Portfolio Review


Three Buys down but not defeated

Cisco stronger than it looks

Cisco Systems ($24; CSCO) shares have fallen 8% since the company declared July-quarter earnings slightly above expectations but issued disappointing guidance. The company also announced plans to cut 4,000 jobs, about 5% of its work force, though some of the workers will be reallocated to other positions within the company. Cisco's explanations make sense:

• Weaker sales and profit targets for the October quarter reflect not competitive issues, but economic uncertainty. CEO John Chambers said Cisco continues to gain market share, calling the guidance conservative.

• Layoffs represent a diversion of resources to newer, faster-growing businesses from segments with less potential.

• Cost trends are mixed, with production expenses rising and operating expenses falling. Layoffs and resource reallocation should help address the cost issues, but not overnight.

The bad news masked a recovery in Europe (orders up 6%), a 3% increase in U.S. government orders (up from an 11% decline in the year-earlier quarter), and impressive growth in Cisco's wireless and cloud-computing businesses. Cisco could remain under pressure in the near term, but the stock retains its Focus List Buy and Long-Term Buy ratings. Don't be afraid to buy on the dip.

Keep your money in J.P. Morgan

J.P. Morgan Chase's ($52; JPM) legal woes continue to mount, with the U.S. launching new investigations into its hiring practices in China and participation in domestic energy markets. The Securities and Exchange Commission is investigating allegations that J.P. Morgan curried favor from Chinese officials by hiring their children, known as "princelings." In one instance, the bank hired the son of a top executive at China Everbright Bank and later won multiple deals with the bank. J.P. Morgan also managed the initial public offering of a railroad after hiring the daughter of an official.

The U.S. Justice Department is also investigating claims that J.P. Morgan manipulated U.S. energy markets. Just last month, the bank agreed to pay $410 million to settle allegations brought by the Federal Energy Regulatory Commission. In related news, J.P. Morgan reportedly plans to put its commodities business up for sale in early September. J.P. Morgan Chase shares may remain under pressure in the near term, but the recent news should have little effect on the financial giant's revenue and profits. J.P. Morgan remains a Focus List Buy and a Long-Term Buy.

B/E Aerospace set to soar

B/E Aerospace's ($69; BEAV) stock has pulled back about 6% from its all-time high near $74 set earlier this month, giving investors another opportunity to scoop up shares of a company well positioned in the robust aerospace industry.

Global air traffic and capacity at commercial airlines continue to expand at a healthy clip. Record backlogs at Boeing ($105; BA) and Airbus will put pressure on plane makers to increase production rates, while airlines try to gain market share by upgrading cabin amenities. Demand for wide-body planes remains strong, a sweet spot for B/E Aerospace because the larger planes require more seating products and food-preparation and storage equipment. While the strong delivery cycle for new aircraft drove B/E Aerospace's 12% sales growth in the first six months of 2013, management says its aftermarket business should continue to improve in the second half of the year and into 2014.

B/E Aerospace will expand its consumables-management business with the planned acquisition of Blue Dot Energy Services for roughly $75 million in cash. Blue Dot offers parts distribution, rental equipment, and on-site services for the oil-and-gas services industry, a new market for B/E Aerospace. B/E Aerospace is a Buy and a Long-Term Buy. Boeing is rated A (above average).

Health-care review

A patent trial held this week could shape the course of future revenue streams for Mylan Laboratories ($36; MYL) and other generic-drug makers. Eli Lilly ($53; LLY) is defending the patent for lung-cancer treatment Alimta, its second-biggest drug. Alimta generated $1.27 billion in sales in the first half of 2013, roughly 11% of its total revenue. The drugmaker seeks to block generic competition until Alimta's secondary patent, covering the method of administration, expires in 2022, rather than when patent protection for the drug's basic compound ends in 2017. Should Lilly prevail, other drugmakers could have more luck defending secondary patents for their own treatments, delaying the release of generics.

Mylan also faces the postponement of its proposed $1.6 billion acquisition of Agila Specialties, an Indian maker of generic injectable drugs. India's government is looking to revamp laws for foreign investment to ensure lifesaving drugs remain well stocked and moderately priced for its residents. Foreign investment into India's pharmaceutical industry totaled $1.1 billion in the 12 months ended March. Mylan is a Focus List Buy and a Long-Term Buy. Eli Lilly is rated B (average).

Corporate roundup

Wal-Mart Stores ($73; WMT) said July-quarter earnings per share rose 6% to $1.25 excluding a tax-related charge, matching the consensus estimate. Within the U.S., same-store sales slipped 0.3% at the core Walmart business, below internal expectations, but rose 1.7% at Sam's Club. Total revenue advanced 2% to $116.95 billion, paced by 3% growth from international operations. Management, citing cautious consumer spending and unfavorable currency trends, lowered full-year targets for both sales and per-share profits. For the October quarter, the retailer expects earnings per share of $1.11 to $1.16, implying growth of 3% to 7%. Wal-Mart Stores remains a Long-Term Buy.

Apple ($501; AAPL) has reportedly asked its suppliers to begin shipping two new iPhone models — including a low-end version — in early September. According to published reports, Apple will show off its devices Sept. 10. A cheaper iPhone model could revive Apple's sales in China, especially if Apple secures a deal with China Mobile ($54; CHL), the world's largest carrier with about 700 million customers. Apple is a Buy and a Long-Term Buy.

Alliance Data Systems ($202; ADS) said average receivables for its private-label unit rose to $7.07 billion in July, up 23% from the year-earlier period. Alliance Data Systems is a Focus List Buy and a Long-Term Buy.

Visa ($178; V) shares rallied after the Federal Reserve said it will appeal a judge's decision that its rules for debit-card fees were illegal. A U.S. district judge ruled on July 31 that swipe fees set by the Fed were illegal, resulting in retailers being overcharged by billions of dollars. Visa is a Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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