Portfolio Review


Tweaking the Focus List

Schlumberger ($94; SLB) is replacing Cisco Systems ($23; CSCO) on the Focus List. Schlumberger, a provider of oilfield services, grew per-share profits from continuing operations 24% to $1.29 in the September quarter, exceeding the consensus by a nickel. Sales advanced 11% to $11.61 billion on broad growth across all four business units. Schlumberger has relied on its international footprint for growth in recent quarters. But now the North America business has begun to come around, with revenue up 9% and net income 19% in the quarter on higher offshore activity and market-share gains in hydraulic fracturing. Management seems confident it can keep expanding profit margins, even without pricing gains. Schlumberger is also a Long-Term Buy.

Cisco suffers from weak trends for profit estimates and share-price action. Shares have slid 14% since the company posted July-quarter results in August and issued a cautious outlook that disappointed investors. Sluggish results from other hardware companies in recent weeks have echoed Cisco's concerns and could weigh on short-term prospects. Still, the stock remains an attractive pick for 12-month and long-term returns. For fiscal 2014 ending July, the consensus projects 4% higher per-share profits on 5% sales growth, conservative targets. At 11 times trailing earnings, shares trade 27% below their five-year average. Cisco remains a Buy and a Long-Term Buy.

September-quarter earnings

For a complete list of Forecasts recommended stocks that have reported September-quarter earnings, visit www.DowTheory.com/Go/Earnings.


B/E Aerospace ($78; BEAV) shares rose after the airplane supplier said per-share profits surged 25% to $0.89 in the September quarter, easing past the consensus by a penny. Sales, up 16% to $888 million, also exceeded the consensus. Total backlog rose 7% to $8.8 billion. Looking ahead to 2014, management expects per-share profits of $4.25, implying 21% growth, compared to the consensus of $4.29; projected sales are $4.0 billion, up 15%, versus the consensus of $3.70 billion. B/E Aerospace is a Buy and a Long-Term Buy.

Dover ($90; DOV) reported September-quarter earnings per share of $1.54 excluding special items, up 23% and $0.04 above the consensus. Revenue climbed 7% to $2.25 billion, with 4% of growth coming from acquisitions and 3% organic. Dover cited softer economic conditions in narrowing its full-year outlook for per-share profits. For 2013, Dover now expects organic revenue growth of 3%, versus its prior range of 3% to 5%. Dover remains a Focus List Buy and a Long-Term Buy.

Union Pacific ($155; UNP) grew per-share profits 13% to $2.48 in the September quarter, $0.01 above the consensus. Total revenue advanced 4% to $5.57 billion on pricing gains and flat volumes. The railroad warned earlier this month that profits would lag analyst expectations. Union Pacific is a Long-Term Buy.


Capital One Financial ($71; COF) said net income slipped 7% to $1.86 per share in the September quarter, topping the consensus estimate by $0.06. Revenue dipped 2% to $5.65 billion. Net interest margin appeared to stabilize, improving from the June quarter, though it remained below year-ago levels. As evidence that Capital One continues its push beyond the core credit-card business, total commercial loans jumped 14%, while the credit-card portfolio declined 12%. Capital One is a Focus List Buy and a Long-Term Buy.

In the September quarter, Fifth Third Bancorp ($19; FITB) posted per-share profits of $0.41 excluding special items, up 5% and in line with the consensus. The regional bank reported favorable credit trends and 11% growth in deposits. The loan portfolio expanded 5%, as strength in commercial and industrial loans, credit cards, and residential mortgages offset weakness in commercial mortgages and home-equity lines. Fifth Third is a Buy and a Long-Term Buy.


Alliance Data Systems ($232; ADS) earned $2.67 per share excluding special items, up 13% and $0.02 above the consensus estimate. Revenue surged 20% to $1.10 billion. Management raised its full-year guidance, though the implied December-quarter outlook fell short of analyst estimates. Peering ahead to 2014, management sees profits rising 21% to $12.00 per share; the consensus anticipates per-share profits of $12.07. Alliance shares rose on the report and retain their Focus List Buy and Long-Term Buy ratings.

EMC's ($24; EMC) per-share profits held flat at $0.40 excluding special items, missing the consensus by $0.05. Management blamed the miss — and weak 2013 guidance — on the government shutdown, which occurred during a seasonally important period for EMC. However, not all the news was bad. EMC holds a roughly 80% stake in VMware ($85; VMW), which posted robust results and offered encouraging guidance. EMC is a Long-Term Buy.

Google ($1,007; GOOG) grew per-share profits 21% to $10.74 in the September quarter, well ahead of the consensus estimate of $10.34. Sales climbed 12% to $14.89 billion, also above the consensus. Motorola Mobility continued to slump, with revenue down 34% to $1.18 billion and losses continuing to mount. But growth remained stout at Google's core business. Paid clicks, an indication of advertising volumes, jumped 26%, even as average cost per click declined 8%. The results pushed Google shares to an all-time high. Google is a Buy and a Long-Term Buy.

Other sectors

Varian Medical Systems ($77; VAR) reported flat earnings per share of $1.08 in the September quarter, missing the consensus of $1.13. Revenue grew 2% to $770 million, slightly short of the consensus of $779 million. Varian's December-quarter guidance fell short of analyst expectations, with management targeting per-share profits of $0.87 to $0.91, versus the consensus of $0.96 and $0.86 in the year-earlier quarter. For now, Varian remains a Long-Term Buy.

In the September quarter, Whiting Petroleum ($64; WLL) grew per-share profits 66% to $1.28 per share excluding special items, topping the analyst forecast of $1.07. Total revenue surged 57% to $831 million, easily outpacing the consensus of $684 million. Per-day production rose 12%, with 87% of production oil or natural-gas liquids, while total realized price jumped 19%. Whiting is a Buy and a Long-Term Buy.

Corporate roundup

J.P. Morgan Chase ($54; JPM) tentatively agreed to pay $13 billion to resolve an extensive U.S. probe into allegations of mortgage fraud. The settlement would be the largest ever paid by a bank to the federal government. In other news, a group of investors who bought mortgage-backed securities from J.P. Morgan is reportedly seeking an additional $5.75 billion from the bank. J.P. Morgan is a Focus List Buy and a Long-Term Buy.

Apple ($520; AAPL) refreshed its roster of iPad tablets and Mac computers. The iPad Air, starting at $499, is 20% thinner than its predecessor and goes on sale Nov. 1. Apple also introduced an iPad mini that will launch later in November for $399. In a move to challenge Microsoft ($35; MSFT), Apple will give away its operating system and iWork business-software suite for iPads and Macs. Apple is a Buy and a Long-Term Buy. Microsoft is rated B (average).

Visa ($200; V) hiked its quarterly dividend 21% to $0.40 per share, payable Dec. 3. Visa is a Buy and a Long-Term Buy.

Rank Changes

Schlumberger ($94; SLB) is being added to the Focus List, replacing Cisco Systems ($23; CSCO), which remains a Buy and a Long-Term Buy.

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