Portfolio Review


Two upgrades and a downgrade
Comcast ($15; CMCSA) operates the largest U.S. cable-television company, with 24 million subscribers for basic service, 17 million for digital video, 15 million for Internet, and about 6.5 million for digital phone. The company also owns cable networks such as E! Entertainment Television and The Golf Channel.

In the March quarter, revenue advanced 5% to $8.84 billion. Per-share profits excluding special items rose 42% to $0.27 — the sixth straight quarter of growth. Average monthly revenue per user rose 8% to $115 on strong growth from digital and advanced services. The total customer count rose 6%, as growth in digital video and other services offset a decline in basic video customers.

Typical of big cable or telecom companies, Comcast carries a hefty chunk of debt, $29.42 billion, or nearly 42% of total capital.  But operating cash flow, up 8% to $3.4 billion in the March quarter, consistently exceeds net income. Relative to historical norms, the stock seems cheap as measured by cash flow and free cash flow.

Consensus estimates project earnings per share will grow at least 19% this year and 11% next year. Shares trade at 15 times trailing earnings, well off the three-year average of 32. With a Quadrix® Overall score of 94, Comcast is being added to the Buy and Long-Term Buy lists.

CVS Caremark ($33; CVS), a recent addition to the Long-Term Buy List, is being added to the Buy List. Wall Street anticipates per-share profits will climb 15% this year and in 2010, yet the stock trades at less than 13 times projected profits for the next 12 months, down from the five-year average of 15. CVS Caremark will be reviewed in next week’s Analysts’ Choice feature. CVS Caremark is a Buy and a Long-Term Buy.

Western Digital’s ($23; WDC) March-quarter results exceeded expectations but were still down sharply. Revenue fell 25%, with per-share earnings down 76% to $0.30. Cash flow has also begun to deteriorate. Expectations for 2009 appear to have stabilized, but Western Digital could disappoint if end-market demand doesn’t improve enough to spark a further rebound in orders. The stock has nearly doubled this year and no longer seems cheap compared to historical norms. Western Digital is being downgraded to Neutral and should be sold.

News roundup
In the March quarter, BMC Software ($35; BMC) earned $0.64 per share excluding special items, down 2% but $0.02 above the consensus estimate. Revenue rose 3% to $479 million with expansion at all three units — licensing, maintenance, and professional services. Wall Street expects per-share profits of $2.42 in fiscal 2010 ending March, up 7%. BMC Software is a Focus List Buy and a Long-Term Buy.

Microsoft ($20; MSFT) plans to sell $3.75 billion of bonds May 18, the first debt offering in its 36-year history. Supplementing current cash holdings of $25.34 billion, proceeds will be used for general corporate purposes, possibly including stock buybacks and acquisitions. Separately, Microsoft said Windows 7, the latest version of the operating system that runs nearly 90% of the world’s personal computers, should be available for the holiday shopping season this year. Microsoft is rated a Long-Term Buy.

Shares of AstraZeneca ($39; AZN) surged 9% in the two days after it announced encouraging results from a late-stage trial of a heart pill. Designed to prevent blood clots, Brilinta proved to be more effective in preventing heart attacks and strokes related to cardiovascular problems than Bristol-Myers Squibb’s ($20; BMY) Plavix. Last year, Plavix generated $8.6 billion in sales, making it the world’s second-biggest-selling drug. AstraZeneca plans to submit Brilinta to the Food and Drug Administration in the December quarter. AstraZeneca is a Buy and a Long-Term Buy. Bristol-Myers is rated Neutral.

New York Attorney General Andrew Cuomo asked Chevron ($69; CVX) to disclose details of potential legal liabilities. A lawsuit involving thousands of Ecuadorians alleges Texaco, acquired by Chevron in 2001, polluted rainforests in the 1970s. An Ecuadorian court could levy damages of up to $27 billion. Chevron is a Buy and a Long-Term Buy.

Oracle ($18; ORCL) said it intends to keep the hardware business of recently acquired Sun Microsystems ($9; JAVA). Many industry watchers had expected Oracle to retain Sun’s software assets and sell off the lower-margin hardware operations. In related news, Oracle learned before completing the deal that Sun might have violated U.S. bribery laws in an undisclosed country. Punishment could range from a fine to the loss of U.S. government contracts — a major source of revenue for Sun. Oracle is a Buy and Long-Term Buy. Sun Microsystems is rated Neutral.

The European Union fined Intel ($15; INTC) $1.45 billion — 4% of the company’s 2008 revenue — for antitrust violations. An eight-year probe found that Intel gave rebates to computer manufactures in exchange for virtually exclusive business, allegedly shutting out rivals. Neutral-rated Intel is appealing the ruling.

Verizon Communications ($30; VZ) agreed to sell its traditional telephone business in 14 states — including 4.8 million phone lines and 1 million broadband connections — to Frontier Communications ($8; FTR) for $8.6 billion in stock and cash. Verizon shareholders will receive one share of Frontier for every 4.2 shares of Verizon and will own 68% of Frontier after the deal. Verizon is rated Neutral.

Retail report
Sales at retail chains picked up in April, helped by lower gasoline prices and a later Easter. Based on the Thomson Reuters revenue-weighted retail index, same-store sales grew 1.2%, well above the consensus 0.2% decline.

Several retailers, including Target ($43; TGT), Gap ($16; GPS), Kohl’s ($44; KSS), and J.C. Penney ($28; JCP), projected higher-than-expected profits in the April quarter. Wal-Mart Stores ($51; WMT) reported U.S. same-store sales up 5.0% excluding gasoline, above the consensus of 2.9%. The company also said it will no longer provide monthly sales results.

While the April results are encouraging, investors should not get too excited, as “better than expected” does not necessarily mean “good.” Excluding Wal-Mart, same-store sales fell 2.7%. Wal-Mart Stores is a Long-Term Buy. Kohl’s, Target, and J.C. Penney are rated Neutral.

Finance update
The federal government projected that America’s largest banks could lose more than $599 billion through the end of 2010 if the economy falters worse than expected. Regulators ordered 10 of the 19 banks that underwent stress tests to raise a combined $74.6 billion of capital to protect against that scenario.

Banks responded swiftly, with a handful announcing stock offerings. Wells Fargo ($26; WFC) raised $7.5 billion in new equity at an 11% discount to market price to help cover its $13.7 billion capital shortfall. Bank of America ($12; BAC), facing a $33.9 billion capital gap, sold a $7.3 billion stake in China Construction Bank and plans to raise another $17 billion by issuing common shares and converting preferred shares to common stock.

To raise $5.5 billion, Citigroup ($4; C) will expand a previously announced $25 billion conversion from preferred stock to common shares, potentially giving the federal government more than 35% the company. Morgan Stanley ($26; MS), seeking to make up a $1.8 billion shortfall, plans to issue $2 billion in stock and $3 billion in debt. Wells Fargo, Bank of America, Citigroup, and Morgan Stanley are rated Neutral.

Comcast ($15; CMCSA) is being initiated as a Buy and a Long-Term Buy. CVS Caremark ($33; CVS) is being added to the Buy List. Western Digital ($23; WDC) is being downgraded to Neutral. Vanguard Short-Term Investment-Grade ($10.02; VFSTX) now represents 32.5% of the Buy List and 31.8% of the Long-Term Buy List.

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