Portfolio Review


Wal-Mart woes

Shares of Wal-Mart Stores ($69; WMT) fell after an executive reportedly called early results for the April quarter a "total disaster." Citing an internal email dated Feb. 12, Bloomberg says the executive described February as the worst start of a month he'd seen since joining the retailer about seven years ago.

The pessimistic comments support concerns that delays for income-tax refunds and the expiration of payroll-tax deductions for Social Security will hurt discretionary spending, especially for retailers that rely on middle- and lower-income consumers. Wal-Mart will post January-quarter results on Feb. 21, after our deadline. We will pay close attention to quarterly results and guidance. For now, Wal-Mart Stores remains a Long-Term Buy.

Health-care review

Express Scripts ($57; ESRX) earned $1.05 per share excluding special items in the December quarter, up 28% and a penny above the consensus. Helped by the $29.1 billion acquisition of Medco Health Solutions, pharmacy-benefit manager Express Scripts reported sales of $27.41 billion, up from $12.10 billion in the same quarter in 2011. For 2013, Express Scripts sees earnings per share of $4.20 to $4.30, implying 12% to 15% growth, versus the consensus of $4.20 at the time of the announcement. Shares rallied on the results. Express Scripts is a Buy and a Long-Term Buy.

Celgene ($100; CELG) shares hit an all-time high after the drugmaker announced plans to repurchase $600 million of stock from an investment bank by May 20, enough to lower the share count by more than 1% at current prices. Celgene added that it has already spent $385 million on share repurchases this year. Celgene is a Buy and a Long-Term Buy.

The U.S. government released lower preliminary 2014 reimbursement rates for Medicare Advantage than investors had anticipated, pushing down shares of UnitedHealth ($57; UNH) and other insurers. Medicare Advantage rates vary by patient type and plan ratings. One industry group projected the new rates, in combination with provisions of the health-care-reform law, would drop payments by more than 8%. Medicare Advantage accounts for 6% medical members at UnitedHealth, compared to 16% at Humana ($73; HUM), 2% at Aetna ($49; AET), and 5% at Coventry Health Care ($46; CVH), which is being acquired by Aetna. Final rates will be announced April 1, and there could be some room for negotiation. UnitedHealth Group is a Focus List Buy and a Long-Term Buy. Aetna is rated B (average).

Merck ($42; MRK) agreed to pay $688 million to settle a class-action lawsuit that accused the drugmaker of defrauding investors because it sat on poor results from a clinical trial for nearly two years. Merck is rated B (average).

Johnson & Johnson ($77; JNJ) recalled 7,500 all-metal hip implants sold outside of the U.S. through September 2011. Some countries have reported failure rates as high as 12%. J&J is rated B (average). 

Buffett's big buy

Warren Buffett, still on the acquisition hunt, has bagged Heinz ($72; HNZ). Berkshire Hathaway ($101; BRKb), the insurance company that serves as CEO Buffett's investment vehicle, and 3G Capital, a Brazilian private-equity firm, agreed to pay $23.2 billion for Heinz. The deal represents a 20% premium to the share price before the announcement. With about 20% of total sales coming from emerging economies, Heinz holds a 26% share of the global ketchup market. Berkshire is rated B (average).

Corporate roundup

European Union regulators plan to take action against Google ($807; GOOG) by this summer for failing to address concerns about its privacy policy. The EU is also overhauling the way it handles penalties. Under the new policy, next year the EU should be able to fine companies up to 2% of annual sales — in Google's case, more than $1 billion. Google is a Focus List Buy and a Long-Term Buy.

Foot Locker ($34; FL) raised its quarterly dividend 11% to $0.20 per share, payable May 3. The retailer also announced a fresh three-year, $600 million share-repurchase program. Foot Locker is a Focus List Buy and a Long-Term Buy.

Intel targets living rooms

Continuing efforts to diversify beyond personal computers, Intel ($21; INTC) plans later this year to begin selling an online TV service accessed through a set-top box. Intel has begun to test the service while it negotiates deals with programmers. The company hopes to offer live and on-demand content in smaller bundles than currently offered by cable operators, a potential sticking point for content providers. The set-top box, equipped with a camera and facial-recognition technology, will allow for custom programming and video conferencing.

The market reacted skeptically to the announcement, considering Intel has limited direct experience in the consumer market and none in broadcasting. In addition, Intel enters a crowded space dominated by cable companies and satellite-TV providers, while Amazon.com ($270; AMZN), Apple ($460; AAPL), and Netflix ($196; NFLX) already offer on-demand programming. Intel is a Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy. Amazon.com is rated C (below average).

Stick with Fifth Third despite mortgage issues

Fifth Third Bancorp ($16; FITB) shares slipped after CEO Kevin Kabat said the bank's mortgage business has experienced softer revenue and tighter profit margins in the March quarter than management anticipated. He blamed the slowdown on an uptick in interest rates and the waning of the refinancing boom. Mortgage banking accounted for 28% of Fifth Third's noninterest income last year, while residential mortgages comprise 14% of its loan portfolio. Separately, the Mortgage Bankers Association projects U.S. mortgage originations will decline 19% in 2013 and 25% in 2014.

Nevertheless, Kabat reaffirmed the bank's 2013 outlook, issued last month. Consensus profit estimates for the March quarter have steadily climbed in the past 60 days but still reflect a healthy amount of caution at $0.40 per share, implying a 11% decline on 4% lower sales. Shares trade at just 10 times estimated 2013 earnings, 30% below the average for S&P 1500 regional banks. With an Overall rank of 91 and at least 85 in four of six Quadrix categories, Fifth Third remains a Buy and a Long-Term Buy.

Currency chop to hit U.S. firms

Venezuela announced it will devalue its currency, the bolívar fuerte, by 32%, the fifth devaluation in the past 10 years. For U.S. companies, the move lowers the value of assets in Venezuela and depresses future sales. It could also spur other Latin American countries to follow suit. With more than 40% of Venezuela's pay-TV market, DirecTV ($49; DTV) plans to take a $160 million charge in the March quarter. Colgate-Palmolive ($112; CL) said it will take a $120 million charge in the March quarter, while Procter & Gamble ($77; PG) plans to book charges of $200 million to $275 million in 2013. Merck ($42; MRK) and Halliburton ($43; HAL) also expect to take a hit. DirecTV is a Focus List Buy and a Long-Term Buy. Halliburton is rated A (above average). Colgate-Palmolive, Merck, and Procter & Gamble are rated B (average).

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