Portfolio Review


Tech & telecom earnings review

CA ($21; CA) grew per-share profits 5% to $0.42 per share excluding special charges in the September quarter, $0.02 above the consensus estimate. Sales dipped 3% to $1.07 billion but would have risen 1% in constant currency. Software bookings plunged 37% to $947 million, but the comparison was skewed by the signing of one multiyear contract worth more than $400 million in the year-earlier period. Looking toward fiscal 2010 ending March, CA ratcheted down its revenue-growth target to 2% to 4% at constant currency but guided profits roughly in line with the consensus of 12% growth. CA is a Focus List Buy and a Long-Term Buy.

Microsoft ($29; MSFT) reported September-quarter earnings of $0.40 per share, down 17% but $0.08 above Wall Street expectations. Sales of $12.92 billion declined 14% but also beat the consensus. The software giant deferred a higher-than-expected $1.47 billion in revenue related to Windows 7, which officially launched in October. Including that revenue, sales would have declined 4% and per-share profits would have risen 8%. Shares leapt 5% on the results to reach their highest level since August 2008. Microsoft, a Long-Term Buy, said it expects higher revenue and lower costs in coming quarters, and profit estimates are rising.

NII Holdings’ ($29; NIHD) per-share profits surged 38% to $0.69 in the September quarter, easily surpassing the consensus of $0.55. Revenue slipped 3% to $1.14 billion as persistently weak sales in Mexico continued to offset rapid growth in Brazil. At constant currency, revenue would have grown 17%. While weak Latin American currencies have weighed on results relative to year-earlier numbers, those currencies strengthened in the quarter. NII is a Focus List Buy.

Energy update

National Oilwell Varco’s ($43; NOV) September-quarter earnings per share plunged 30% to $0.95 excluding special charges but still beat expectations by 20%. Despite topping the consensus, shares fell 5% on management’s concerns over the “glacial pace” of recovery in the credit markets. The backlog for capital-equipment orders was $7.3 billion at the end of September, down 16% from the end of June. National Oilwell is a Buy and a Long-Term Buy . . . Schlumberger ($65; SLB) earned $0.65 per share in the September quarter, down 48% but $0.02 ahead of the consensus. Sales slumped 25%. The company says the worst of the economic slowdown appears to be over and demand for energy should “increase somewhat” in coming months. Schlumberger is a Long-Term Buy.

Health-care earnings review

Hospira’s ($47; HSP) per-share profits for the September quarter jumped 43% to $0.90 excluding special items, trouncing the consensus by $0.21. Revenue advanced 9% to $1.01 billion, as 24% growth in specialty injectables offset declines in other pharmaceuticals and devices. Hospira now projects per-share profits of $2.85 to $2.90 excluding special items, above the consensus of $2.84 and representing growth of 13% to 15%. Hospira is a Focus List Buy and a Long-Term Buy . . . Laboratory Corp. of America ($71; LH) earned $1.22 per share in the September quarter, up 11% excluding restructuring and other special charges and $0.07 above the consensus. Revenue climbed 4% to $1.19 billion. The company updated 2009 per-share-profit guidance, reflecting $0.08 in merger-related dilution but also raising the low end of the target range. LabCorp, a Long-Term Buy, rose 3% on the news . . . Merck ($32; MRK) posted per-share earnings of $0.90 excluding a one-time gain and special charges, up 13% and $0.08 better than the consensus estimate. Sales rose 2%. Merck also said it received approval from European regulators to continue with its $41 billion acquisition of Schering-Plough ($29; SGP), a deal it hopes to close by the end of the year. Merck is rated Neutral.

Corporate roundup

Wal-Mart Stores ($50; WMT) said it expects sales growth of 1% to 2% in fiscal 2010 ending January and 4% to 6% in fiscal 2011. The company also intends to adopt a smaller floor plan and expand into urban markets, largely virgin territory for the retail giant. Wal-Mart is a Long-Term Buy . . . Disappointing trial results forced AstraZeneca ($46; AZN) to withdraw its application for approval of lung-cancer drug Zactima. AstraZeneca is a Buy and a Long-Term Buy . . . IBM ($121; IBM) authorized $5 billion in share repurchases, in addition to $4.2 billion still available from a previous plan. IBM, which has spent more than $5 billion on share buybacks in the last 12 months, is a Focus List Buy and a Long-Term Buy.

