Portfolio Review


Microsoft, AT&T take aim at Apple

The popularity of Apple's ($629; AAPL) iPhone has crimped the profit margins of wireless carriers, saddled with onerous contracts and hefty subsidies. AT&T ($31; T) hopes to improve its leverage by promoting an upstart smartphone player that holds just 4% of the U.S. market: Microsoft ($32; MSFT).

The software giant's Windows Phone platform should enjoy elevated visibility from a massive marketing blitz for the Nokia ($5; NOK) Lumia 900 smartphone, with AT&T promising the April 8 launch will be its biggest yet, surpassing even the iPhone debut. At just $100 — half the price of rivals' top-line devices — the Lumia 900 features Windows Phone 7 software and runs on fourth-generation networks. Early reviews call it the best Windows Phone yet, though some question whether it's enough to convert consumers from iPhone and Android devices.

Microsoft's position in the mobile market could gain momentum later this year when Windows 8 arrives. Windows-based tablets and Ultrabooks capable of running Microsoft Office might appeal to the company's huge customer base. Microsoft hopes to enlist the support of developers to build a vast library of applications to compete with Apple and Google ($643; GOOG). 

Seeking to revive sales of its Android tablets, Google plans to market co-branded devices through an online store similar to those used by Apple and Amazon.com ($200; AMZN), reported The Wall Street Journal. Google abandoned an earlier attempt to bypass retailers — involving an Android smartphone — after just four months in 2010.

In related news, former smartphone leader Research In Motion ($13; RIMM) said BlackBerry shipments tumbled in the February quarter, down 21% from the November quarter and 26% from the year-earlier period. RIM plans to de-emphasize the consumer market and focus on its core corporate customers. The company will also consider strategic options, possibly putting itself up for sale. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy. Google is a Long-Term Buy. RIM is rated B (average). AT&T and Amazon.com are rated C (below average).

Credit-card update

In yet another reminder of the credit-card industry's vulnerability to data theft, Global Payments ($47; GPN) said hackers stole up to 1.5 million credit-card numbers earlier this year. As a third-party processor, Global Payments handles transactions that range from credit-card purchases to gift-card redemptions. Visa ($120; V) promptly dropped Global Payments from its registry of approved service providers. MasterCard ($438; MA) will review the results of an independent probe before taking any action. MasterCard and Visa said their systems were not breached. MasterCard is a Focus List Buy and a Long-Term Buy. Visa is a Buy and a Long-Term Buy.

Alliance Data Systems ($127; ADS), provider of credit-card and loyalty programs, suffered a similar security breach in April 2011. In other news, Alliance issued bonds for the first time in history, tapping the debt market for a total of $750 million at a blended interest rate of 5.1%. The stock has risen to all-time highs since Alliance reported that the delinquency rate for its private-label business fell in February. Alliance is a Focus List Buy and a Long-Term Buy.

Retail review

Bed Bath & Beyond ($67; BBBY) earned $1.48 in the February quarter, up 32% and $0.15 above the consensus. Same-store sales climbed 6.8% with total revenue up 9%. The company projects profit growth in the high single-digits or low double-digits in the fiscal year ending February 2013, roughly in line with the consensus. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy.

An index of 21 chain stores tracked by Thomson Reuters is expected to post 3.4% higher same-store sales for March. Easter, the third-largest buying holiday in the U.S., falls earlier this year, which should help March results. Shoppers also appear more inclined to buy the latest fashions at full price rather than waiting for discounts. The consensus calls for Macy's ($41; M) to grow same-store sales 4.8%. Chain-store sales for March were slated for release April 5, after our deadline. Macy's is a Focus List Buy and a Long-Term Buy.

Wal-Mart Stores ($61; WMT) does not report monthly sales, but the discounter suggested U.S. same-store sales rose in the past two months despite higher gasoline prices. Wal-Mart continues to invest in its online business in an effort to keep thrifty customers from migrating toward Amazon.com ($200; AMZN), a trend that has tripped up Best Buy ($24; BBY). The electronics retailer reported 2.4% lower same-store sales for the January quarter, and total revenue missed analysts' expectations. Best Buy's eroding fundamentals are leading us to downgrade the stock to B (average). Wal-Mart Stores is a Long-Term Buy. Amazon.com is rated C (below average).

Technology wrap-up

According to media reports, News Corp. ($20; NWSa) subsidiary NDS, a software maker that Cisco Systems ($21; CSCO) agreed to purchase in a $5 billion deal in March, pirated the programming of an Australian pay-TV firm. Cisco Systems is a Buy and a Long-Term Buy. News Corp. is rated B (average).

Micron Technology ($8; MU) agreed to settle a patent lawsuit brought by Oracle ($29; ORCL) claiming the semiconductor maker harmed its Sun Microsystems unit by conspiring to raise microchip prices. In a separate lawsuit, negotiations have stalled between Oracle and Google ($643; GOOG). Oracle accuses Google of misappropriating Java patents in Android software. Google offered Oracle a portion of Android's revenue, but Oracle called the licensing fee too low. A trial is scheduled to begin April 16. Oracle is a Long-Term Buy. Google is a Long-Term Buy.

Qualcomm ($68; QCOM) raised its quarterly dividend 16% to $0.25 per share, payable June 20. Qualcomm is a Focus List Buy and a Long-Term Buy.

Corporate roundup

After being rebuffed by the courts, Brazilian prosecutors are pushing for a second time to ban Chevron ($107; CVX) and Transocean ($54; RIG), proposing a $273 million fine for each day the companies continue operations. The renewed push follows reports of an additional leak, comprised of an estimated 14 barrels of oil. The state-controlled oil company Petrobras ($26; PBR) said it might be liable for 30% of losses resulting from last year's spill, estimated at less than 3,000 barrels. Petrobras owns a 30% stake in the well but has not been charged. Chevron, holding a 52% stake in the project, and rig owner Transocean have been named in two environmental lawsuits, both seeking $11 billion in damages. So far, all of the charges have come from local officials rather than the central government, which reduces the likelihood of a large payout. Chevron is a Focus List Buy and a Long-Term Buy.

St. Jude Medical ($44; STJ) discontinued its QuickSite and QuickFlex left-ventricular leads, following 39 reports of wires poking through the insulation. St. Jude estimates that 3% to 4% of these leads, which connect pacemakers to patients' hearts, could be flawed; sales totaled 171,000 units. The company said the defect has harmed no patients, but the news could further damage St. Jude's reputation in the wake of a recall of another brand of leads in December for similar problems. Shares fell on the news, but St. Jude remains a Long-Term Buy.

Cleared by U.S. antitrust regulators, Express Scripts ($58; ESRX) completed its $29 billion acquisition of Medco Health Solutions, combining two of the three biggest pharmacy-benefits managers in the country. Express Scripts is rated B (average). Medco is being dropped from coverage.

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