Portfolio Review


Two new Buys

Helmerich & Payne ($54; HP), an oil and natural-gas drilling contractor, has grown sales 24% and per-share profits 32% over the last year. In each of the last nine quarters, sales have risen at least 18% and profits at least 25%. H&P has managed stronger growth than most peers because of its technological advantage — newer, more flexible rigs capable of drilling in shale formations. The quality of H&P's fleet has kept its utilization rate among the highest in the industry and limited exposure to industrywide declines in day rates. Rising profitability at the rig level has helped the company boost operating profit margins. H&P shares have risen 18% since topping September-quarter sales and profit estimates but still trade at 10 times estimated 2013 earnings, roughly in line with peers despite superior growth potential. Earlier this month, the company more than doubled its quarterly dividend to $0.15 per share, payable March 1. H&P, now yielding 1.1%, is being initiated as a Buy and a Long-Term Buy.

Celgene ($79; CELG), a maker of biological drugs, is being initiated as a Buy and a Long-Term Buy. The company relies on cancer treatment Revlimid for about two-thirds of sales, though the pipeline of new drugs appears promising. In the nine months ended September, Celgene posted growth of 14% in sales and 19% in cash provided by operations, building on record highs set last year. At 17 times trailing earnings, the stock trades 39% below its three-year average. For 2013, Celgene is projected to grow per-share profits 14%, versus 10% for the median biotechnology stock in the S&P 1500 Index. Despite the superior outlook, shares trade at 14 times the 2013 profit estimate, a 20% discount to their peer group. Celgene scores above 60 for five of six Quadrix categories, earning an Overall rank of 93.

Two downgrades

Microsoft ($26; MSFT) is being dropped from the Buy List but remains a Long-Term Buy. Its Quadrix Overall rank, currently 78, has declined from 97 at the end of April, hurt by eroding operating momentum and weak share-price action. Microsoft has talked up strong sales of Windows 8, launched Oct. 26. But researcher NPD says sales of Windows-based personal computers plunged about 21% in the four weeks ended Nov. 17. Touchscreen PCs and tablets appear to be faring better than traditional PCs, though mixed reviews and limited distribution channels weigh on Microsoft's Surface tablet, which is reportedly selling at a far slower rate than the company expected. Corporate clients are typically slow to adopt new Windows operating systems, and Dell's ($10; DELL) CFO says many companies are unlikely to consider upgrading to Windows 8 until next summer. Yielding 3.5%, Microsoft remains worthwhile for patient investors with time horizons of 24 months to 48 months but is no longer a top pick for year-ahead returns.

Wyndham Worldwide ($50; WYN) shares have rallied 50% since we first recommended the stock in November 2011, well ahead of the 13% gain posted by the S&P 500 Index. But the company, which operates timeshare rentals and hotel chains, may have overstayed its welcome. Its Overall score has fallen to 68, reflecting slower operating momentum and weaker earnings-estimates trends. In the past couple of quarters, Wyndham has experienced decelerating sales growth, contracting operating profit margins, and declining cash provided by operations. Moreover, shares now trade at 16 times trailing earnings, 8% above their three-year average. As a result, we are removing Wyndham from the Buy and Long-Term Buy lists and also dropping the stock from coverage.

Technology review

With supplies of its iPhone 5 appearing to stabilize, Apple ($576; AAPL) says it will be selling the device in 100 countries by the end of the year, including launches in South Korea and China. Apple is a Focus List Buy and a Long-Term Buy.

Italy launched a fresh investigation into Google ($691; GOOG) after a prior probe alleged the company failed to declare income of at least $310 million from 2002 through 2006. In related news, finance ministers from France, Germany, and the U.K. are working on tax proposals aimed at preventing companies — especially multinationals selling via the internet — from exploiting loopholes. Google is a Focus List Buy and a Long-Term Buy.

Qualcomm ($63; QCOM) agreed to pay roughly $120 million for a 2.6% equity stake in Sharp ($2; SHCAY), the struggling Japanese electronics firm. Hoping to further stabilize its deteriorating balance sheet, Sharp could seek cash infusions from other U.S. companies, including more from Qualcomm and up to $244 million apiece from Intel ($20; INTC) and Dell ($10; DELL). Qualcomm is a Buy and a Long-Term Buy. Intel is a Long-Term Buy. Dell is rated B (average).

Cisco Systems ($19; CSCO) said it will pay $141 million in cash to acquire Cariden Technologies, a maker of software for managing network traffic. Cisco is a Buy and a Long-Term Buy.

Dividend news

Aetna ($43; AET) raised its quarterly dividend 14% to $0.20 per share, payable Jan. 25. Aetna is a Buy and a Long-Term Buy.

Disney ($49; DIS) hiked its annual dividend 25% to $0.75 per share, payable Dec. 28. Disney is rated A (above average).

Addressing uncertainty over the tax rate on dividends next year, Oracle ($32; ORCL) approved an accelerated dividend. The company will pay $0.18 per share Dec. 21, replacing its regular dividend that would have paid $0.06 in each of the next three quarters. Oracle is a Long-Term Buy.

Corporate update

Abbott Laboratories ($64; ABT) approved the separation of its pharmaceutical business, now called AbbVie. On Jan. 1, investors will receive one share of AbbVie for every share of Abbott they own. AbbVie will begin trading Jan. 2 under the ticker ABBV. The rest of the company will continue to use the ABT ticker. AbbVie expects to pay an annualized dividend of $1.60; no target share price has been released, so we don't yet know the yield. In other news, Abbott won an 8% share of a $667 million South African contract for HIV treatments that drew aggressive bidding and was spread among 12 companies. In an upcoming issue, we will update our advice on the two companies resulting from the merger. For now, Abbott Laboratories remains a Long-Term Buy.

Citing disruptions from Hurricane Sandy, Macy's ($38; M) reported a 0.7% decline in November same-store sales, ending a streak of 35 months of higher growth. The results also fell well short of the consensus projection of 1.5% growth. Macy's described a strong Thanksgiving weekend and said same-store sales would have risen if not for hurricane-related disruptions earlier in the month. Although the shares fell on the news, Macy's remains a Focus List Buy and a Long-Term Buy.

Rank Changes

Mylan ($27; MYL) is being added to the Focus List. Helmerich & Payne ($54; HP) and Celgene ($79; CELG) are being initiated as Buys and Long-Term Buys. Microsoft ($26; MSFT) is being dropped from the Buy List. Wyndham Worldwide ($50; WYN) is being dropped from the Buy List, Long-Term Buy List, and from coverage. The Vanguard Short-Term Investment-Grade ($10.88; VFSTX) now makes up 9.2% of the Buy List and 11% of the Long-Term Buy List.

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