September-quarter earnings

General Dynamics ($66; GD) earned $1.47 per share, down 7% but $0.07 ahead of the consensus. Revenue rose 8% to $7.72 billion, as strong results from defense businesses offset weakness in corporate jets. General Dynamics, which raised its 2009 profit guidance, is a Buy and a Long-Term Buy.

Aflac ($42; AFL) earned $1.25 per share excluding realized investment losses, surging 23% and topping the consensus by a nickel. Revenue jumped 23% to $4.53 billion but fell short of Wall Street expectations. The investment and cash portfolio rose 9% from the June quarter, lifted by a stronger yen and positive investment returns. Aflac is a Buy and a Long-Term Buy.

Sigma-Aldrich ($54; SIAL) reported per-share profits of $0.70, up 10%, topping Wall Street’s forecast by $0.03. Revenue slipped 1% to $534 million. The company said it anticipates full-year profits of at least $2.70 per share. Sigma-Aldrich is a Long-Term Buy.

American Express’s ($36; AXP) per-share profits from continuing operations slid 37% to $0.44 excluding a nonrecurring accounting benefit but topped the consensus by $0.06. Revenue net of interest expense fell 16%. Net charge-offs decreased to 8.9% of credit-card loans from 10.0% in the June quarter. Amex is rated Neutral.

Phillip Morris International ($49; PM) earned $0.93 per share, down 8% but still topping Wall Street expectations by $0.02. Excluding a tax benefit in the year-earlier quarter, profits were flat. Sales decreased 5% to $16.57 billion as cigarette shipment volumes fell 3%. Phillip Morris is rated Neutral.

The major U.S. railways posted lower September-quarter operating results and suggested freight volumes have begun to stabilize. Burlington Northern’s ($77; BNI) profits fell 32% to $1.36 per share excluding a favorable coal rate case adjustment, and the company projected December-quarter profits below Wall Street expectations. Norfolk Southern ($46; NSC) earned $0.81 per share, down 41% but still $0.02 above the consensus. Union Pacific ($55; UNP) reported earnings of $1.02 per share, down 26%, and said business volumes remain “at very low levels.” All three railroads posted sales declines of more than 20%. Burlington, Norfolk Southern, and Union Pacific are rated Neutral.

Utility earnings review

Energen’s ($46; EGN) per-share earnings declined 40% to $0.61 excluding a gain on a property sale in the September quarter, missing the consensus by a penny. Revenue slid 13%. Energen initiated a 2010 profit target that reflects 13% to 24% growth, versus the 26% consensus. Energen is a Long-Term Buy . . . Questar ($41; STR) reported profits of $0.60 excluding sales of noncore assets and mark-to-market gains and losses, down 42% but $0.09 ahead of Wall Street forecasts. Revenue decreased 21% on weak energy prices and lower production but still topped the consensus by 11%. The company raised 2009 profit guidance by $0.10 to $2.45 to $2.55, versus the $2.57 consensus. In other news, Questar raised its quarterly dividend 4% to $0.13 per share, payable Dec. 14. Questar is a Long-Term Buy . . . FPL Group ($51; FPL) grew earnings 10% to $1.38 per share excluding special items in the September quarter but missed the consensus by $0.03. Revenue declined 17%. Reflecting the dismal Florida economy and the disappointing contribution of gas-generation assets in Texas, FPL trimmed profit guidance for 2009 and 2010. While the quarter was troubling, FPL’s guidance seems overly conservative, and the company still has decent long-term growth potential. The stock retains its A rating in the Utility Update and its membership in the Top 15 Utilities portfolio.

No changes were made this week in Dow Theory Forecasts.

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