Portfolio Review


Earnings report

In the December quarter, Wells Fargo ($35; WFC) grew per-share profits 25% to $0.91, topping the consensus of $0.89. Revenue advanced 7% to $21.95 billion. Total loans increased 2% on strong growth from residential mortgages and commercial and industrial borrowing. Shares wavered on the results, with some investors concerned by the continued compression of net interest margins. But the margin decline stemmed partly from the surge in average core deposits, up 7%. The bank's mortgage pipeline also looks a bit disappointing, though seasonality likely played a role.

The quarter did not change our mind on the bank stock, up 6% since we first added it to the Long-Term Buy List last May. The U.S. housing market appears to have turned a corner, though activity and prices remain low relative to historical standards, leaving room for improvement. Shares trade at 10 times trailing earnings, 34% below their five-year average and 26% below the median for banks in the S&P 1500 Index. Wells Fargo is a Focus List Buy and a Long-Term Buy.

American Express ($61; AXP), in releasing preliminary results for the December quarter, said it earned $1.09 per share excluding special charges in the December quarter, up 8% and $0.03 above the consensus. Total revenue net of interest expense rose 5% to $8.1 billion. Despite a temporary disruption from Hurricane Sandy, cardmember spending grew 8%. Amex also said it will reduce staff by 4% to 6% this year, with many of the cuts in corporate-travel operations. The company was slated to release final results Jan. 17. Amex is a Focus List Buy and a Long-Term Buy.

Chevron ($113; CVX) shares rose after the energy titan said December-quarter profits should be "notably higher" than the $2.69 per share earned in the September quarter. The consensus calls for December-quarter earnings of $3.01 per share, versus $2.58 in the same quarter a year earlier. During the first two months of the quarter, Chevron's total global production increased slightly, while its downstream business posted margins for both refining and marketing well above year-earlier levels. Chevron is a Buy and a Long-Term Buy.

U.S. Bancorp ($33; USB) earned $0.75 per share in the December quarter, up 17% and in line with the consensus estimate. Net revenue held steady at $5.11 billion. Average deposits rose 9%, while average loans increased 6% on strong growth in residential mortgages and commercial loans. Net interest margin contracted slightly, a trend the bank sees continuing in the March quarter. In early January, U.S. Bancorp sought Federal Reserve approval to raise its dividend and continue repurchasing shares; it expects an answer by late March. U.S. Bancorp is a Buy and a Long-Term Buy.

J.P. Morgan Chase ($46; JPM) grew December-quarter earnings per share 50% to $1.35 excluding special items, well ahead of the consensus of $1.16. Revenue advanced 10% to $24.38 billion on double-digit gains posted by its investment-banking, consumer-banking, and asset-management units. Like many of its peers, J.P. Morgan saw its net interest margin shrink. The bank plans to reduce share buybacks this year to boost capital to comply with stricter international rules. J.P. Morgan Chase is a Long-Term Buy.

Apple shares snake-bitten

A few months ago, investors fretted over Apple ($506; AAPL) securing enough components to keep up with demand for its new iPhone 5. Now the imbalance fears have flipped. Apple has reportedly cut March-quarter orders for iPhone components, sending its shares to their lowest point since February 2012. Some factories could reduce output by 40% to 80% from December-quarter levels. But investors disagree over what the news means: A reflection of weak demand? Apple bleeding inventories as it accelerates the launch of its next model? Higher manufacturing yields lowering the need for excess supplies? It's too early to tell, but Apple shares have fallen 28% from September highs, already discounting a lot of bad news.

A similar report of Apple cutting production stirred concerns about
iPhone demand last month. The iPhone has struggled in emerging markets, and a cheaper model could help solve that problem. Earlier this month, Apple CEO Tim Cook met with China Mobile ($57; CHL) to discuss a partnership that could make the iPhone available to a third Chinese carrier.

Apple trades at 11 times trailing earnings, its lowest P/E in more than a decade. If Apple meets the consensus profit estimate for the fiscal year ending in September and its P/E returns to the one-year average of 14.4, the shares will rebound to about $700 by this fall. Apple remains a Focus List Buy and a Long-Term Buy.

Cleanup in the ethics aisle

Over the past 13 months, Wal-Mart Stores ($69; WMT) has consistently downplayed bribery investigations involving its international business. But the company may be in line for a large fine. Two U.S. lawmakers say internal emails show Wal-Mart CEO Michael Duke knew of the bribery allegations at its Mexican business in 2005. Wal-Mart had previously said senior executives were unaware of bribery allegations. Duke took command of international operations in late 2005, before becoming CEO in February 2009.

According to The New York Times, in 2005 Wal-Mart quietly extinguished an internal probe concerning payoffs to Mexican officials without alerting authorities of potential improprieties. The U.S. has launched a criminal investigation into the allegations, and Wal-Mart has opened new probes into its conduct in Mexico, as well as Brazil, China, and India. Several employees at the Indian unit were suspended in November, including the CFO.

In December 2011, Wal-Mart said, "We do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows." But other big bribery cases settled in the past five years have resulted in fines of up to $800 million. Wal-Mart generated $27.25 billion in cash from operations and $9.08 billion in free cash flow in the 12 months ended October. In other news, sales at the Massmart business in Africa jumped 15% in the 26 weeks ended Dec. 23, with same-store sales up 7.3%. Wal-Mart Stores is a Long-Term Buy.

Dell may go private

Shares of Dell ($13; DELL) rallied on reports that the company is shopping itself to private-equity firms. With a market value of $22.9 billion, Dell would represent the biggest buyout of a technology company since 2007. Like other makers of personal computers, Dell has struggled as smartphones and tablets compete for consumers' wallets. Researcher IDC says global shipments of personal computers slipped 6% in the December quarter and 3% for the year, marking the first annual decline since 2001. Dell is rated B (average).

Earnings on the web

Starting Jan. 16, we are listing quarterly profits for all recommended stocks on the Subscriber Area of our website at www.DowTheory.com. We already provide original copy on that page every day the market is open. Visit the Subscriber Area regularly for the latest from Dow Theory Forecasts.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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