Portfolio Review


CA added as a Buy

CA ($22; CA), a provider of software and technology services, is being initiated as a Buy and a Long-Term Buy. CA’s streamlining efforts have lifted profit margins in recent periods, with seven straight quarters of year-to-year improvement in operating margins. CA’s customers are also striving for efficiency gains, helping key a rebound in order growth.

For the June quarter, bookings jumped 16%, or 22% excluding currency translation. Per-share earnings excluding items jumped 5% to $0.42, exceeding consensus estimates by $0.04. Sales rose 5%, or 14% excluding currency translation. Cash flow surged. Per-share-profit estimates for the year ending March have jumped over the past month, with the consensus now projecting an 8% gain to $1.68. CA has rallied but seems capable of a move to $28 or $30 over the next 12 months.

Don’t give up on GameStop

In July, GameStop ($24; GME) launched Casual Digital Store, an online venue for downloading video games. The move addresses a shift toward digital downloading, though GameStop expects only 25% of the market to have such capacity by 2014.

A dearth of new games and stiffening competition in the used-game market have hammered the stock, which is down 26% from April highs. With a Quadrix Value score of 98, GameStop trades at just 10 times trailing earnings, well off the three-year average of 22 for this market leader. One estimate pegs GameStop’s U.S. market share at 25% for new games and 75% for used games.

Wall Street anticipates per-share earnings will rise 17% in fiscal 2010 ending January and 11% in fiscal 2011. Buy-rated GameStop is slated to release July-quarter results Aug. 20.

June-quarter profits

Dolby Laboratories ($42; DLB) earned $0.44 per share, up 10% and $0.13 above the consensus. Revenue climbed 11% to $171 million and included $22 million for licenses related to shipments made in earlier periods. Licensing sales (83% of revenue in the quarter) also rose 11%. Dolby, which raised profit guidance for fiscal 2009 ending September, is a Focus List Buy . . . Oceaneering International ($53; OII) posted profits of $0.87 per share, down 6% but a nickel better than Wall Street expected. Sales slid 10% to $451 million on softening demand for subsea products and inspections. The company narrowed its full-year profit guidance, and the 2009 consensus rose $0.06 in the first four trading days after the announcement. Oceaneering is a Focus List Buy . . . Cognizant Technology Solutions ($34; CTSH) grew per-share profits 28% to $0.50 excluding special items and stock-based compensation, $0.15 above the consensus. Sales climbed 13% to $777 million. Cognizant raised its 2009 profit target to $1.80 per share on an operating basis, up 25% and 17% above the consensus. Cognizant is a Focus List Buy and a Long-Term Buy . . . CVS Caremark ($34; CVS) reported earnings of $0.65 per share from continuing operations, up 8% and a penny better than the consensus. Total sales increased 18%. Same-store sales rose 6.1%. The company raised 2009 guidance for per-share profit, projecting 6% to 9% growth. CVS Caremark is a Focus List Buy and a Long-Term Buy . . . BMC Software ($34; BMC) earned $0.59 per share excluding special charges, up 37% and topping the consensus by $0.10. Sales grew 3% to $450 million. The company raised guidance for per-share profits in fiscal 2010 ending March and now expects growth of 10% to 14%, versus the 8% consensus. BMC is a Focus List Buy and a Long-Term Buy . . . Transocean’s ($80; RIG) per-share earnings dropped 16% to $2.79 per share excluding special items, missing the consensus by $0.24. Revenue fell 8% to $2.88 billion. Expectations for Transocean are very low, and the shares look cheap at less than seven times expected year-ahead earnings. Transocean is a Focus List Buy and a Long-Term Buy . . .  AmerisourceBergen’s ($20; ABC) profits from continuing operations jumped 20% to $0.42 per share, topping the consensus estimate by $0.03. Sales rose 2% to $18.39 billion. Consensus estimates project per-share-profit growth of 5% in the September quarter and 9% in fiscal 2010 ending September. Amerisource is a Long-Term Buy . . . Chevron ($70; CVX) earned $0.87 per share, down 70% and $0.08 short of Wall Street expectations. Revenue fell 52% to $40.21 billion on lower prices for crude oil and natural gas, but production rose 5%. Chevron also raised its quarterly dividend 5% to $0.68, payable Sept. 10. Chevron is a Long-Term Buy . . . Exxon Mobil’s ($71; XOM) profits plunged 63% to $0.84 per share excluding special items, $0.18 below the consensus. While the results are disappointing, energy companies’ profits tend to be volatile because of their dependence on energy prices, and Exxon has proven it is capable of bouncing back from difficult quarters. Exxon remains a Long-Term Buy.

Health-care update 

A U.S. House committee voted in favor of 12 years of patent protection for biotech drugs, reinforcing similar sentiment from a Senate health committee. Consumer groups and generic drugmakers have pushed for patents to expire after as little as five years. While the issue of patent protection remains unsolved, it appears Congress is prepared to create a framework for the marketing of biosimilar drugs. Any such move should benefit Hospira ($40; HSP), which already sells biosimilars in Europe. Hospira is a Focus List Buy and a Long-Term Buy.

Biogen Idec ($49; BIIB) appears likely to challenge an agreement between two other drug companies. As part of Johnson & Johnson’s ($61; JNJ) $1.5 billion deal with Elan ($8; ELN), J&J gained an option that could allow it to acquire Biogen’s 50% stake in multiple sclerosis drug Tysabri if Biogen undergoes a change in control. That option could narrow the field of potential acquirers of Biogen and possibly allow J&J to snap up Biogen at a fairly low price. Biogen is a Focus List Buy and a Long-Term Buy. J&J is a Focus List Buy and a Long-Term Buy. 

Merck ($30; MRK) agreed to sell its half of Merial, an animal-health unit, to partner Sanofi-Aventis ($34; SNY) for $4 billion in cash. Merck is rated Neutral.

News digest

PepsiCo ($59; PEP) agreed to acquire its two largest bottlers, Pepsi Bottling Group ($36; PBG) and PepsiAmericas ($29; PAS), paying a total of $7.8 billion in cash and stock. The bottlers rejected Pepsi’s $6 billion offer in April. PepsiCo is rated Neutral.

Walgreen’s ($30; WAG) same-store sales rose 2.0% in July, while total revenue increased 7% to $5.26 billion. Walgreen is rated Neutral.

Caterpillar ($48; CAT) shares jumped 6% after the company said it could earn per-share profits of $8 to $10 within five years of a global recovery. Caterpillar is rated Neutral.

CA ($22; CA) is being initiated as a Buy and a Long-Term Buy. The Vanguard Short-Term Investment-Grade ($10.35; VFSTX) bond fund now represents 29.8% of the Buy List and 29.6% of the Long-Term Buy List.

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