Portfolio Review


Retailers run low on holiday cheer

While October retail sales rose more than expected, the glad tidings may fade before the holiday sales season. Fitch Ratings predicts sales in stores open at least one year will rise only slightly during the holiday season, helped by weak year-earlier results. In October, the National Retail Federation said it expected total holiday sales to decline 1%.

Sales at department stores and home-improvement retailers have been particularly weak, but discounters and some specialty stores have delivered decent results and seem better positioned for the crucial weeks ahead.

Wal-Mart Stores ($54; WMT) earned $0.84 per share from continuing operations in the October quarter, up 9% to top the consensus by $0.03. Despite modest growth from Sam’s Club, U.S. same-store sales dipped 0.4% excluding fuel. Net sales edged up 1% to $98.67 billion, helped by market-share gains, and would have risen 3% in constant currency. Citing the chilling effects of price deflation, high unemployment, and consumer restraint,the retailer gave per-share-profit guidance of $1.08 to $1.12 for the January quarter, versus Wall Street’s forecast of $1.12. While the guidance is disappointing, it does represent growth of 5% to 9%. Wal-Mart is a Long-Term Buy.

TJX ($39; TJX) grew profits from continuing operations 40% to $0.81 per share, topping the consensus by a penny. Same-store sales rose 7% on growth in every division, while total sales advanced 10%. TJX expects same-store-sales growth of 5% to 7% in the January quarter and earnings per share from continuing operations of $0.65 to $0.71, versus the $0.71 consensus. TJX is a Long-Term Buy.

Taking another step toward digital distribution of videogames, GameStop ($24; GME) will test a program that lets customers download upgrades. These upgrades could give GameStop and other publishers a new revenue stream if gamers prove more willing to pay to enhance their favorite games than they have been to try new titles. GameStop said an attractive slate of game releases should fuel strong sales in fiscal 2011 ending January. GameStop is a Buy.

Mergers and deals

Hewlett-Packard ($51; HPQ) agreed to buy 3Com ($8; COMS) for $2.7 billion, a 39% premium over 3Com’s closing price before the announcement. The move will bolster H-P’s presence in corporate data centers, countering a series of moves by Cisco Systems ($24; CSCO) earlier this year. A shareholder lawsuit has challenged the purchase, alleging the price was too low. In other news, H-P announced preliminary results for the October quarter. Profits rose 11% to $1.14 per share excluding special items, $0.02 above the consensus, while sales fell 8%, also exceeding expectations. H-P also raised its sales and profit outlook for fiscal 2010 ending October. H-P is a Buy and a Long-Term Buy. Cisco is rated Neutral . . . Seeking to re-establish its focus on media content, Time Warner ($33; TWX) will spin off AOL on Dec. 9, about nine years after the ill-fated merger of the publisher and the then-Internet giant. Time Warner shareholders will receive one share of AOL stock for every 11 shares of Time Warner owned, valuing AOL at about $3.44 billion, a fraction of its $163 billion value at the time of the merger announcement in 2000. AOL will begin trading Nov. 24 under the ticker symbol “AOL.” Time Warner is rated Neutral . . . A U.S. congressional panel says internal documents indicate Bank of America ($16; BAC) knew about big losses brewing at Merrill Lynch long before shareholders approved the merger Dec. 5. Bank of America had previously said that it wasn’t aware of the losses — which eventually reached $15.8 billion — until later. Bank of America is rated Neutral . . . General Electric ($16; GE) agreed to sell its fire-alarm and security-system business to United Technologies ($70; UTX) for $1.82 billion. GE and United Technologies are rated Neutral . . . Hershey ($38; HSY) and Ferrero of Italy have discussed bidding for Cadbury ($54; CBY), the British confectioner that has already attracted an unsolicited and unwelcome offer of $16.7 billion from Kraft Foods ($28; KFT). Kraft is rated Neutral.

