Portfolio Review


Corporate roundup

Helmerich & Payne ($79; HP) earned $1.44 per share from continuing operations in the September quarter excluding gains from the sale of used drilling equipment, up 6% and $0.03 above the consensus. Revenue grew 4% to $865 million, also exceeding analysts' expectations. Utilization slipped three percentage points to 82% for H&P's land rigs but rose five percentage points to 89% for its offshore rigs. Shares rose on the results and are now up 40% for the year, yet they trade at just 14 times trailing earnings, a 19% discount to the median for S&P 1500 energy stocks. H&P is a Focus List Buy and a Long-Term Buy.

Aflac ($66; AFL) approved the repurchase of 40 million shares in addition to 16.9 million shares remaining on a prior buyback program. The authorizations equate to $3.8 billion in shares at current prices, enough to lower the share count 12%. Aflac expects to spend $1 billion on buybacks next year. Aflac is a Buy and a Long-Term Buy.

A court in Ecuador upheld a long-disputed ruling against Chevron ($122; CVX) but cut the fine in half to $9.5 billion. In 2011, the oil giant was found responsible for environmental damages caused by Texaco years before it was acquired by Chevron in 2001. Without Chevron's cooperation, Ecuador plaintiffs have struggled to collect their award, which the oil giant says was gained through fraud. Chevron is rated B (average).

General Electric ($27; GE) plans to spin off its credit-card business in 2014 as a separately traded company, potentially worth up to $18 billion. GE looks to sell 20% of the business through an initial public offering. GE is rated B (average).

Technology update

Internet search queries rose 10% for Google ($1,025; GOOG) in October, matching the overall U.S. market's growth. Google's share of the U.S. search market held at 67% for the month, according to industry researcher comScore. Microsoft's queries rose 24%, pushing its share to 18%, compared to 16% in October 2012. Separately, a federal judge dismissed a lawsuit filed by a group of authors claiming Google had violated copyright laws by digitally scanning their books without permission. The group had sought $750 for each of the more than 20 million books Google had scanned. In other news, Snapchat, a messaging service whose texts and pictures disappear seconds after being read, reportedly spurned a $4 billion takeover offer from Google after rejecting $3 billion from Facebook ($46; FB). Google is a Focus List Buy and a Long-Term Buy.

Qualcomm ($72; QCOM) will begin selling Toq, its smartwatch, on Dec. 2 for $350. Compatible with Android smartphones and tablets, Toq will let users receive calls, text messages, and other notifications. Qualcomm has modest hopes for the smartwatch itself. Instead, it views Toq as a way to show off its new low-energy screen technology for inclusion in other devices. Separately, Qualcomm told investors that they should expect the company to return at least 75% of free cash flow in the form of dividends and stock buybacks. The company also expects dividend growth to outpace profit growth in coming years. Qualcomm is a Focus List Buy and a Long-Term Buy.

A U.S. jury awarded Apple ($520; AAPL) more than $1 billion from Samsung Electronics ($1,375; SSNLF) last year, finding the Korean tech giant allegedly violated five iPhone patents. However, a judge later ruled that miscalculations made by the jury affected $400 million of that award. In the retrial, lawyers for Apple seek $380 million of the original $400 million in damages, while Samsung says the penalty should be closer to $53 million. In other legal news, Italian officials are investigating Apple for possibly neglecting to pay taxes on $1.34 billion of profits it booked under a subsidiary based in Ireland in 2010 and 2011. Apple is a Focus List Buy and a Long-Term Buy.

Financial review

J.P. Morgan Chase ($56; JPM) finally put to rest some of the overhanging legal problems that have haunted the bank for years. In what the government billed as the largest settlement in U.S. history, J.P. Morgan agreed to pay $13 billion for repeatedly inflating the quality of mortgage-backed securities it sold to investors. Of that total, about $9 billion will go toward settling state and federal claims, while $4 billion will be set aside for distressed homeowners. The bank admitted its workers intentionally misled investors about the risks of the securities. CEO Jamie Dimon said that the settlement "covers a very significant portion" of the issues with mortgage securities sold by J.P. Morgan and two companies it acquired during the recession, Bear Stearns and Washington Mutual. The U.S. Justice Department continues its criminal probe into the bank.

In a separate settlement, J.P. Morgan agreed to pay $4.5 billion to 21 institutional investors, including BlackRock ($302; BLK) and Goldman Sachs ($167; GS), over defective mortgages sold from 2005 to 2008. In October, J.P. Morgan said its legal expenses could exceed its $23 billion litigation reserve by $5.7 billion. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy. BlackRock is a Long-Term Buy. Goldman Sachs is rated A (above average).

BlackRock and Goldman Sachs were among a group of investors that asked a U.S. court to approve an $8.5 billion settlement with Bank of America ($5; BAC) over faulty mortgages sold by the bank. In other news, Moody's lowered its credit ratings for Bank of New York Mellon ($33; BK), Goldman Sachs, J.P. Morgan, and Morgan Stanley ($30; MS), judging that the U.S. government would be less likely to bail out the banks in the event of another crisis. Bank of America, Bank of New York Mellon, and Morgan Stanley are rated B (average).

U.S. Bancorp ($39; USB) agreed to buy Quintillion, a hedge-fund administrator in Ireland, for an undisclosed price. The bank is also reportedly the leading bidder to acquire about 100 Chicago branches from Citizens Financial Group in a deal that could be worth $500 million. U.S. Bancorp is a Long-Term Buy.

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