Portfolio Review


Earnings roll call

Consumer staples

CVS Caremark ($52; CVS) grew per-share profits 28% to $1.14 excluding special items in the December quarter, topping the consensus by $0.04. Among other things, results excluded charges for early debt repayments that amounted to $0.17 per share. Revenue, up 11% to $31.39 billion, also exceeded the consensus. The pharmacy-services unit reported 17% higher sales, while the retail-pharmacy segment posted 4.0% higher same-store sales. CVS raised its 2013 profit view by $0.02, primarily reflecting lower interest expense from the debt refinancing. The company now targets per-share profits of $3.86 to $4.00, implying growth of 12% to 16%; the consensus projected earnings of $3.94 at the time of the announcement. CVS also announced the acquisition of Drogaria Onofre, which operates 44 retail pharmacies in Brazil. CVS Caremark is a Focus List Buy and a Long-Term Buy.

Health care

In the December quarter, Thermo Fisher Scientific ($75; TMO) grew per-share profits 14% to $1.36 excluding special items, topping the consensus by $0.08. Sales climbed 6% to $3.26 billion, boosted by 12% growth from the specialty-diagnostics unit, Thermo Fisher's most profitable business. The company generates about 10% to 15% of its sales from U.S. academic research institutions, subject to the government's looming spending cuts. Management's 2013 guidance — calling for 8% to 11% higher per-share profits on sales growth of 2% to 4% — assumes the U.S. government will initiate spending cuts in March. Shares rose on the results. Thermo Fisher is a Focus List Buy and a Long-Term Buy.

Aetna ($50; AET) earned $0.94 per share from operations in the December quarter, down 3% and $0.02 short of the consensus. Revenue advanced 16% to $9.93 billion, or 5% excluding a one-time premium. The results were hampered by higher health-care costs, reflected in Aetna's medical-benefits ratio, which rose 3.4 percentage points to 84.1%. Aetna still expects its $5.7 billion acquisition of Coventry Health Care ($46; CVH) to close in the middle of 2013. Aetna also reaffirmed its 2013 guidance for per-share profits of at least $5.40, versus $5.13 last year and the consensus of $5.53 at the time of the announcement. Aetna is a Buy and a Long-Term Buy.

Drug distributor McKesson ($102; MCK) said December-quarter earnings per share climbed 1% to $1.41 excluding special items. Profits missed the consensus, partly because of some unusual costs including a legal charge. Sales crept 1% higher to $31.19 billion. McKesson narrowed its profit guidance for fiscal 2013 ending March, while keeping the midpoint at $7.20 per share; the consensus targeted $7.30 at the time of the announcement. Management also approved $500 million in share repurchases. While the quarterly earnings news is discouraging, McKesson's low valuation already reflects plenty of concerns, and the stock remains a Long-Term Buy.


Helmerich & Payne ($64; HP) shares rallied after the contract driller reported December-quarter earnings per share of $1.40 from continuing operations, up 9% and well ahead of the consensus estimate of $1.29. Operating revenue climbed 15% to $845 million, also ahead of the consensus, on growth of at least 8% in all segments. Rig utilization for the U.S. land unit slipped to 82% from 91% in the year-ago quarter. But the rigs' average daily revenue rose 4%, and management seems confident it can keep raising rates if oil prices remain strong. Helmerich & Payne is a Focus List Buy and a Long-Term Buy.

Exxon Mobil ($90; XOM) said per-share profits jumped 12% to $2.20 in the December quarter, exceeding the consensus by $0.20. Upstream profits slumped 12%, hurt by a 5% decline in total production. But earnings from the refining business surged more than fourfold and chemical earnings jumped 76%. Total revenue slipped 5% to $115.17 billion. Exxon Mobil is a Buy and a Long-Term Buy.


Hurt by weakness in the Japanese yen, Aflac's ($53; AFL) sales rose 7% to $6.38 billion in the December quarter, below the consensus of $6.50 billion. The insurer earned $1.48 per share excluding special items, up 2% and in line with the consensus. Aflac's U.S. business grew sales 6%, while revenue in Japan rose 11% at constant currency. The 2013 outlook calls for per-share profits to rise 4% to 7% at constant currency, in line with earlier guidance. But if the yen continues to slump relative to the U.S. dollar — as it has done so far this year — Aflac projects 2013 per-share profits below the consensus. For now, Aflac remains a Focus List Buy and a Long-Term Buy.

Technology update

In the December quarter, Alliance Data Systems ($156; ADS) delivered 8% growth in per-share earnings and 15% growth in sales, both topping the consensus. Excluding phantom shares the company never expects to issue, per-share profits rose 14%. The purchase of Hyper Marketing in November accounted for the bulk of the sales and profit outperformance, and the acquired firm's digital presence fills gaps at Alliance's Epsilon unit. The private-label business grew sales 23% for the quarter. Alliance says about half of its phantom shares connected to convertible debt will disappear Aug. 1, with the rest sloughing off in 2014, equating to a decline of 12% in the share count over the next two years. Alliance is a Focus List Buy and a Long-Term Buy.

Visa ($160; V) reported December-quarter earnings per share of $1.82 excluding special items, up 22% and $0.03 ahead of the consensus. Total operating revenue advanced 12% to $2.85 billion. Payment volumes rose 9% on a constant-dollar basis, while processed transactions climbed 4% to 14.2 billion. Visa is a Buy and a Long-Term Buy.

Dell ($13; DELL) agreed to a takeover by private-equity firm Silver Lake, founder Michael Dell, and a smattering of investment banks. The $24.4 billion buyout translates to $13.65 per share, a 25% premium to levels before media reports of the deal surfaced. Microsoft ($28; MSFT) will provide a $2 billion loan but won't take an equity stake in Dell as previously reported, perhaps in order to preserve its relationships with other personal-computer makers. Dell makes about 10% of the PCs that run Microsoft's Windows. Dell, previously rated B (average), is being dropped from coverage. Microsoft is a Long-Term Buy.

Oracle ($35; ORCL) said it will acquire Acme Packets ($29; APKT) in a deal valued at $1.7 billion net of cash. Acme sells equipment that helps clients transmit data over the internet. The deal continues Oracle's push into networking, putting the company in closer competition with Cisco Systems ($21; CSCO). Oracle is a Long-Term Buy. Cisco is a Buy and a Long-Term Buy.

Google ($766; GOOG) offered to resolve a European Union probe into complaints about anticompetitive behavior. Google is a Focus List Buy and a Long-Term Buy.

Rank Changes

No changes were made this week to the Dow Theory Forecasts' buy lists. In the Top 15 Utilities portfolio, we're dropping Entergy ($65; ETR) and adding South Jersey Industries ($54; SJI).

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