Portfolio Review


December-quarter earnings

Cognizant Technology Solutions ($46; CTSH) earned $0.50 per share excluding stock-based compensation costs, up 22% and $0.04 above the consensus. Revenue rose 20% to $903 million. For 2010, Cognizant expects profits of at least $2.19 per share, $0.18 above the consensus at the time of the announcement and implying 15% growth. The shares jumped on the news. Cognizant is a Focus List Buy and a Long-Term Buy.

Hospira ($49; HSP) grew profits 12% to $0.87 per share excluding special items, $0.18 above Wall Street’s forecast. However, the stock slumped, hurt by disappointing comments about expected sales of drugs and hospital supplies in 2010. Sales of specialty injectable pharmaceuticals rose 26%, while total revenue increased 15% to $1.06 billion. Management also cautioned that hospital spending on capital equipment has remained tight. Hospira’s 2010 sales guidance topped the consensus, while profit guidance was in line. Hospira is a Focus List Buy and a Long-Term Buy.

Sigma-Aldrich ($48; SIAL) earned $0.75 per share, up 10% and $0.03 better than the consensus. Revenue grew 12% to $573 million. Sigma-Aldrich raised its quarterly dividend 10% to $0.16 per share, payable Mar. 15. The company projects 2010 per-share profits of $3.00 to $3.15, implying 7% to 13% growth. Sigma-Aldrich is a Long-Term Buy.

Retail roundup

Chain retailers showed broad strength in January, as industrywide same-store sales rose 3.3% — the biggest monthly jump since April 2008 and ahead of the Wall Street estimate of 2.4%, according to Retail Metrics.

TJX’s ($38; TJX) sales in stores open for at least a year jumped 12% in January, easily beating the consensus estimate of 7.8%. The results prompted TJX to raise its profit guidance for the January quarter. Ross Stores ($46; ROST) posted 8% higher same-store sales for January. Ross also raised its profit forecast for the January quarter and boosted its quarterly dividend by 45%, payable Mar. 31. Only 23% of retailers disappointed Wall Street, one of them being Walgreen ($34; WAG). The pharmacy reported 1.1% lower same-store sales in January, versus expectations of 2.2% growth.

The largest pharmacy chains should see profitability rise as patents expire on blockbuster branded drugs in the next few years. Generic drugs generate higher profit margins for pharmacies such as Walgreen and CVS Caremark ($33; CVS), which pass on only a portion of their cost savings to consumers.

CVS’ profits from continuing operations rose 14% to $0.79 per share excluding special items in the December quarter, beating the consensus estimate by a penny. Revenue rose 7% to $25.82 billion. Sales from pharmacy services jumped 14%, while the retail-pharmacy unit managed 5% growth. Same-store sales increased 4.9%. CVS said profit growth from its retail pharmacies should more than offset declines at the pharmacy-benefit-management unit in 2010. CVS is a Focus List Buy and a Long-Term Buy. Ross is a Buy and a Long-Term Buy. TJX is a Long-Term Buy. Walgreen is rated A (above average).

Corporate report

IBM ($123; IBM) unveiled its latest microprocessor and midrange servers designed to handle duties that range from managing electrical grids to processing electronic trades for financial companies. The new products will help IBM better compete in a crowded server field that includes Hewlett-Packard ($48; HPQ) and recent entrants Cisco Systems ($24; CSCO) and Oracle ($24; ORCL). IBM is a Focus List Buy and a Long-Term Buy. Hewlett-Packard and Oracle are both rated Buy and Long-Term Buy. Cisco Systems is rated B (average) . . . In 2009, video-game sales dropped by 8% in the world’s three biggest markets: Japan (down 2%), the U.S. (down 7%), and the United Kingdom (down 14%). Shares of GameStop ($19; GME) slid following an analyst downgrade and a disappointing March-quarter outlook from video-game maker Electronic Arts ($16; ERTS). GameStop, which looks very cheap at seven times projected earnings for fiscal 2011 ending January, remains a Buy . . . In the December quarter, Apple ($196; AAPL) gained share in the smartphone market, while Microsoft ($28; MSFT) lost ground. Based on data compiled by comScore, Research In Motion ($66; RIMM) controls a 42% share, followed by Apple (25%), and Microsoft (18%). Microsoft is a Long-Term Buy. Apple and Research In Motion are rated A (above average) . . . According to published reports, MetLife ($35; MET) plans to purchase the American Life Insurance business from American International Group ($23; AIG) for an estimated $15 billion in stock and cash. The deal has yet to be finalized. MetLife is rated B (average).

Health-reform woes not healthy for stocks

The Massachusetts special election that landed a Republican in the Senate seat held for 47 years by the late Democrat Ted Kennedy stalled more than health-care reform. Health-care stocks have also taken a hit, with the S&P 1500 Health Care Sector Index down 6% since the election, roughly in line with the broader index.

The fact that health care didn’t rally on news that health reform was sick suggests the market had become comfortable with the idea. After all, it would have expanded the addressable market for drugs, medical devices, and insurance by 30 million Americans. The health-care index rose 23% in the six months before the special election, versus 20% for the broader index.

Under the most recent reform plan, drugmakers would have paid $8 billion a year in fees and discounts, decent terms for an industry with nearly $250 billion in annual revenue. The industry would have benefited from legislation closing a coverage gap in Medicare, where out-of-pocket costs tend to induce the elderly to trim their medication usage. Drugmakers could be hard pressed to hammer out similar terms again. Earlier this month, President Obama proposed taxing foreign profits from some patents held by U.S. companies, a measure that could cost drugmakers tens of billions of dollars.

The old reform plan was less attractive for device makers, which would have been saddled with $20 billion in annual fees. It is impossible to determine whether a watered-down bill would be a positive for device makers, or for biotechnology companies, which could receive terms other than the agreed-on 12 years of patent protection.

Managed-care companies face the greatest uncertainty. Without universal health care, Americans would not be forced to purchase insurance coverage. However, many alternative proposals require insurers to accept clients they would otherwise deny due to pre-existing conditions

President Obama remains committed to reform, but he has acknowledged that it may not happen. Republicans, proposing a far smaller bill laden with tax incentives, will meet with the president Feb. 25.

No changes were made this week in Dow Theory Forecasts.

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