Portfolio Review


Intel dropped from Long-Term Buy List

Intel ($24; INTC) said June-quarter earnings per share dove 28% to $0.39, missing the consensus by a penny. Revenue fell 5% to $12.81 billion. Sales of semiconductors for personal computers declined 7%, while sales to data centers were flat. Gross profit margin fell to 58.3% from 63.4% in the year-earlier period.

For the September quarter, management guided to a revenue range with a midpoint of $13.5 billion, below the consensus at the time of the announcement. Intel also cut its full-year guidance for gross profit margin; the company will have to boost margins in the second half to meet even the lowered target. Intel has been dropped from the Long-Term Buy List and is now rated B (average).

Financial update

Wells Fargo ($43; WFC) grew June-quarter earnings per share 20% to $0.98, topping the consensus by a nickel. Total revenue held flat at $21.38 billion. Average core deposits grew 6%, while average loans rose 4%. But the bank's residential-mortgage business softened, with originations up 3% from the March quarter but down 15% year-over-year on a sharp drop in refinancing. At the same time, higher interest rates helped Wells Fargo's net interest margin to begin to stabilize.

As for how interest rates could affect the mortgage business, sentiment shared by executives at Wells Fargo and rival J.P. Morgan Chase ($55; JPM) took divergent paths. J.P. Morgan warned that mortgage refinancing could plunge 30% to 40% in the second half of the year with interest rates at current levels. Wells Fargo struck a more bullish tone, noting that the U.S. housing market has posted its strongest and broadest improvement since before 2008, a trend that tends to coincide with strength in other business units. Wells Fargo shares rallied on its results, while J.P. Morgan shares slipped. Both J.P. Morgan Chase and Wells Fargo are rated Focus List Buy and Long-Term Buy.

U.S. Bancorp ($37; USB) earned $0.76 per share in the June quarter, up 7% and in line with the consensus estimate. Total revenue slipped 2% to $4.95 billion, hurt by a 2% decline in net interest income. The bank's loan portfolio grew 5% to $225.2 billion, driven by higher demand for commercial loans and residential mortgages. Total deposits advanced 7%. For now, U.S. Bancorp is a Buy and a Long-Term Buy.

American Express ($78; AXP) grew earnings per share 10% to $1.27 in the June quarter, topping the consensus by $0.05. Total revenue net of interest expense advanced 4% to $8.25 billion, helped by higher spending from U.S. cardmembers. Before releasing earnings, Amex slipped on concerns the European Commission will propose a cap on interchange fees for credit- and debit-card payments. Some analysts said these rules would cut into Amex's profits, but management stressed the effects would be limited, as the caps wouldn't affect several of its businesses. Europe accounted for 11% of Amex's billed business in 2012. For now, Amex is a Buy and a Long-Term Buy.

Health-care review

Celgene ($135; CELG) shares rose after the company reported a late-stage trial showed its blockbuster Revlimid improved survival rates for patients recently diagnosed with blood cancer. Celgene said it will submit an application for wider usage of Revlimid in both the U.S. and Europe. A new indication could revive slowing sales growth for Revlimid, which accounted for more than two-thirds of Celgene's revenue in the 12 months ended March. Celgene is a Buy and a Long-Term Buy.

In the June quarter, Abbott Laboratories ($36; ABT) earned $0.46 per share from continuing operations excluding special items, topping the consensus by $0.02. Revenue climbed 3% to $5.45 billion, as growth in nutrition (up 8%) and diagnostics (up 5%) offset weakness in medical devices and established pharmaceuticals (both down 2%). Sales in emerging markets jumped 13% to $2.3 billion. In other news, Abbott agreed to pay up to $400 million for OptiMedica, which makes a laser system to help doctors perform cataract surgery. Abbott also plans to pay $310 million for IDEV Technologies, a stent maker. Abbott Laboratories is a Long-Term Buy.

Technology review

Global shipments of personal computers slipped 11% in the June quarter, said industry researchers, marking the fifth consecutive quarterly decline. Inexpensive tablets continue to gain momentum in emerging markets. The U.S. showed signs of stabilizing, with PC shipments falling less than 2% year-over-year, the smallest decline in the past seven quarters.

Microsoft ($36; MSFT) shares jumped after the company announced its largest restructuring in five years in an effort to remove internal bottlenecks slowing product development. Microsoft is a Long-Term Buy.

Hulu off the market … again

DirecTV ($65; DTV) bid more than $1 billion for Hulu and had even entered discussions over licensing contracts, reported The Wall Street Journal. But for the second time in three years, sellers' remorse struck Hulu's owners after they placed the online video service on the auction block. The owners — a group that includes Comcast ($44; CMCSa), Disney ($65; DIS), and News Corp. ($15; NWSa) — ultimately decided to keep Hulu and position the company as an online platform for pay-TV operators to offer programming to subscribers. They also pledged a fresh $750 million investment into Hulu so it can better compete with streaming services offered by Amazon.com ($307; AMZN) and Netflix ($260; NFLX).

Hulu has 30 million monthly visitors, including about four million paying subscribers. Hulu may still sell a stake to Time Warner Cable ($113; TWC). DirecTV is a Focus List Buy and a Long-Term Buy. Comcast is a Long-Term Buy. Disney is rated A (above average). News Corp. is rated B (average). Amazon.com is rated C (below average).

Corporate roundup

United Parcel Service ($86; UPS) slashed its full-year guidance for adjusted earnings per share to a range with a midpoint of $4.75, down from a prior $4.93; the shipper earned $4.53 per share in 2012. UPS said results were hurt by a slowing U.S. economy and an ongoing trend of customers shifting to cheaper shipping options. UPS is rated C (below average).

Walgreen ($49; WAG) hiked its quarterly dividend 15% to $0.315 per share, payable Sept. 12. Walgreen, which has raised its dividend for 38 consecutive years, is rated B (average).

AT&T ($36; T) agreed to acquire Leap Wireless International ($17; LEAP) for $1.19 billion in cash, or $15 per share. That price tag carries an 88% premium to Leap's closing price prior to the announcement. AT&T also agreed to assume net debt of $2.64 billion. The deal could face scrutiny from antitrust officials, though Leap is far smaller than T-Mobile USA, which the U.S. Justice department blocked AT&T from acquiring in 2011 for $39 billion. AT&T is rated C (below average).

Rank Changes

Intel ($24; INTC) is being dropped from the Long-Term Buy List. Vanguard Short-Term Investment-Grade ($10.68; VFSTX) now accounts for 5.2% of the list.

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