Portfolio Review


Too soon to slam door on Foot Locker

Foot Locker ($32; FL) earned $0.46 per share in the July quarter excluding special items, up 21% but a penny below the consensus. Same-store sales rose 1.8%, the lowest growth in the past 14 quarters. Total revenue grew 6% to $1.45 billion, in line with the consensus. Gross profit margins declined for the first time since the October 2009 quarter, hurt by a less favorable product mix and vendors hiking their prices faster than Foot Locker did. However, management says its customers do not seem overly sensitive to price increases, so it should be able to continue raising prices. Moreover, operating profit margins continued their upward trajectory.

Same-store sales climbed at a low mid-single-digit rate during the first few weeks of August. For fiscal 2014 ending January, Foot Locker now expects same-store sales at the low end of its prior growth target, mid single-digits. Shares slipped 3% on the report. Foot Locker trades at 12 times trailing earnings, a 46% discount to its five-year average and 30% below the median for S&P 1500 apparel retailers. Foot Locker remains a Focus List Buy and a Long-Term Buy.

Corporate roundup

Amgen ($109; AMGN) struck a deal to acquire Onyx Pharmaceuticals ($123; ONXX) for $125 per share, up from its June bid of $120 per share. The cash acquisition, valued at $10.4 billion, pushes Amgen into the cancer-drug market — and into direct competition with Celgene's ($137; CELG) myeloma treatment Revlimid. Amgen generated $17.66 billion in sales in the 12 months ended June, highest among S&P 1500 biotechnology companies, but must brace for a wave of biosimilar drugs to hit the market in coming years. Onyx, with 12-month revenue of $516 million, won U.S. approval last year to sell a multiple-myeloma drug and already markets a drug for liver and kidney cancer. Amgen is rated A (above average). Celgene is a Buy and a Long-Term Buy.

Halliburton ($48; HAL) plans to spend $3.3 billion to repurchase 68 million of its own shares, more than 7% of its outstanding stock, at $48.50 per share via a Dutch auction. Halliburton is rated A (above average).

Helmerich & Payne ($63; HP) CEO Hans Helmerich, grandson of the company's co-founder, plans to retire in March. Chief Operating Officer John Lindsay, with the company since 1987, will become CEO. H&P is a Focus List Buy and a Long-Term Buy.

Technology report

Microsoft ($33; MSFT) CEO Steve Ballmer, 57, plans to end his rocky 13-year reign by retiring within the next 12 months. Ballmer's departure, the subject of speculation for years, may have been accelerated by Microsoft's board, according to at least one published report. Ballmer takes much of the blame for two problems that have weighed on Microsoft for more than a decade: slow recognition of emerging trends, and clumsy execution to capitalize on those trends. From the day Ballmer became CEO in January 2000, near the height of the tech bubble, until the day of his retirement announcement, Microsoft shares plunged 40%. In contrast, the S&P 500 Index rose 13%. On the day Ballmer announced his retirement, Microsoft shares outperformed the S&P 500 by 7%. Microsoft is rated B (average).

Qualcomm ($66; QCOM) agreed to sell Omnitracs to Vista Equity Partners, a private-equity firm, for $800 million in cash. Omnitracs, launched by Qualcomm in the late 1980s, provides wireless systems and services to transportation and logistics companies. In other news, a teardown of Google's ($850; GOOG) new Moto X smartphone by researcher IHS revealed about $43 of Qualcomm components in each unit. Qualcomm is a Focus List Buy and a Long-Term Buy. Google is a Buy and a Long-Term Buy.

Apple ($489; AAPL) has reportedly entered discussions to sell its iPhone on the network of Japan's largest mobile carrier, NTT DoCoMo ($16; DCM). Two of Japan's smaller carriers already sell the iPhone. Meanwhile, Apple continues to expand programming for Apple TV, most recently adding content from Disney ($61; DIS), the Weather Channel, and Vevo, which offers music videos. Apple TV is a set-top box that connects televisions to the internet. Separately, activist investor Carl Icahn said he will meet with CEO Tim Cook in September to pitch a proposal for increasing the size of Apple's stock buyback, already a record $60 billion. Apple is a Buy and a Long-Term Buy. Disney is rated B (average).

Financials update

Moody's says it will consider downgrading the debt of J.P. Morgan Chase ($51; JPM), Wells Fargo ($41; WFC), Goldman Sachs ($153; GS), and Morgan Stanley ($25; MS). With the U.S. becoming less likely to help banks in distress, bond investors could face steeper losses if the companies default on their debt. Current ratings assume government assistance. Both J.P. Morgan Chase and Wells Fargo are rated Focus List Buy and Long-Term Buy. Goldman Sachs is rated A (above average). Morgan Stanley is rated C (below average).

The U.S. government reportedly seeks at least $6 billion from J.P. Morgan to settle lawsuits linked to bonds sold by the bank and backed by subprime mortgages. Two years ago, the Federal Housing Finance Agency sued J.P. Morgan over $33 billion of the ill-fated securities. In other news, published reports suggest J.P. Morgan will face $500 million to $600 million in penalties from U.S. and British regulators in connection with last year's “London whale” trading scandal.

Wells Fargo plans to slash 2,300 jobs from its home-loans business, a reflection of the sharp decline in mortgage refinancing this year. Mortgage applications fell nearly 30% in the June quarter at Wells Fargo, the country's biggest mortgage lender.

Google makes a play for DirecTV's NFL gig

Google ($850; GOOG) reportedly met with the National Football League to explore acquiring rights to the NFL Sunday Ticket. But DirecTV ($58; DTV) still looks like the frontrunner. The pay-TV provider currently pays the NFL about $1 billion a year for licensing rights under a four-year contract set to expire in 2014. And DirecTV's management told an analyst that renewal discussions are progressing smoothly. DirecTV may also be considering different marketing packages for the NFL Sunday Ticket, including one that would allow mobile access. Roughly two million subscribers receive the service. It's not clear whether Google seeks exclusive rights or a deal to stream NFL games internationally. Regardless, the negotiations have broadcast Google's intent to make a splash in video content.  DirecTV is a Focus List Buy and a Long-Term Buy. Google is a Buy and a Long-Term Buy.

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