Portfolio Review


Picture perfect looking pretty

Earnings revisions for the March quarter provide grounds for optimism. The ratio of negative to positive preannouncements for the March quarter is 1.3-to-1, well below the typical 2-to-1, according to Thompson Reuters. Analysts foresee companies in the S&P 500 Index growing per-share earnings by 37%, versus the historical average of 7% to 8%.

Reflecting these trends, Honeywell ($45; HON) raised its earnings forecast by $0.04 per share to reflect higher orders in key markets. Shares of Qualcomm ($42; QCOM) jumped after the company hiked its revenue and profit targets. Alcoa ($14; AA) is expected to kick off earnings season on April 12. Wall Street expects profits of $0.15 per share versus an operating loss in the year-earlier quarter. Honeywell and Qualcomm are rated B (average). Alcoa is rated C (below average).

Technology review

Oracle ($26; ORCL) earned $0.38 per share excluding special items in the February quarter, up 9% and matching the consensus estimate. Bolstered by the Sun Microsystems merger, revenue jumped 17% to $6.40 billion. Without the deal, Oracle’s revenue would have grown 7%. Sales of software licenses, updates, and support climbed 13%, offsetting a 9% decline in services revenue. The midpoint of Oracle’s May-quarter profit guidance is $0.54 per share, a penny above the consensus at the time of the announcement. The solid results received a tepid response from Wall Street, but Oracle boasts a strong long-term growth record and appears to be successfully integrating Sun into its operations. The stock is a Buy and Long-Term Buy.

Research In Motion’s ($75; RIMM) February-quarter profits jumped 41% to $1.27 per share but missed the consensus by a penny. Revenue climbed 18% to $4.08 billion but also fell short of Wall Street’s forecast. The company projected May-quarter sales and profits above Wall Street expectations.

Leading into the earnings announcement, RIM’s stock dipped on chatter that its BlackBerry could face a new challenge from Apple’s ($236; AAPL) iPhone. Apple is reportedly designing a new iPhone to be carried by Verizon Communications ($31; VZ), a move that would expand the gadget’s addressable market. Since their 2007 release, iPhones in the U.S. have run solely on AT&T’s ($26; T) network. However, subscribers should not panic. The explosive growth of smart-phones leaves plenty of opportunities for both companies. Research In Motion’s quarterly results are disappointing, but the company’s revenue and profit guidance seems solid, and the earnings miss doesn’t invalidate the growth story. RIM remains a Buy and a Long-Term Buy. Apple is rated A (above average). Verizon and AT&T are rated B (average).

Apple’s strained relationship with Google ($567; GOOG) has led to speculation that its new iPad tablet computer could use Microsoft’s ($30; MSFT) Bing as the default Web browser.

While Bing’s presence on the iPad could lead to a place in the far larger iPhone world, Google remains the world’s top search engine, and it is difficult to handicap this race. Apple was expected to introduce the iPad Saturday. Microsoft is a Long-Term Buy. Apple and Google are rated A (above average).

Health-care report

Health-care reform has opened a new market for Hospira ($57; HSP). The government will now allow patents for biologic drugs to expire after 12 years, effectively creating a market for biosimilars, or copycat versions of biotech drugs. Prescriptions for some biologic drugs, which are derived from living cells, can cost $100,000 a year. Hospira already sells Retacrit, a generic biologic anemia treatment, in Europe and has two more biosimilar treatments under review.

While biosimilars promise to play major role in Hospira’s future, traditional generic injectables (53% of 2009 sales) figure prominently in the company’s current business. Last month, Hospira completed the $400 million acquisition of Orchid Chemicals & Pharmaceuticals’ generic injectable-drug business. Hospira acquired a manufacturing facility in India in the deal, further expanding its global presence. The stock is a Focus List Buy and a Long-Term Buy.

U.S. regulators asked Abbott Laboratories ($53; ABT) and AstraZeneca ($45; AZN) for more information on Certriad, an experimental heart drug that combines treatments from both companies. Abbott had originally wanted to bring Certriad to market in the first half of 2010, but that time frame may no longer be realistic. Abbott Laboratories is a Buy and a Long-Term Buy. AstraZeneca is rated B (average).

A private-equity firm has reportedly offered to purchase Johnson & Johnson’s ($65; JNJ) breast-care business for an undisclosed sum. J&J is a Long-Term Buy.

Corporate roundup

Best Buy ($43; BBY) grew February-quarter profits 13% to $1.82 per share excluding restructuring and impairment charges in the year-ago period, topping the consensus by $0.03. Same-store sales advanced 7% on higher revenue from flat-screen TVs, notebook computers, and cell phones. Best Buy sees 1% to 3% higher same-store sales in the year ahead and profit growth of at least 10%, above Wall Street’s target at the time of the announcement. Best Buy is rated A (above average) . . . The U.S. Treasury plans to gradually sell its entire stake in Citigroup ($4; C) over a six-month span this year. The government holds 7.7 billion shares — roughly 27% of the bank’s common stock — and profits from the sale could exceed $7 billion at current prices. But the U.S. won’t entirely wash its hands clean of the bank; it still holds $5.3 billion worth of preferred securities and warrants to buy about 465 million shares. Citigroup is rated C (below average) . . . Raytheon ($57; RTN) boosted its quarterly dividend by 21% to $0.375 per share, payable April 29, and announced a $2 billion stock buyback. Raytheon is a Focus List Buy and a Long-Term Buy.

BMC grows despite recession

BMC Software ($38; BMC) makes mainframe software that helps clients slash costs. While business has slowed, the recession did not completely erode demand. Over the past four quarters, BMC’s per-share profits have risen 28% on 2% higher sales. In March, Nasdaq OMX ($21; NDAQ), the company that operates the Nasdaq stock market, hired BMC to manage business services for its technology department in an effort to automate manual tasks and improve service delivery. BMC could also garner new business when IBM ($129; IBM) introduces a new mainframe computer model later this year.

Wall Street sees more growth ahead. For the March quarter, Wall Street had expected the company to report earnings of $0.69 per share, implying 8% growth. BMC has made a habit of topping the consensus, with surprises of at least 11% in each of the last three quarters. Per-share profits are projected to climb at a 14% annual rate over the next five years.

BMC appears attractively valued relative to its growth outlook. The stock trades at 15 times the year-ahead profit consensus, 15% below the five-year average forward valuation. BMC Software and IBM are both Focus List Buys and Long-Term Buys.


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