Portfolio Review


Four rank changes

Union Pacific ($173; UNP), already a Long-Term Buy, is being added to the Buy List. The stock rallied on an impressive December quarter and has now generated higher cash from operations in five consecutive quarters. At 18 times trailing earnings, the shares trade in line with railroad peers in the S&P 1500 Index. Yet Union Pacific enjoys superior 2014 prospects, with per-share profits projected to advance 15% on 7% revenue growth. The Overall score is 95 and sector-specific ranks are at least 90.

We are removing Visa ($215; V) from the Buy and Long-Term Buy lists. The shares have soared 108% since we first recommended Visa in the Jan. 2, 2012, issue of the Dow Theory Forecasts, compared to a 39% gain for the S&P 500 Index. That rally has dragged Visa's Quadrix Value score down to 31 — only two of the factors comprising the Value rank exceed 50. At 27 times trailing earnings, Visa shares trade at a 21% premium to their five-year average and 38% above the median for S&P 1500 technology stocks. At this point, the stock appears to have little upside left, and its lofty valuation allows little margin for error.

Visa delivered solid December-quarter results, with per-share earnings up 14% to $2.20, topping the consensus by $0.04. Sales climbed 11%. However, MasterCard ($73; MA) reported disappointing results, which could foreshadow tougher competition between the rivals. Visa's Earnings Estimates score has also fallen to 32, reflecting a weakening trend in analyst profit estimates. Visa is now rated B (average). MasterCard is rated A (above average).

Dover ($84; DOV) is being pulled from the Focus and Buy lists after its Overall score slipped to 68, hurt by a middling December-quarter report. Dover earned $1.28 per share from continuing operations, up 17%, to match the consensus estimate. Results excluded tax benefits and spin-off costs for Knowles, the electronics business Dover plans to divest in the March quarter. Revenue rose 10% to $2.21 billion on growth of at least 7% for all four segments.

Dover also said it acquired MS Printing Solutions, an Italian maker of digital inkjet printers used in the textile industry. Dover expects MS Printing to generate 2014 sales of $70 million. Excluding Knowles, Dover gave 2014 profit guidance with a midpoint of $4.70 per share, up 9% on 5% to 6% higher sales. The stock earns an attractive Value score of 75, and its P/E ratio of 16 lags the median for S&P 1500 industrial machinery stocks by 24%. Dover remains a Long-Term Buy.

Celgene ($152; CELG) was dropped from the Long-Term Buy List on the Jan. 31 Friday Hotline. The stock rallied 92% during its stay on our Long-Term Buy List, which began in December 2012, more than triple the S&P 500's 26% advance. But its Overall score has fallen to 62, hurt by a Value score of 32, and both sector-specific ranks now linger below 35. With operating momentum eroding, the stock's premium valuation no longer seems justified. Trading at 25 times trailing earnings, Celgene is now rated B (average).

Technology news

Google ($1,138; GOOG) grew December-quarter earnings per share 13% to $12.01 excluding special items in the December quarter, below the consensus of $12.20. Revenue surged 17% to $16.86 billion, ahead of the consensus. Paid clicks, a proxy for ad volumes, climbed 31% even as average cost per click declined 11%. Google also agreed to sell its troubled Motorola handset business to China's Lenovo for $2.91 billion. Google paid $12.5 billion for Motorola's trove of wireless patents and handset business in May 2012. Google shares rose on the earnings report.

In other news, Google plans to issue one share of Class C stock for each outstanding share of Class A and Class B stock on April 2. The Class C shares will trade under the symbol GOOG and lack voting rights. The Class A shares, using the symbol GOOGL, will likely trade at a premium to the Class C shares because of their voting rights; both should trade at roughly half of Google's current price, as this stock dividend is somewhat like a 2-for-1 stock split. It's not yet clear which stock class indexes such as the S&P 500 will include. In other news, Joaquin Almunia, the European Union's antitrust chief, said he will accept Google's latest round of concessions, effectively ending a three-year probe into the company's web-search practices. However, Almunia added that Android, Google's mobile operating system, could face closer scrutiny from regulators. The stock is a Focus List Buy and a Long-Term Buy.

Cognizant Technology Solutions ($93; CTSH) said per-share profits rose 16% to $1.15 excluding special items in the December quarter. Revenue advanced 21% to $2.36 billion, supported by broad, double-digit growth from all of Cognizant's major industry end markets. For the March quarter, Cognizant expects per-share profits of $1.18, up about 18% and in line with expectations, on revenue growth of 20%. It also announced a two-for-one stock split, expected to occur about March 7. Shares sold off on the news, perhaps due to elevated expectations after several peers posted blowout results and Cognizant shares' nearly 50% rise since the end of June. Cognizant remains a Focus List Buy and a Long-Term Buy.

Microsoft ($36; MSFT) tapped Satya Nadella, a 22-year veteran of the company, as its next CEO, replacing Steve Ballmer. Nadella, 46, helped build Microsoft's cloud-computing business. Co-founder Bill Gates will give up his role as chairman to John Thompson, a former director who headed the CEO search. Microsoft is rated A (above average).

Corporate roundup

Aflac's ($61; AFL) operating earnings fell 5% to $1.40 per share in the December quarter, easing past the consensus by a penny. Currency headwinds contributed to a 9% revenue decline. For 2014, Aflac expects per-share profits to rise 2% to 5% at constant currency; the consensus estimate projected flat profits at the time of the announcement. U.S. sales, hampered in 2013 by weak hiring trends among small businesses, could rise as much as 5% this year. Aflac is a Buy and a Long-Term Buy.

B/E Aerospace ($77; BEAV) earned $0.90 per share in the December quarter excluding acquisition costs, up 23% but a penny below the consensus. Revenue advanced 12% to $903 million, with growth powered by a 20% surge in the commercial-aircraft business. Shares fell on the report, but the sell-off seems overdone given B/E's 2014 outlook, which calls for 21% higher per-share earnings on 15% sales growth. The stock, trading at 18 times projected 2014 earnings, is a Buy and a Long-Term Buy.

Wal-Mart Stores ($73; WMT) warned of lower-than-expected profits for the January quarter, becoming the latest casualty of lackluster spending by middle- and lower-income Americans. Wal-Mart's U.S. same-store sales are now projected to decline, pressured by competition from other discounters and a reduction in food stamps, used by an estimated 20% of its shoppers. Wal-Mart Stores is a B (average).

Rank Changes

Dover ($84; DOV) is being dropped from the Focus and Buy lists but remains a Long-Term Buy. Visa ($215; V) is being dropped from the Buy and Long-Term Buy lists. Union Pacific ($173; UNP) is being added to the Buy List. Celgene ($152; CELG) was dropped from the Long-Term Buy List on the Jan. 31 Hotline. Vanguard Short-Term Corporate Bond ($80; VCSH) now accounts for 8.5% of the Buy List and 12.5% of the Long-Term Buy List.

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