Portfolio Review


Blue chips in the news

Global shipments of personal computers fell 7.6% in the September quarter, according to industry researcher IDC, which had projected a 9.5% decline. IDC sees the PC market continuing to contract in 2014, though the slump has begun to stabilize. Within the U.S., PC shipments were flat, though IDC estimated that Apple ($499; AAPL) experienced an 11% drop, possibly a sign that the iPad is cannibalizing Mac sales. Apple reported a 4% decline in Mac revenue for the nine months ended June, though according to one analyst the company is designing a new Mac for 2014 that could "redefine laptop computing." In other news, Apple hired Burberry Group ($47; BURBY) CEO Angela Ahrendts to run its retail unit, which has lacked steady leadership since Ron Johnson bolted for J.C. Penney's ($7; JCP) CEO job in June 2011. Apple is a Buy and a Long-Term Buy.

Google ($882; GOOG) is launching a new advertising service that incorporates personal information, including names, comments, and photographs of Google+ users who have recommended particular products through the social network. Facebook ($50; FB) has launched a similar advertising strategy that appeals to marketers but has also prompted privacy concerns.

Brazil is investigating complaints filed by Microsoft ($34; MSFT) and local shopping websites that accuse Google of unfairly stifling competition for the benefit of its own advertising services and shopping sites. Brazilian regulators have stepped up scrutiny of U.S. internet companies after learning that the U.S. spied on the digital messages of its president and Petrobras ($16; PBR), the state-run energy giant. Google is a Buy and a Long-Term Buy. Microsoft is rated B (average).

Abbott Laboratories ($34; ABT) hiked its quarterly dividend 57% to $0.22 per share, payable Feb. 15, marking the 42nd straight year with a higher payout. Abbott also said September-quarter earnings per share advanced 31% to $0.55 excluding special items, topping the consensus by $0.04. Total revenue increased 2% to $5.37 billion, as an 8% gain in diagnostics more than offset a 3% decline in drugs. Excluding currency fluctuations, revenue rose 4%. Abbott is rated B (average).

September-quarter earnings


J.P. Morgan Chase ($52; JPM) reported September-quarter earnings per share of $1.42, excluding a charge of $1.85 for litigation expense and a $0.26 benefit from reserve releases, up 1% and $0.24 above the consensus. J.P. Morgan has set aside $23 billion for its litigation reserve — including $9 billion allocated in the September quarter. The bank says the range of reasonable potential losses in excess of current reserves stands at $5.7 billion, down from $6.8 billion at the end of June. J.P. Morgan's underlying operating results were solid, as fees from investment banking rose 6% and growth in commercial loans helped offset softness in residential mortgages.

On Oct. 16, the bank agreed to pay $100 million to settle with the Commodity Futures Trading Commission, pushing litigation expenses stemming from the "London Whale" trading mess above $1 billion. As J.P. Morgan puts more lawsuits in its rearview mirror, we see room for the shares to rise. Even assuming the lowest Wall Street profit estimate for 2014 of $5.32 per share is correct and the P/E ratio will expand slightly to the five-year median of 10, the stock would trade at $53 in 15 months. Should J.P. Morgan reach the consensus of $5.97 and return to its 10-year median P/E of 12, the stock would trade at $72. J.P. Morgan, yielding 2.9%, is a Focus List Buy and a Long-Term Buy.

Wells Fargo ($42; WFC) earned $0.99 per share in the September quarter, up 13% and two pennies above the consensus. The results benefited from the bank's biggest release of loan-loss reserves since the three months ended June 2011. Revenue slipped 3% to $20.48 billion in the quarter. Net interest margin continued to contract after it had appeared to stabilize last quarter; management expects more margin pressure in the near term. Although the decline in Wells Fargo's residential-mortgage unit accelerated, the bank's other businesses performed well, with strong loan growth and healthy deposit inflows.

Wells Fargo shares, like those of J.P. Morgan, have room to run once the bank gets a handle on its legal affairs. Earlier this month, New York's attorney general sued Wells Fargo for allegedly skirting the $25 billion settlement reached last year between five mortgage lenders and 49 states over the handling of home foreclosures and loan modifications. However, the group charged with monitoring the settlement says Wells Fargo, J.P. Morgan, Citigroup ($49; C), and Bank of America ($14; BAC) paid a combined $15.35 billion in 2012 in the form of lower interest rates and monthly payments — more than 75% of the relief they agreed to give homeowners by 2015. All four banks claim to have paid the remainder of their share of the settlement this year. Wells Fargo, earning an Overall rank of 94, remains a Focus List Buy and a Long-Term Buy. Citigroup is rated A (above average). Bank of America is rated B (average).

U.S. Bancorp ($37; USB) grew per-share profits 3% to $0.76 in the September quarter, meeting the consensus estimate. Total revenue declined 6% to $4.89 billion. Deposits rose 5% and average total loans climbed 6%, driven by
9% growth in commercial loans. Net interest margin slipped to 3.43% from 3.59% in the year-ago quarter but held steady compared to the June quarter. U.S. Bancorp is a Long-Term Buy.

Diversified financials

BlackRock ($282; BLK) said September-quarter earnings per share jumped 12% to $3.88 excluding special items, equaling the consensus estimate. Revenue advanced 7% to $2.47 billion on market gains and long-term net inflows of $25.29 billion. BlackRock's iShares exchange-traded funds business drove net inflows. Assets under management surged 12% to $4.10 trillion. BlackRock is a Long-Term Buy.

American Express ($75; AXP) earned $1.25 per share in the September quarter, up 15%, to exceed the consensus by $0.03. Total revenue net of interest expense rose 6% to $8.30 billion, also above the consensus. Spending by U.S. card members rose 8%. The consensus calls for Amex to deliver 14% profit growth in the December quarter. Amex is a Long-Term Buy.


IBM ($185; IBM) said September-quarter earnings per share were $3.99 excluding special items, up 10% and $0.03 above the consensus. Revenue slipped 4% to $23.72 billion, missing expectations due to declines in hardware and services. IBM is rated B (average).

Intel ($23; INTC) posted flat earnings per share of $0.58 to top the consensus by a nickel. Revenue also held steady at $13.48 billion, well short of the $14.00 billion analyst target. Intel sees early signs of improving demand for personal computers in North America and Western Europe. The company also noted stronger demand for semiconductors used in the server systems that are housed in corporate data centers, offering some hope of improving trends for enterprise spending. But Intel's sales guidance for the December quarter fell short of analysts' expectations. Intel is rated A (above average).

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