Portfolio Review


An upgrade and a downgrade

Google ($633; GOOG) was added to the Buy List on the July 27 hotline. Google's new tablet is enjoying favorable reviews and brisk sales, while its core advertising business continues to grow with the proliferation of mobile devices. In July, an industry researcher raised its 2012 outlook for global online advertising to 18% growth. Google is also unrolling new services for cable television and high-speed Internet that the company claims is 100 times faster than the broadband used in most homes. For now, the service will only be available in Kansas City and lacks popular channels like HBO and ESPN.

Cash provided by operations has advanced at double-digit rates in 11 of the last 12 quarters, stuffing the balance sheet with net cash of $36.92 billion, or $112 per share. Shares trade at 16 times trailing earnings, 42% below their five-year average. Excluding net cash, the stock's P/E is just 13. Google is a Buy and a Long-Term Buy.

CA Technologies ($24; CA) was removed from the Buy and Long-Term Buy lists on the July 27 hotline. For the June quarter, CA grew earnings per share 15% to $0.63 per share, $0.02 ahead of the consensus despite a 2% dip in sales. But shares slumped after the software maker cut its sales guidance for fiscal 2013 ending March. A sign of challenges ahead, bookings plunged 36% while the total backlog declined 9%. The stock is being dropped from coverage and should be sold.

June-quarter earnings

AGCO ($44; AGCO) shares rallied after the agricultural-equipment maker reported earnings per share of $2.08 in the June quarter, up 54%, on sales of $2.69 billion, up 14%. The consensus had projected earnings of $1.80 per share and sales of $2.81 billion. Droughts could dampen demand for farm equipment in North America later this year. But AGCO's broad reach should help protect against a potential downturn, with overseas operations accounting for 74% of first-half revenue. AGCO raised its 2012 guidance for per-share earnings to $5.50 to $5.75, versus the consensus of $5.49 at the time of the announcement. The stock is a Focus List Buy.

Aetna ($36; AET) said operating earnings slipped 3% to $1.31 per share in the June quarter, $0.06 above the consensus. Sales increased 6% to $8.83 billion. Aetna added 114,000 members in the quarter. Aetna's medical-benefit ratio, or the percentage of premiums used to pay claims, rose to 82.4% from 81.5% in the March quarter and 79.7% in the same quarter last year. The insurer projects 2012 per-share profits of $5.00 to $5.10, versus the $5.04 consensus at the time of the announcement. Aetna is a Buy and a Long-Term Buy.

McKesson ($91; MCK) said per-share earnings jumped 22% to $1.55 excluding special items in the June quarter, topping the consensus by $0.07. Sales ticked 3% higher to $30.80 billion. Operating profit margins for the distribution business widened, helped by patent expirations. Generic drugs generate higher margins for McKesson. In other news, McKesson agreed to pay $151 million to settle claims that it overcharged 29 states for prescription drugs from 2001 to 2009. McKesson is a Buy and a Long-Term Buy.

Technology update

Apple ($611; AAPL) could introduce its new iPhone Sep. 12, according to multiple media reports. The latest model will reportedly have a larger screen, thinner casing, and the ability to run on long-term evolution (LTE) networks. In other news, Apple presented its opening statement in a patent lawsuit against Samsung in California. Apple claims Samsung copied the design of its iPhone.

Separately, Apple and Microsoft ($29; MSFT) are leading a group of buyers preparing to bid on 1,100 patents held by bankrupt Eastman Kodak, reported The Wall Street Journal. Google spearheads a rival consortium that includes handset makers Samsung, HTC, and LG Electronics. Kodak says the patents could fetch up to $2.6 billion, though the company has tried and failed to sell them in the past. The auction is scheduled for Aug. 8. Last summer, a group led by Apple and Microsoft topped Google with a $4.5 billion bid for 6,000 wireless patents and patent applications owned by bankrupt Nortel Networks. Apple is a Focus List Buy and a Long-Term Buy. Google and Microsoft are rated Buy and Long-Term Buy.

Comcast's Olympics strategy a winner

The Summer Olympics in London have proved golden for Comcast ($33; CMCSa) and its shareholders. Comcast rallied after saying it could break even on its estimated $1.28 billion investment in the 2012 Olympics, including both broadcast rights and production costs. Leading up to the games, management had expected a $200 million loss. Ratings for the first five days jumped 9% over the same period during the 2008 Summer Olympics, lending support to NBC's decision to tape-delay the opening ceremonies and other marquee events for evening broadcasts. Online ads have brought in $60 million, three times what they generated in 2008.

For the June quarter, Comcast's per-share earnings rose 19% to $0.50 excluding special items, $0.02 above the consensus. Revenue climbed 6% to $15.21 billion. Comcast added 138,000 net subscribers, up 39% from the same quarter last year, on the strength of its broadband and phone services and a slower decline from video.

Sales slipped 1% at NBC Universal on a 9% decline from broadcast TV, while the unit's cash provided by operations fell 15%, due in part to the movie flop Battleship. Comcast plans to use cash generated by NBC Universal to buy out General Electric's ($21; GE) 49% stake in the business. Comcast acquired a 51% stake in NBC Universal in January 2011. Comcast is a Long-Term Buy. GE is rated C (below average).

Energy review

June-quarter results demonstrate how Chevron ($110; CVX) benefited from its lower reliance on U.S. natural gas — which accounts for about 15% of Exxon Mobil's ($87; XOM) production but less than 8% of Chevron's. U.S. natural gas makes up just 5% of Chevron's reserves, versus 18% for Exxon.

As discussed in Investment Strategy, Chevron's per-share profits fell 5% but topped the consensus. Exxon, in contrast, earned $1.80 per share excluding special items, down 17% and $0.15 below the consensus estimate. Earnings from the upstream unit dipped 2% to $8.36 billion as production fell 6%, while refining earnings jumped to $6.65 billion from $1.36 billion in the year-ago quarter, lifted by a $5.3 billion gain on the sale of a Japanese business. Exxon's chemicals business reported a 10% increase in earnings to $1.45 billion.

In other news, Chevron failed to convince a U.S. judge to rule that the Ecuador's massive legal award is unenforceable. Meanwhile, an Ecuador court increased the award by nearly $1 billion to $19 billion. Chevron and Exxon are rated Buy and Long-Term Buy.

Rank Changes

On Friday, we added Google ($633; GOOG) to the Buy List and dropped CA Technologies ($24; CA) from the Buy List and the Long-Term Buy List. Vanguard Short-Term Investment-Grade ($10.81; VFSTX) now represents 9.9% of the Buy List and 16.8% of the Long-Term Buy List.

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