Portfolio Review


New iPhone casts long shadow

Apple ($675; AAPL) will host a press event on Sep. 12, widely expected to be the unveiling of its new iPhone. Apple's invitation showed a shadow in the shape of the number five, hinting of the unveiling of its iPhone 5.

The announcement revived speculation of a larger screen and triggered the requisite bullish reaction from analysts. The iPhone accounted for 53% of Apple's revenue in the nine months ended June, but growth slowed over the summer as consumers anticipated the new device. Apple might also accelerate the phone's release in China to counter the decline of its market share in the Asian powerhouse. As symbolized on its invitation, the iPhone's shadow has long loomed over the smartphone industry. The new phone, coupled with Apple's patent victory over handset maker Samsung Electronics, figure to shape the strategy of other players, notably Google ($681; GOOG) and Microsoft ($30; MSFT).

Apple appears intent on dissolving its relationship with Google. The new iPhone, unlike earlier models, is expected to scrap the applications Google Maps and YouTube, which generate ad revenue for Google. Eventually, Google could lose its status as the default search engine for Apple devices. Still, Google enjoys some leverage over Apple. If Google stopped making popular applications for Apple devices, some consumers might migrate toward devices using Google's Android operating system.

But Apple's patent lawsuits against Samsung and other smartphone makers could restrict Google's access to the mobile market. Android held a 64% share of the global market in the June quarter, surging 21 percentage points from a year ago, according to researcher Gartner. Google says most of the patents cited in the Apple/Samsung lawsuit don't relate to its core operating system, and the company is working with Samsung to alter features that do violate Apple patents.

Device makers publicly support Google but are reportedly exploring other software options. Samsung has already announced plans to make a smartphone for Microsoft's Windows Phone 8 operating system, set to arrive in stores by November. Nokia ($2; NOK) has also unveiled its own Windows-powered phone, a model that did not make a strong first impression. Microsoft took less than 3% of the smartphone market in the June quarter and must overcome the dearth of applications made for Windows.

Through its Motorola Mobility acquisition, Google now possesses the capability to build its own devices, adding a measure of insurance in case manufacturers shift strategies. The trove of wireless patents inherited from Motorola Mobility could give Google additional ammunition in a fight against Apple. The two companies may eventually end up licensing patents to each other.

Google has never been known to bake just one pie at a time. Its Nexus 7 tablet has won over both reviewers and consumers. And the company is reportedly looking to expand its nascent cable business, Google Fiber, beyond test market Kansas City. Its social network Google+ boasts more than 250 million users worldwide, while the Chrome web browser has 310 million users.

Of course, Google sometimes misses the target. In the past month, it abandoned efforts to build an online marketplace for television ads and delayed the launch of Nexus Q, a device designed to stream video and music from Android smartphones and tablets. Google is also reportedly looking to sell off a Motorola business that makes set-top boxes for cable companies, a deal potentially worth $2 billion. Apple and Google are rated Focus List Buy and Long-Term Buy. Microsoft is a Buy and a Long-Term Buy.

Industrial update

FedEx ($88; FDX) shares dipped after the shipper warned that the global economy hurt August-quarter results. The bellwether said earnings per share fell to $1.37 to $1.43, down from its prior forecast of $1.45 to $1.60 and the $1.46 earned in the year-ago quarter. FedEx blamed much of the slowdown on its largest unit, FedEx Express, which draws on international markets for about 44% of its revenue. 

The FedEx warning coincides with weak manufacturing reports from China and Europe. CSX ($22; CSX) sees economic growth slowing in the second half of 2012 for both the U.S. and international markets. Weakness in coal and construction shipments has been partly offset by growth from fertilizer and automobiles. U.S. railroads saw intermodal traffic rise 4% in August — roughly in line with growth for the year to date. Growth accelerated toward the end of the month, according to the Association of American Railroads. CSX is a Long-Term Buy. FedEx is rated A (above average).

Corporate roundup

Macy's ($40; M) reported 5.1% higher same-store sales in August, exceeding the consensus estimate of a 3.6% gain. Management credited the growth to broad strength across merchandise categories and a 37% surge in online sales. Macy's is a Focus List Buy and a Long-Term Buy.

Oracle ($32; ORCL) appealed a judge's decision that slashed a jury's award from $1.3 billion — the most ever awarded by a jury in a copyright case — to $272 million in a longstanding dispute against SAP ($66; SAP). In other news, Oracle said it will continue to provide software for Itanium-based servers made by Hewlett-Packard ($17; HPQ). In August, a court agreed to enforce a development contract between the two companies. Oracle is a Long-Term Buy. H-P and SAP are rated B (average).

Executive change won't stall Southwest

Southwest Airlines ($9; LUV) said Tammy Romo, age 50, will replace retiring Chief Financial Officer Laura Wright, age 52. Romo, currently senior vice president of planning, joined Southwest in 1991.

Encouraged by steady business traffic, Southwest continues to add new routes in the Midwest. Cash flow from operations rose 14% in the first half of 2012. In July, passenger revenue per available seat mile increased about 2%. Southwest expects revenue per average seat mile to continue rising.

Analysts have scaled back expectations in the past two months, but the consensus still calls for healthy growth, with per-share profits projected to jump 67% in the September quarter on 3% higher sales. Earning a Quadrix® Value rank of 92, the stock trades at 15 times trailing earnings, a 36% discount to its five-year average. Southwest Airlines is a Long-Term Buy.

DirecTV finds growth channel

At a time when many companies struggle to grow, DirecTV ($52; DTV) is projected to increase per share profits 22% in the second half of 2012 and 23% next year. And that growth comes cheap. Despite rising 22% since the middle of June, the shares trade at less than 14 times trailing earnings, 27% below their five-year average and 26% below the median for cable and satellite stocks.

DirecTV's aggressive use of stock buybacks has lowered the share count by 35% over the past three years and 7% in the first half of 2012 alone. During its June-quarter earnings call, DirecTV said it will outline for investors this fall plans for more buybacks, and possibly even a dividend. With free cash flow up 34% to $1.42 billion in the six months ended June, DirecTV is a Focus List Buy and a Long-Term Buy.

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No changes were made this week in Dow Theory Forecasts.

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