Dividends and buybacks

AmerisourceBergen ($24; ABC) hiked its quarterly dividend 33% to $0.08 per share, payable Dec. 7. The company also authorized the repurchase of $500 million in stock and announced plans to retire $350 million of shares — equal to roughly 5% of the stock’s market value — in fiscal 2010 ending September. Amerisource is a Focus List Buy and a Long-Term Buy . . . National Oilwell Varco ($46; NOV) initiated a quarterly dividend of $0.10, payable Dec. 16. The company also declared a one-time dividend of $1.00 per share to be paid on the same date. National Oilwell Varco is a Buy and a Long-Term Buy . . . Intel ($20; INTC) raised its quarterly distribution 13% to $0.1575 per share for the first dividend to be declared in 2010. Separately, Intel will pay $1.25 billion to settle claims by Advanced Micro Devices ($7; AMD) that the chipmaker violated antitrust and patent laws. Intel is rated Neutral.

Health-care review

AstraZeneca’s ($45; AZN) blood-thinner Brilinta outperformed market leader Plavix, sold by Bristol-Myers Squibb ($24; BMY), in heart-attack patients who required emergency procedures. Brilinta also worked more quickly than Plavix and did not heighten the risk of major bleeding. AstraZeneca plans to apply for U.S. regulatory approval of Brilinta later this year, and the drug could eventually generate billions of dollars in annual sales.

In other news, Bristol-Myers is splitting off its 83% stake in Mead Johnson Nutrition, an infant-formula maker. Shareholders have the option to exchange $1 of Bristol-Myers stock for about $1.11 of Mead stock, in most cases with no tax liability. AstraZeneca is a Buy and a Long-Term Buy. Bristol-Meyers is rated Neutral.

Shares of Baxter International ($55; BAX) fell following the report that a major plasma distributor described unexpected weakness. A portion of Baxter’s revenue comes from the U.S. plasma market, but management said nothing about instability during a mid-October investor call. Baxter is a Long-Term Buy.

A British study found antipsychotic drugs benefited less than 20% of dementia patients treated with them. AstraZeneca, Johnson & Johnson ($62; JNJ), and Eli Lilly ($36; LLY) produce top-selling antipsychotics. J&J is a Long-Term Buy. Eli Lilly is rated Neutral.

CVS Caremark ($30; CVS) says it hopes to hire an external candidate to lead its pharmacy-benefit-management business by the end of the year. CEO Tom Ryan said the unit — which lost almost $5 billion in 2010 contracts — must improve its relationship with PBM consultants. CVS is a Focus List Buy and a Long-Term Buy.

Earnings review

Disney ($31; DIS) reported earnings of $0.46 per share in the September quarter excluding special items, up 5% and $0.05 above the consensus. Sales climbed 4% to $9.87 billion, as strength at the company’s media networks offset weaker results from theme parks, movies, and consumer products. Disney is rated Neutral . . . Home Depot ($27; HD) reported a 9% decline in profits to $0.41 per share in the October quarter, $0.05 above the consensus. Hurt by fewer customer transactions and smaller average purchases, sales dipped 8%. Same-store sales decreased 6.9%. Home Depot is rated Neutral.

News digest

While repairing the flaw that has kept its troubled 787 Dreamliner passenger jet grounded, Boeing ($53; BA) discovered that metal bolts had caused slight cracking in the composite materials of the wings of one test jet. However, Boeing reaffirmed its goal of sending the 787, now more than two years behind schedule, on its first flight this year. Boeing is rated Neutral.

Wells Fargo ($28; WFC) agreed to repay about $1.3 billion to brokerage clients whose funds were frozen when the auction-rate securities market crashed. Wells Fargo is rated Neutral.

Ending a six-month search, DirecTV ($31; DTV) named Michael White, an executive at PepsiCo ($63; PEP), to take over as CEO  Jan. 1. DirecTV is a Focus List Buy and a Long-Term Buy. PepsiCo is rated Neutral.

No changes were made this week in Dow Theory Forecasts.

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