Portfolio Review


Focus List picks in the news

IBM’s ($116; IBM) per-share profits jumped 18% to $2.32 for the June quarter, exceeding the consensus estimate by $0.31. Revenue declined 13% to $23.25 billion on lower sales in all major segments. Like other technology companies, IBM has seen clients delay purchases of new equipment. But for IBM, such higher-margin segments as services and software have softened the impact of the drop in hardware demand. June-quarter gross profit margins expanded for both the services and software segments, while their sales fell significantly less than hardware’s 26% decline. The company lifted full-year 2009 earnings guidance to at least $9.70 per share, up from previous guidance of at least $9.20. IBM, modestly valued at less than 11 times the 2010 consensus profit estimate of $10.62 per share, is a Focus List Buy and a Long-Term Buy.

Biogen Idec ($48; BIIB) said it earned about $1.07 per share in the June quarter excluding unusual items and an up-front payment related to a drug-development collaboration, up from $0.91 in the year-earlier period. The adjusted earnings exceeded consensus expectations, as did a sales gain of 10%. Results benefited from solid sales of Tysabri, up 27%, and Avonex, up 12%. The number of Tysabri patients climbed 8% from the March quarter to about 43,300. Separately, marketing partner Elan ($8; ELN) said its $1.5 billion deal with Johnson & Johnson ($59; JNJ) gives J&J the option to acquire Biogen’s 50% stake in Tysabri should Biogen undergo a change in control. J&J’s deep pockets could scare off potential Biogen suitors — or possibly lead to an eventual takeover by J&J itself. Biogen Idec and J&J are Focus List Buys and Long-Term Buys.

Transocean ($78; RIG) signed Petrobras, Brazil’s oil giant, to a three-year contract worth $558.5 million that starts in early 2010. Petrobras will lease an ultra-deepwater rig for an average day rate of $510,000 — 4% above the rate in the rig’s current contract, which expires in January. Transocean is a Focus List Buy and a Long-Term Buy.

Health-care update

St. Jude Medical ($37; STJ) reported earnings per share of $0.63 for the June quarter, up 15% and in line with the consensus. Revenue climbed 4% to $1.18 billion as smaller segments overcame a 1% sales decline at the cardiac rhythm management (CRM) unit, which represented 59% of sales. Excluding the impact of currency translation, total sales rose 10%. St. Jude reiterated full-year profit guidance of at least $0.61 per share and said it plans to repurchase up to $500 million of common shares in the second half of 2009. St. Jude shares slumped on news of the sales decline at the CRM unit, but the company’s growth outlook remains intact. St. Jude is a Buy and a Long-Term Buy.

Stryker’s ($40; SYK) June-quarter earnings per share were flat at $0.73, a penny better than the consensus. Sales of $1.63 billion were down 5% but virtually flat excluding currency translation. The company reaffirmed full-year guidance, projecting per-share profits will rise at least 2% and sales will rise at least 1% in constant currency. Stryker, modestly valued at less than 14 times expected 2009 earnings, is a Buy and a Long-Term Buy.

Aerospace and defense news

The U.S. and India agreed to a defense pact that will allow American companies to sell sophisticated weapons in India. India’s spending on military upgrades is expected to exceed $5 billion over the next five years. The country also approved two nuclear plant sites, which could generate another $10 billion. Starting in August, Lockheed Martin ($75; LMT) and Boeing ($43; BA) will compete for a 126-jet contract, which could be awarded in the second half of 2010.

For the June quarter, Lockheed’s per-share profits fell 13% to $1.88 including pension-related expenses, $0.07 above the consensus. Sales rose 2%. Lockheed trimmed 2009 guidance for operating profit, though the company says share buybacks and lower taxes will help it reach the previously stated 2009 guidance for earnings per share of $7.15 to $7.35. Shares fell 8% on the news. Separately, the U.S. Senate voted to remove $1.75 billion from the $680 billion defense bill that would have extended Lockheed’s F-22 Raptor fighter jet program. The decision signifies a shift toward the new F-35 Joint Strike Fighter, also built by Lockheed. For now, Lockheed remains a Long-Term Buy.

United Technologies ($54; UTX) earned $1.21 per share excluding special items for the June quarter, topping the consensus by $0.16. Revenue decreased 17%. Management lowered 2009 revenue guidance by $2 billion to $53 billion. United Technologies said it expects full-year earnings per share of $4 to $4.20, down from previous guidance of $4 to $4.50. In other news, the company won defense contracts worth $684 million to build engines for the F-35 Joint Strike Fighter. United Technologies is a Buy and a Long-Term Buy based on its modest valuation and earnings-recovery prospects.

June-quarter tech results

Qualcomm ($48; QCOM) earned $0.54 per share excluding special items, down 2% but $0.02 above the consensus. Revenue was virtually flat at $2.75 billion. Qualcomm raised sales guidance for fiscal 2009 ending September to a midpoint of $10.35 billion, implying a 7% decline. The consensus projects revenue of $10.43 billion. Qualcomm is a Long-Term Buy…Apple ($156; APPL) reported earnings of $1.35 per share, up 13% and exceeding the consensus estimate by $0.17. Revenue grew 12%. Apple is rated Neutral…Google ($428; GOOG) earned $5.36 per share excluding special items, up 16% and $0.27 above consensus expectations. Sales climbed 3%. Google is rated Neutral.

Financial review

The latest earnings season has deepened the divide between strong and weak banks. As Goldman Sachs ($160; GS) did one week earlier, J.P. Morgan Chase ($37; JPM) posted strong quarterly earnings by relying on its trading and investment-banking operations.

Results for Bank of America ($12; BAC) and Citigroup ($3; C) suggest their footing is less stable. The net June-quarter profits reported by both companies were propped up by one-time gains from asset sales. Citigroup and Bank of America are highly leveraged to consumer and commercial lending, meaning they have been forced to set aside billions of dollars in preparation for what could be a crushing wave of bad credit-card loans and mortgage defaults.

Wells Fargo ($25; WFC) blamed the weak economy for rising losses from bad loans, which totaled $4.39 billion in the June quarter, up from $3.26 billion in the March quarter. The bank also said it expects such losses to increase.

General Electric ($11; GE) beat consensus expectations for per-share profit, though revenue, down 17%, disappointed analysts and caused the shares to fall. The finance arm, GE Capital, weighed on results yet again, as sales plunged 80%. Goldman Sachs, J.P. Morgan, Bank of America, Citigroup, Wells Fargo, and GE are rated Neutral.

Energen update

Energen ($40; EGN) earned $0.76 per share in the June quarter, down 18% but $0.18 better than the consensus. Revenue declined 10% despite 9% higher production. Nearly 70% of production was hedged at prices well above market prices. The company affirmed 2009 per-share profit guidance of $3.10 to $3.50. Energen is a Long-Term Buy.

No changes were made this week in Dow Theory Forecasts.

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