Portfolio Review


Technology update

Reports on inventory levels for Apple's ($488; AAPL) iPhone 5C have been mixed. But most U.S. stores have sold out of the iPhone 5S, Apple's premium device, with wait times as long as three weeks. Components cost $213 for the iPhone 5S and $156 for the iPhone 5C, estimated one analyst. Taking into account manufacturing and related costs, gross profit margins for both devices could be around 50%, similar to their predecessor iPhones. Companywide, Apple's gross profit margins fell to 36.9% in the June quarter from 42.8% in the year-ago quarter.

Looking ahead to Apple's next product launch, the new iPad mini could be unveiled later this month. However, the device could see limited supplies or completely miss the holidays due to production delays for its new retina display, according to published reports.

Separately, Apple CEO Tim Cook met with activist investor Carl Icahn, who is pushing the company to repurchase $150 billion in shares. In April, Apple raised its buyback program to $60 billion from $10 billion. Icahn holds a $2 billion stake in Apple. Apple is a Buy and a Long-Term Buy.

Cisco Systems ($23; CSCO) CEO John Chambers said he sees the U.S. driving the company's near-term growth, though Europe is recovering better than expected, especially in the northern part of the continent. He added that Cisco would consider curtailing stock buybacks in order to accelerate dividend growth. The company has pledged in the past couple years to spend half of its free cash flow on dividends and share repurchases. Cisco is a Focus List Buy and a Long-Term Buy.

Google ($887; GOOG) improved its proposal to end the European Union's antitrust probe, according to EU Competition Commissioner Joaquin Almunia, who added that the matter could be settled by next spring. Meanwhile, Google faces fines in France for failing to obey the country's privacy laws. Five other European countries have launched investigations into Google's privacy policy. Google is a Buy and a Long-Term Buy.

Financial roundup

American Express's ($76; AXP) corporate-travel business plans a collaboration with an investor group that will take a 50% stake and has pledged to pump up to $1 billion in the joint venture. Amex is a Long-Term Buy.

J.P. Morgan Chase ($52; JPM) continues to hammer out the details of a sweeping federal and state settlement for soured mortgage securities that could cost the bank about $11 billion. A series of massive fines and settlements could cause the bank to suspend stock repurchases to backstop capital levels, as it did last year following the "London Whale" losses. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.

Wells Fargo ($41; WFC) agreed to repay Freddie Mac $869 million to settle a lawsuit over faulty mortgages sold prior to 2009. Separately, the state of New York has sued Wells Fargo for allegedly failing to follow terms set in a $25 billion mortgage-servicing settlement reached by 49 states and five banks. Wells Fargo is a Focus List Buy and a Long-Term Buy.

Corporate report

Dover ($91; DOV) has filed with the Securities and Exchange Commission to spin off Knowles Corp., a communications-technology subsidiary with annual sales of roughly $1.3 billion, early next year. Dover, which generated revenue of $8.10 billion in 2012, originally announced plans for the spin-off in May. Dover is a Focus List and a Long-Term Buy.

CEO Mike White hinted that DirecTV ($60; DTV) could be working on an internet-video service similar to those offered by Netflix ($325; NFLX) and Hulu. Separately, DirecTV reached a distribution deal with startup film studio A24 that will let the pay-TV provider exclusively show movies to subscribers one month ahead of the theatrical release. DirecTV is a Focus List Buy and a Long-Term Buy.

The U.S. Federal Trade Commission told Mylan ($39; MYL) and Agila Specialties that they must jettison 11 injectable generic drugs to gain approval to complete their $1.6 billion merger. Mylan is a Focus List Buy and a Long-Term Buy.

Retail review

Sales at U.S. stores are expected to rise 2.4% in November and December, according to industry researcher ShopperTrak, which would mark the slowest holiday growth since 2009. The projection excludes online sales. Note that ShopperTrak has underestimated holiday sales in each of the past two years and that there will be six fewer shopping days between Thanksgiving and Christmas this year.

Foot Locker ($34; FL) shares have bounced recently, lifted by encouraging August-quarter reports from two key players in athletic apparel. Rival Finish Line ($25; FINL) topped consensus estimates for both per-share profits and sales. Meanwhile, Nike ($72; NKE) said per-share profits surged 37% to $0.86 in the August quarter, well ahead of the consensus estimate of $0.78. Foot Locker is a Buy and a Long-Term Buy. Nike is rated B (average).

Keep Hertz in your fleet

Hertz Global's ($22; HTZ) shares slid into a ditch, but the company did not lose control of its growth story. The stock has fallen 14% since management cut its full-year outlook due to weaker demand for car rentals at U.S. airports. The range for per-share profits fell $0.10 to $1.68 to $1.78, which still implies growth of 26% to 34%. The stock's Overall score has deteriorated to 62.

However, pricing remains strong, and the company still seems capable of generating at least 15% profit growth in the second half of 2013 and 2014. The stock has staged a modest rebound recently and for now remains a Buy and a Long-Term Buy.

Aerospace review

Boeing's ($118; BA) Dreamliner still suffers from some glitches, most recently causing airlines in Europe to temporarily sideline a pair of jets. Growing pains of the new plane aside, the company continues to gain momentum, which bodes well for supplier B/E Aerospace ($76; BEAV).

B/E has rallied 53% this year – more the double the return of the S&P 500 Index and above the average gain of 37% for the 55 aerospace stocks in our Quadrix® stock-rating system. Heady outperformance begs a question: How much is left in the tank? B/E trades at 23 times trailing earnings — a 16% premium to its three-year average and 42% above its five-year norm. In Quadrix, the shares earn a Value score of 41, reflecting weak ranks for price/cash flow (19), price/book (30), and price/sales (40).

Sometimes it's worth paying up for growth. Few companies can match B/E's earnings momentum and growth outlook, which reflect expanding commercial-airline fleets. For 2013, Wall Street targets per-share profits of $3.56, up 26%. Per-share earnings are projected to climb another 21% next year and at least 20% annually over the next five years. Only 3% of S&P 1500 stocks are expected to generate comparable earnings growth over those periods, and they earn an average Value score of 36.  For now, B/E remains a Buy and a Long-Term Buy, though a near-term move above $86 could tempt us to take profits. Boeing is rated A (above average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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