Portfolio Review


September-quarter earnings

In the September quarter, U.S. Bancorp ($34; USB) earned a record $0.74 per share, up 16% and in line with analyst expectations. Revenue increased 8% to $5.18 billion, slightly ahead of the consensus. Results reflect robust mortgage-banking activity, which contributed to growth in both loans and fee income.

Revenue from mortgage banking more than doubled to $519 million, helping drive a 10% increase in noninterest income. Average total loans rose 7% from a year earlier, paced by a 22% increase in commercial loans. Overall credit quality of the loan portfolio continued to improve, as net charge-offs and nonperforming assets declined from year-earlier levels.

U.S. Bancorp has a bright near-term growth outlook, with low interest rates and government incentives stoking demand for home loans. For 2012, the consensus calls for per-share earnings of $2.85, up 18%. U.S. Bancorp is a Buy and a Long-Term Buy.

J.P. Morgan Chase ($43; JPM) said September-quarter earnings rose 37% to $1.40 per share excluding special items, exceeding the consensus by $0.16. Revenue climbed 6% to $25.86 billion as gains in retail financial services, commercial banking, asset management, and private equity more than offset weakness at the investment bank. Mortgage fees and related revenue rose to $2.38 billion from $1.38 billion in the year-earlier period, and CEO Jamie Dimon said, "The housing market has turned the corner." J.P. Morgan Chase is a Long-Term Buy.

American Express ($59; AXP) earned $1.09 per share from continuing operations in the September quarter, up 6% and in line with the consensus. Pretax income rose 9%, helped by a 2% decline in expenses. But income taxes jumped 30% from a year earlier, when Amex benefited from foreign tax credits. Revenue net of interest expense rose 4% to $7.86 billion, 1% below the consensus. Cardmember spending grew 8% in the U.S. and 6% worldwide in the quarter, and credit quality continued to increase. American Express is a Focus List Buy and a Long-Term Buy.

For the September quarter, Intel ($22; INTC) earned $0.60 per share excluding special items, down 13% but $0.10 above the consensus. Revenue slipped 5% to $13.46 billion. Semiconductor sales for personal computers slumped 8%, partly offset by a 6% increase in sales to data centers. For the December quarter, Intel gave sales guidance with a midpoint of $13.6 billion, below the consensus of $13.78 billion. Intel, which trades at just 10 times the 2012 profit consensus, remains a Long-Term Buy.

Abbott Laboratories ($72; ABT) grew per-share profits 10% to $1.30 excluding special items, topping the consensus by $0.02. Sales were roughly flat, missing the consensus, though they rose 4% at constant currency. Sales growth for rheumatoid arthritis drug Humira (24% of quarterly sales) slowed to 10%, well below its 17% gain in the first half of 2012. But Abbott may have another blockbuster on its hands. In late-stage trials, an experimental pill performed well in suppressing hepatitis C. Abbott hopes to launch the drug in 2015. Abbott Laboratories is a Long-Term Buy.

Corporate roundup

Apple ($650; AAPL) has scheduled a media event for Oct. 23, when it is widely expected to unveil a smaller version of its iPad tablet — just three days before Microsoft's ($29; MSFT) Surface tablet is scheduled to go on sale. Microsoft has begun taking preorders for Windows 8, also set to launch Oct. 26. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Buy and a Long-Term Buy.

California state regulators opened an investigation into allegations reported by the Los Angeles Times that CVS Caremark ($47; CVS) allegedly refilled prescriptions and billed insurers without patients' knowledge. The Times also said the company is being investigated by the U.S. Department of Health and Human Services for similar practices. CVS is a Focus List Buy and a Long-Term Buy.

Japanese telephone carrier SoftBank ($16; SFTBY) agreed to take a 70% stake in Sprint Nextel ($6; S) by acquiring $12.1 billion in shares on the open market and $8 billion in shares direct from the company. SoftBank will reportedly pay $7.30 per share to existing shareholders for up to 55% of shares outstanding. Sprint Nextel is rated C (below average).

U.S. regulators are considering suing Google ($745; GOOG) for allegedly misusing its dominant web-search position to violate antitrust laws and for allegedly improperly using its patents to block rivals from launching smartphones. Google is a Focus List Buy and a Long-Term Buy.

Rosy outlook extends Wal-Mart Stores rally

Shares of Wal-Mart Stores ($77; WMT) rallied to an all-time high after the retailer outlined its strategy for the coming year. Management expressed confidence in the holiday season, already getting a boost from the rollout of a layaway program. The consensus projects sales growth of more than 4% in the six months ending January, and the company targets growth of 5% to 7% in the fiscal year ending January 2014, versus the consensus of 5%. The retailer plans to accelerate the expansion of smaller stores, which it uses to penetrate urban areas. Wal-Mart Stores is a Long-Term Buy.

Executive action

Fifth Third Bancorp ($15; FITB) named Mitchell Stapley, an 11-year veteran at the bank, as chief investment officer of its Fifth Third Asset Management subsidiary after the sudden resignation of Keith Wirtz. Fifth Third is a Focus List Buy and a Long-Term Buy.

Citigroup ($37; C) announced the abrupt resignation of CEO Vikram Pandit and COO John Havens, just a day after the bank reported favorable quarterly results. Pandit, who had led the company for five years, and Havens reportedly clashed with the board over the bank's strategic direction. Citigroup named Michael Corbat, who has worked for the company since 1983, as its new CEO. Citigroup is rated B (average).

Stick with Wells Fargo, UnitedHealth Group

Wells Fargo ($34; WFC) reported September-quarter earnings per share of $0.88, up 22% and in line with consensus estimates. Revenue rose 8% to $21.2 billion, slightly below the consensus of $21.5 billion. The banking giant reported healthy loan growth, with total loans increasing at an annualized rate of 3.8% from the June quarter. But deposits grew more quickly than loans — leaving more cash to be invested in a low-rate environment and putting pressure on margins.

Net interest margin fell to 3.66%, down from 3.91% in the June quarter and worse than management had predicted a few weeks ago. Mortgage results were strong but slightly below expectations, partly because Wells Fargo elected to keep some single-family home loans on its balance sheet in an effort to support its interest income. While the stock dipped on the report — and consensus profit estimates for 2013 have declined about 1% since its release — Wells Fargo's growth prospects remain intact. The stock, trading at roughly nine times the 2013 consensus, remains a Focus List Buy and a Long-Term Buy.

UnitedHealth Group ($57; UNH) reported September-quarter profits of $1.50 per share, up 28% on 8% revenue growth. The percentage of premiums spent on medical care fell nearly two percentage points to 79% and operating profit margins rose to 9.6% from 8.2% a year ago, helped by cost controls. Medical-insurance enrollment reached 36.5 million people, up 6% from year-ago levels. In response to the strong results, UnitedHealth raised its full-year target for per-share profits to $5.20 to $5.25, up 10% to 11% from last year.

The news wasn't all good; United-Health CEO Stephen Hemsley expects sales and profits to rise next year but says it will be a "considerable challenge" to meet the 2013 profit consensus, which calls for 7% to 8% growth from the company's new 2012 target. Hemsley cited concerns about price competition and lower profit margins next year as more people seek medical treatment. However, UnitedHealth tends toward the conservative with its projections. UnitedHealth remains 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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