Portfolio Review


April-quarter earnings

Advance Auto Parts ($69; AAP) grew per-share profits 33% to $1.79 in the April quarter but missed the consensus by $0.02. Same-store sales rose 2.1%, improving on a 1.4% gain in the prior year's quarter. Total revenue grew 3% to $1.96 billion. The retailer said sales suffered a "meaningful slowdown" in April, and the environment remains "challenging." Management stood by its 2012 per-share-profit guidance of $5.55 to $5.75 (versus the $5.97 consensus) and lowered expectations for same-store sales growth to the low single-digits. The company announced a fresh $500 million share-repurchase program, enough to buy back roughly 10% of its shares at current prices. The disappointing results and cautious commentary erased the stock's 2012 gains. Now roughly flat for the year, shares trade at less than 14 times trailing earnings, a 13% discount to their five-year average. Earning an Overall score of 96, Advance Auto Parts remains a Buy and a Long-Term Buy.

Wal-Mart Stores ($64; WMT) earned $1.09 per share from continuing operations in the April quarter, up 11% and $0.05 above the consensus. Excluding fuel, same-store sales advanced 2.6% at Walmart U.S. and 5.3% at Sam's Club on increased foot traffic and higher prices. Walmart U.S. has now grown same-store sales in three consecutive quarters after nine straight declines. Total sales climbed more than 8% to $112.27 billion. The retailer also warned that the ongoing investigation into bribery in Mexico has expanded to include other potential crimes linked to foreign subsidiaries. Nonetheless, shares rallied on the strong results and trade at their highest level since September 2008. Wal-Mart Stores is a Long-Term Buy.

Phone wars

Wading into the ongoing patent warfare among smartphone players, the U.S. International Trade Commission has banned the importation of some Motorola Mobility smartphones that violate a patent held by Microsoft ($30; MSFT). Motorola said it will consider appealing the ruling.

Meanwhile, global sales of mobile devices slipped 2% to 419 million units in the March quarter, reports researcher Gartner, ending 10 straight quarters of growth.

Apple's ($557; AAPL) global mobile-device market share has doubled to 8% over the last year, and that slice should widen if the company clinches a distribution deal with China Mobile ($53; CHL). China Mobile has more subscribers than any other telecom carrier, but its wireless network does not support the semiconductors used in current iPhone models. The two parties have reportedly met to discuss a partnership as China Mobile rolls out its fourth-generation network. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy.

Google keeps busy

Cleared by Chinese regulators, Google ($601; GOOG) completed its $12.5 billion acquisition of Motorola Mobility Holdings, securing a treasure chest of wireless patents and the infrastructure to build its own mobile devices. The U.S. and Europe signed off on the deal in February. In the March quarter, Motorola Mobility held on to its 2% share of the global mobile-device market, even as its unit sales fell 5%.

Google is making extensive upgrades to its internet search engine, which controls nearly two-thirds of the U.S. search market. The search engine will incorporate new technology that uses relationships between key words, linked to a massive database that Google has accumulated by tracking online activity and processing images gathered by camera-equipped cars. Seeking to allay privacy concerns, Google will meet with French officials to explain its new, consolidated privacy policy.

In other news, the European Union is pressuring Google to offer concessions in a drawn-out antitrust case, opened in November 2010 when Microsoft and others accused Google of manipulating search results in order to promote its online advertising. Google is a Long-Term Buy.

J.P. Morgan calls dividend safe

CEO Jamie Dimon said J.P. Morgan Chase ($34; JPM) will suspend share repurchases but maintain its dividend while unwinding a massive and disastrous derivatives bet. J.P. Morgan announced a $15 billion stock-buyback plan in April.

Since the bank's initial announcement about trading losses May 10, those losses have swelled by at least $1 billion to more than $3 billion. Hedge funds and other banks are taking advantage of J.P. Morgan's weak position. According to some published reports, the losses could ultimately reach $5 billion, roughly equal to the bank's March-quarter net income. J.P. Morgan shares have fallen 17% since news of the trading losses broke. At just 10 times the lowest 2012 profit estimate, the stock price already reflects some bad news. J.P. Morgan is a Buy and a Long-Term Buy.

Technology update

One of the largest initial public offerings in U.S. history, Facebook ($31; FB) has gotten off to an inauspicious start, with shares diving 18% from the offering price of $38 in their first three days of trading. Facebook will be added to the Monitored List once Quadrix scores for the stock become available. Given its price/earnings ratio of 60 times the 2012 estimate, the stock will likely have a low Value score.

Shares of Intel ($26; INTC) and Microsoft ($30; MSFT) fell after Dell's ($15; DELL) disappointing April-quarter report. Excluding special items, Dell's per-share earnings slumped 22% on a 4% revenue decline, missing the consensus on both counts. Dell's July-quarter sales guidance also fell short of the consensus estimate. Echoing Cisco Systems' ($17; CSCO) comments from two weeks earlier, Dell blamed some of the weakness on Europe. But the results underscore the soft U.S. consumer market for personal computers. Earlier this month, Intel reiterated its 2012 outlook, partly helped by its presence in emerging markets. In other news, Microsoft should learn on June 27 whether it must pay a $1.14 billion fine to the European Union for allegedly overcharging rivals for licenses required to connect products to Windows computers. Intel is a Focus List Buy and a Long-Term Buy. Cisco and Microsoft are rated Buy and Long-Term Buy. Dell is rated A (above average).

Hewlett-Packard's ($22; HPQ) per-share profits plunged 21% excluding special items, while sales slipped 3%. Both sales and profits topped the consensus. H-P expects per-share profits of $4.05 to $4.10 for the fiscal year ending October 2012, above the $4.03 consensus. H-P also said it plans to lay off 28,000 workers, roughly 8% of its work force, by the end of fiscal 2014 ending October. The shares rose in aftermarket trading on the earnings news. H-P is rated B (average).

Corporate roundup

Seeking to bolster its life-sciences business, Agilent Technologies ($40; A) agreed to pay $2.2 billion in cash for Dako, a Danish cancer-diagnostics company. Agilent expects Dako to add $373 million in sales and $0.35 per share in profits for fiscal 2013 ending October. The consensus estimate calls for Agilent to earn $3.58 per share in fiscal 2013, up 11%. Agilent is a Focus List Buy and a Long-Term Buy.

In an attempt to tap into China's rising middle class, Macy's ($36; M) plans to begin selling private-label apparel through a Chinese website. Macy's 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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