Portfolio Review


Technology review

Hewlett-Packard ($42; HPQ) CEO Mark Hurd was encouraged to resign for misstating expense reports, allegedly to hide an inappropriate relationship with a contractor. H-P said its investigation did not uncover any violations related to sexual harassment, but it did find violations of H-P’s Standards of Business Conduct. CFO Cathie Lesjak, a 24-year veteran at the company, takes the helm during H-P’s search for a replacement. Hurd, widely credited for turning around H-P during his five-year tenure, slashed costs and completed major acquisitions that expanded H-P’s presence in markets ranging from smart phones to corporate data centers to technology services. The shares fell 10% on the news as investors assessed the potential disruption caused by Hurd’s departure.

H-P also preannounced solid results for the July quarter. The company said it earned $1.10 per share excluding special charges, topping the consensus by $0.03. H-P generated sales of about $30.7 billion, up 11%. The company raised its sales and profit guidance for fiscal 2010 ending October and will release its full July-quarter results Aug. 19. Hewlett-Packard remains a Buy and Long-Term Buy.

The U.S. is suing Oracle ($24; ORCL) for allegedly failing to offer government customers the same software discounts it gave commercial clients between 1998 and 2006. Some estimates put potential damages at $1 billion, more than 5% of Oracle’s cash reserves. Separately, rival SAP ($47; SAP) said it would accept responsibility in a copyright-infringement case dating back to 2007, but it disputes the extent of the damages to Oracle. Oracle claims it lost more than $1 billion; SAP contends the damages are in the tens of millions. Oracle is a Long-Term Buy.

Research In Motion ($56; RIMM) won a reprieve from Saudi Arabia, which had threatened to ban service for the BlackBerry smart phone, used by 700,000 customers in the kingdom. According to published reports, RIM agreed to turn over user codes that will let Saudi authorities monitor text messages for terrorism and other illegal activities. Officials from other Middle Eastern governments suggest that RIM has already relaxed its security standards for certain Western countries; RIM denies these claims. Any agreement could set a precedent for other counties that have expressed similar concerns. India says it might suspend BlackBerry services if conditions are not met.  Research In Motion is a Buy and a Long-Term Buy.

Advance Auto Parts earnings

In the June quarter, Advance Auto Parts’ ($53; AAP) profits jumped to $1.16 per share, up 40% excluding a special charge in the year-earlier quarter and topping the consensus by $0.13. Revenue rose 7% to $1.42 billion, edging out Wall Street’s forecast. Same-store sales climbed 5.8%. Cash provided by operations rose 14% in the six months ended June, while free cash flow increased 42%. Advance Auto raised its full-year outlook for per-share earnings to $3.70 to $3.80, above the $3.58 consensus and implying growth of 23% to 27%. The stock is a Long-Term Buy.

Retail wrap-up

In July, retailers struggled to generate momentum going into back-to-school season, the industry’s most important period other than Christmas. Same-store sales climbed 2.9% for the month, but analysts expected 3.1% growth, based on a Thomson Reuters index of 28 retail stocks. The results indicate that consumers remain timid, their confidence eroded by persistent weakness in the labor market. Shoppers are exercising their patience, delaying purchases and scouring for discounts. Such action often leads retailers to discount even more . . . TJX ($43; TJX) grew July same-store sales about 2%, versus the 2.4% Wall Street anticipated. Same-store sales for the core U.S. business, Marmaxx Group, advanced 3%. Lower inventories meant less clearance merchandise, which translated into weaker sales gains but higher profit margins. For the July quarter, TJX expects per-share profits to reach or exceed the upper range of its previous guidance of $0.70 to $0.73, implying growth of at least 20%. TJX is a Buy and a Long-Term Buy . . .  Ross Stores ($53; ROST) said same-store sales rose 2% in July, missing both its own projection and the consensus estimate of 3.5%. Ross attributed the disappointing performance in part to steep discounts offered by other retailers. Ross is a Focus List Buy and a Long-Term Buy . . . Promotional activity has also taken a heavy toll on consumer-staples companies. Shares of Kellogg ($52; K), Colgate-Palmolive ($78; CL), and Procter & Gamble ($61; PG) fell following dismal earnings announcements for the June quarter. Hampered by a recall of 28 million boxes of cereal, Kellogg missed analyst profit targets. Kellogg said it should fare better in the second half of the year, though management still lowered its 2010 profit forecast. Colgate-Palmolive and P&G both posted disappointing sales growth. P&G cautioned investors about the next 12 months, and though Colgate maintained its profit guidance, analysts expressed skepticism by lowering their estimates. Colgate and P&G are rated B (average). Kellogg is rated C (below average).

Energy update

BP ($40; BP) said cement used to plug a damaged oil well in the Gulf of Mexico has hardened, closing off the well. This month, the oil giant expects to finish a relief well that should permanently seal the ruptured well. BP also deposited its first $3 billion into a fund that should ultimately contain $20 billion to cover liabilities related to the spill.

According to a BP audit completed seven months before the explosion, Transocean’s ($56; RIG) rig Deepwater Horizon suffered from an array of maintenance problems. Transocean said it corrected all critical problems and that an independent inspection found the rig in good condition days before the explosion.

In related news, Transocean maintains that its 400-page contract with BP shelters the rig owner from nearly all lawsuits and fines related to the spill. However, Transocean acknowledged it must deal with the civil lawsuits filed by the families of nine workers who died in the accident. BP and Transocean are rated B (average).

Corporate digest

Newmont Mining ($57; NEM) is considering spinning off part of its Indonesian business via a public stock offering. Newmont, which owns a 31.5% interest in the operations, faces opposition from at least one large stakeholder. Separately, Indonesian workers agreed to end their strike against Newmont that had centered on overtime payments. Newmont is a Focus List Buy and a Long-Term Buy.

J.P. Morgan Chase ($39; JPM) purchased a $3.5 billion portfolio of real-estate loans from Citigroup ($4; C). Terms of the deal were not released. J.P. Morgan is a Buy and Long-Term Buy. Citigroup is rated C (below average).

Varian Medical Systems ($57; VAR) authorized the repurchase of 8 million shares by September 2011, representing more than 6% of shares outstanding. Varian is a Focus List Buy and a Long-Term Buy.

AstraZeneca ($53; AZN) agreed to pay $198 million to settle roughly 17,500 U.S. lawsuits claiming the drugmaker failed to properly warn patients that antipsychotic drug Seroquel could cause diabetes. AstraZeneca is rated B (average).

In a late-stage trial, Amgen’s ($56; AMGN) colon-cancer drug Vectibix failed to extend the lives of patients suffering from head and neck cancer in a statistically significant way. Amgen is rated B (average).


No changes were made this week in Dow Theory Forecasts.

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