Portfolio Review


Tech roundup

Cisco Systems ($18; CSCO) grew October-quarter earnings per share 12% to $0.48 excluding special items, topping the consensus by $0.02. Revenue advanced 6% to $11.88 billion, also ahead of analyst expectations. Cash provided by operations, up 6% to $2.47 billion, has now risen in nine of the past 11 quarters. For the January quarter, Cisco expects per-share profits of $0.47 to $0.48, versus the consensus of $0.47, as U.S. conditions improve and the environment in Europe likely gets worse. Cisco is a Buy and a Long-Term Buy.

Apple ($543; AAPL) and HTC announced a 10-year licensing pact, closing another chapter in the computermakers' widespread lawsuit. Apple sued HTC in 2010 for allegedly violating several patents, and the U.S. International Trade Commission ruled in Apple's favor last year on one of those patents. Apple has settled a similar lawsuit with Nokia ($3; NOK) and won a $1.05 billion verdict against Samsung. Separately, a U.S. jury found that Apple should pay $368 million to VirnetX Holding ($34; VHC) for patent violations in Apple's FaceTime software, which lets devices make video calls. Apple is a Focus List Buy and a Long-Term Buy.

Health-care update

Shares of managed-care providers Aetna ($41; AET) and UnitedHealth Group ($52; UNH) have fallen 7% since the re-election of President Obama, lagging the broader market by at least three percentage points. The election clears the path for the continued rollout of the Affordable Care Act, projected to add 30 million new patients for insurers — and plenty of near-term uncertainty for their shares. Investors worry that insurers' profit margins could feel the squeeze of tighter regulations, hefty investment in insurance exchanges, and the tightening of reimbursement rates, especially for Medicare Advantage. In other news, U.S. regulators asked for more details about Aetna's proposed $5.6 billion acquisition of Coventry Health Care ($43; CVH). Aetna still expects to complete the deal in mid-2013. Aetna is a Buy and a Long-Term Buy. UnitedHealth Group is a Focus List Buy and a Long-Term Buy.

With free cash flow up 34% to $1.63 billion in the past year, Thermo Fisher Scientific ($61; TMO) raised its quarterly dividend 15% to $0.15 per share, payable Jan. 15. Management also approved a $1 billion share-repurchase plan starting Jan. 1, equating to more than 4% of outstanding shares at the current price. Thermo Fisher entered the December quarter with $350 million remaining on a previous buyback plan. A maker of diagnostic instruments and laboratory equipment, Thermo Fisher is a Focus List Buy and a Long-Term Buy.

Credit-card review

A U.S. judge gave preliminary approval to a $7.25 billion settlement between almost 8 million retailers and Visa ($142; V) and MasterCard ($471; MA). The settlement includes a $6.05 billion cash payment from Visa and MasterCard for allegedly fixing the swipe fees charged to retailers, along with $1.20 billion in temporary discounts on future swipe fees. The deal still faces opposition from a group of retail heavyweights, such as Wal-Mart Stores ($72; WMT), Target ($62; TGT), and Home Depot ($63; HD). Visa is a Buy and a Long-Term Buy. Wal-Mart Stores is a Long-Term Buy. Target is rated A (above average). Home Depot and MasterCard are rated B (average).

Alliance Data Systems ($142; ADS) agreed to acquire Hyper Marketing, a marketing-services agency, in a deal valued at $460 million. Hyper Marketing is expected to generate $50 million in earnings before interest, taxes, depreciation, and amortization next year on sales of $300 million. Alliance Data Systems is a Focus List Buy and a Long-Term Buy.

Corporate roundup

With the Federal Reserve's blessing, J.P. Morgan Chase ($40; JPM) plans to repurchase up to $3 billion in shares — about 2% of its share count — early next year. The bank suspended its buyback activity in May after uncovering massive trading losses linked to the so-called "London Whale." J.P. Morgan also agreed to settle with U.S. regulators over two probes involving mortgage-backed securities. No settlement amount was reported, though the bank raised its estimate of lawsuit losses in excess of its current reserve to $6 billion from $5.3 billion. J.P. Morgan Chase is a Long-Term Buy.

With many European residents facing austerity measures, the tax practices at large companies have come under scrutiny. British lawmakers slammed Google ($659; GOOG), Amazon.com ($227; AMZN), and Starbucks ($50; SBUX) for allegedly exploiting loopholes that let them avoid reporting profits in countries with higher tax rates. Britain and Germany are pushing for the Group of Twenty major world economies to install tighter regulations that prevent multinational companies from skirting corporate-tax laws. And France sent Amazon a back-tax bill of $252 million. Google is a Focus List Buy and a Long-Term Buy. Amazon.com and Starbucks are rated C (below average).

Resignations, new releases keep Microsoft busy

Less than three weeks after the launch of Windows 8, Steven Sinofsky, head of Microsoft's ($27; MSFT) Windows unit, announced his resignation. Naturally, Sinofsky's departure raises questions regarding the initial success of Windows 8. However, some reports suggest that the departure stemmed from personality clashes rather than business issues. Since announcing that it sold more than 4 million Windows 8 upgrades in the first few days after the software's launch, outstripping the rate of Windows 7 adoption, Microsoft has revealed little about the success of the operating system. Analyst projections are mixed.

The company has been more communicative about its other new product, the Surface tablet. CEO Steve Ballmer described Microsoft's distribution approach as "modest" and the early reception as "fantastic." For now, the Surface is only available online and through Microsoft's retail stores, though Ballmer says more outlets will soon carry the device. The Surface continues to garner generally upbeat reviews, and it seems capable of ultimately filling the space between laptop and tablet computers. But there are published reports of Surface's keyboard covers splitting and audio defects that could reflect a glitch in Windows 8.

While glitches aren't uncommon for new devices — recall that Apple's ($543; AAPL) iPhone 4 had problems with its antenna — Microsoft's response to these complaints will be critical. Poor customer service could send Surface the way of Research In Motion's ($8; RIMM) misguided PlayBook and Hewlett-Packard's ($13; HPQ) largely ignored TouchPad. In other news, Microsoft is reportedly designing a version of its Office suite for Apple and Android tablets, though it may be offered as a subscription service. Microsoft is a Buy and a Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy. H-P is rated B (average). RIM is rated C (below average).

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