Portfolio Review


Retail wrap-up

Consumers, still cautious and frugal, are beginning to creep back into shopping centers.

According to February data from Retail Metrics, retailers reported 4.1% higher same-store sales — revenue from stores open for more than a year. Especially for retailers, leveraged to luxury markets, results benefited from comparisons to dismal 2009 results. However, some of the best performances came from discounters.

Ross Stores ($51; ROST) said same-store sales jumped 11%, easily topping Wall Street’s forecast of 6.0%. TJX ($42; TJX) reported 10% higher comparable sales, ahead of the consensus estimate of 8.9%. At McDonald’s ($65; MCD), same-store sales advanced 4.8%, more than double the consensus estimate of 2.1%. Ross is a Focus List Buy and a Long-Term Buy. TJX is a Buy and a Long-Term Buy. McDonald’s is rated A (above average).

Wal-Mart Stores ($54; WMT) no longer reports monthly sales, but the retail giant did hike its quarterly dividend 11% to $0.3025 per share, payable April 5. Wal-Mart, yielding 2.2%, is a Long-Term Buy.

Shares of GameStop ($18; GME) have underperformed the market this year. The stock has been dragged down by the usual suspects — concerns over the shift toward digital downloads and increasing competition from Wal-Mart. GameStop lowered its profit guidance for the January quarter, with results slated for release March 18. However, the stock trades at just eight times estimated year-ahead earnings, a 46% discount to the three-year average forward P/E ratio, and earns a top Quadrix® Value score of 100. GameStop’s troubles also reflect challenges experienced by the industry as a whole. U.S. sales of video-game software declined in 10 of the 11 months ended January and probably fell again in February. But starting in March, comparisons become easier, and a stream of new games should help lift sales. GameStop is a Buy.

Drug review

Abbott Laboratories ($55; ABT) agreed to buy Facet Biotech ($27; FACT) for $450 million in cash, a 67% premium to Facet’s closing price prior to the announcement. Facet is developing several experimental cancer treatments and collaborating on a multiple sclerosis drug, daclizumab, with Biogen Idec ($58; BIIB). In other news, Biogen halted trials of ocrelizumab, under development with Roche as a potential treatment for rheumatoid arthritis. Several deaths had been linked to the drug. Ocrelizumab was intended to succeed Rituxan when patents for the older drug, also used for rheumatoid arthritis, expired. Abbott is a Buy and a Long-Term Buy. Biogen is rated B (average) . . . Citing the upcoming loss of a key patent, Bristol-Myers Squibb ($25; BMY) said 2013 profits will fall to 9% to 13% below anticipated 2010 earnings. In 2012, generic competitors will begin eating into sales of blood-thinner Plavix, which generates annual revenue of $6 billion. Bristol-Myers expects to introduce five new drugs by 2012 to help offset the patent loss. Bristol-Meyers is rated B (average) . . . Pfizer ($17; PFE) raised to $4 billion its bid for German generic drugmaker Ratiopharm Group, which is attracting interest from two other companies. Separately, Pfizer’s experimental drug for Alzheimer’s disease, Dimebon, failed a late-stage trial, though studies that combine Dimebon with other Alzheimer’s treatments will continue. Pfizer is rated B (average) . . . According to published reports, Internal documents indicate a subsidiary of Johnson & Johnson ($64; JNJ) encouraged the use of Risperdal for elderly dementia, an unapproved treatment for the antipsychotic drug. Multiple states have sued J&J over the way it marketed Risperdal. J&J is a Long-Term Buy.

Tech update

In the December quarter, sales of data-storage products slipped 1% to $5.29 billion, said research firm IDC. The decline suggests sales, down 10% in 2009, are reaching a trough. EMC ($19; EMC), the market leader with a 24% share, posted flat sales for the quarter. Ranking second, IBM ($126; IBM) grew sales 9%, stretching its market share to 17%. Hewlett-Packard ($52; HPQ) held onto third place, though its storage sales shrank 7%.

Research group Gartner ($24; IT) raised its outlook for personal-computer shipments in 2010 and now expects 20% growth. Mobile PCs should account for the majority of the growth and could represent 70% of shipments by 2012, up from 55% last year. Both H-P and Dell ($14; DELL) should benefit as consumers and businesses begin replacing aging machines.

In other news, Hewlett-Packard said it reduced its previously reported net income by about $73 million, or $0.03 per share, for the January quarter. The profit decline reflects a boost in the reserve for an ongoing lawsuit in the United Kingdom. IBM is a Focus List Buy and a Long-Term Buy. Hewlett-Packard is a Buy and Long-Term Buy. Dell and EMC are rated B (average).

When it comes to acquisitions, Oracle ($25; ORCL) can apparently spin straw into gold. The software company has absorbed 60 acquisitions over the past five years, including the contentious $10.3 billion takeover of PeopleSoft. During that time, per-share profits rose at an annualized rate of 16% and operating profit margins widened by more than five percentage points. But Oracle’s latest prize, Sun Microsystems, will test that reputation. Sun represents a new challenge for Oracle — how to integrate a hardware company into a software company. Oracle CEO Larry Ellison predicts a quick turnaround for Sun, which lost more than $2 billion in the past two years.

Rather than divest the hardware business, Oracle plans to put additional resources into it, hiring 2,000 new salespeople and boosting research-and-development spending. Sun generated 20% lower server revenue in the December quarter as rivals chipped away at its market share. Sun’s software-licensing business will fold into Oracle’s technology group, while software and hardware maintenance becomes part of license updates and support. Oracle is a Buy and Long-Term Buy.

CA ($23; CA) agreed to acquire Nimsoft, a developer of performance-monitoring software, for $350 million in cash. CA is a Buy and a Long-Term Buy.

News digest

General Dynamics ($74; GD) raised its quarterly dividend 11% to $0.42 per share, payable May 7. General Dynamics is a Buy and a Long-Term Buy.

MetLife ($41; MET) agreed to pay $15.5 billion in cash and stock for American Life Insurance Co., yet another business clipped from American International Group ($33; AIG) as it struggles to repay more than $130 billion in federal bailout funds. MetLife is rated B (average).

Raytheon ($57; RTN) received a contract modification worth $152 million for engineering services for the U.S. Patriot Air and Missile Defense System. Raytheon is a Focus List Buy and a Long-Term Buy.

Northrop Grumman ($64; NOC) and European aerospace giant EADS pulled out of the running for a $35 billion U.S. tanker contract, leaving Boeing ($68; BA) as the sole remaining bidder, though France calls the contract anticompetitive and threatens further action. Boeing is rated B (average).


No changes were made this week in Dow Theory Forecasts.

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