In Latin America, net subscriber additions soared 56% to an all-time high of 590,000. The stock is a Focus List Buy and a Long-Term Buy.

Apache ($110; APA) grew December-quarter earnings per share 34% to $2.94 excluding special items, $0.07 above the consensus. Revenue surged 25% on a 4% bump in production and higher energy prices. Management expects production to climb 7% to 13% in 2012. The company also hiked its quarterly dividend 13% to $0.17 per share, payable May 22. Apache is a Long-Term Buy.

Rogers Communications ($39; RCI) earned C$0.70 per share in the December quarter excluding special items, up 17%, topping the consensus on 1% revenue growth. Net additions for postpaid wireless subscribers slipped to 42,000, down 14% from last year's adds, but cable additions rose 59% to 27,000. In other news, the company announced an 11% hike to its quarterly dividend, payable April 2. Rogers is a Long-Term Buy.

Hewlett-Packard ($29; HPQ) reported January-quarter earnings per share of $0.92 excluding special items, down 32% but a nickel above the consensus. Revenue fell 7%, missing the consensus. The company's profit outlook for the April quarter also fell short of consensus expectations, though guidance for the year ending October has not changed. H-P, trading at just six times trailing earnings, retains its Long-Term Buy rating.

Mining review

On Feb. 20, Newmont Mining ($62; NEM) agreed to renegotiate its mining contract with the government of Indonesia. Newmont's Batu Hijau mine produces 3% of the company's gold and about two-thirds of its copper. This deal comes just four days after rival Freeport-McMoRan Copper & Gold ($44; FCX), which operates the world's biggest gold mine in Indonesia, agreed to renegotiate its own contract. Labor strikes probably contributed to the companies' willingness to renegotiate, a development that will not go unnoticed by protestors in other regions.

Newmont was slated to declare December-quarter earnings Feb. 24, with the consensus projecting per-share-profit growth of 10%. Next year, Newmont expects to produce 5.0 to 5.2 million ounces of gold, flat to down 3%, while copper production falls 17% to 27%. Despite rising costs and the lack of production growth, the consensus projects 12% sales growth and a 24% profit jump, suggesting a belief that gold prices will continue their upward trend and Newmont will outperform its production forecast.

After 2012, the production outlook should improve, with several huge projects coming on line. Newmont expects annual production of 7 million ounces of gold and 400 million pounds of copper by 2017. In other news, Newmont declared a quarterly dividend of $0.35 per share, payable March 29. The dividend, tied to gold prices, matches the December payout. For now, Newmont's two- to three-year potential warrants its Long-Term Buy rating. Freeport is rated B (average).

Corporate news

For the 40th straight year, Abbott Laboratories ($56; ABT) raised its quarterly dividend, with a 6% bump to $0.51 per share, payable May 15. Abbott is a Long-Term Buy.

Google ($614; GOOG) has been circumventing the privacy settings for Apple's ($515; AAPL) web browser to track users' online habits, reported The Wall Street Journal. Microsoft ($31; MSFT) has also accused Google of tricking its Internet Explorer browser into accepting cookies users attempted to block. Although Google disputed some of the allegations, the coverage underscores the value of personal data for customizing digital ads. Regulators have taken an interest in the issue, though it is uncertain whether any change in regulation will affect Google's bottom line. Google is a Long-Term Buy.

Rank Changes

Cisco Systems ($20; CSCO) is being added to the Buy List and Long-Term Buy List. Walter
($67; WLT) is being dropped from the Buy List and from coverage.

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