Portfolio Review


NASDAQ up, Baxter down

NASDAQ OMX Group ($25; NDAQ), operator of several exchanges in the U.S. and Europe — including the one that shares its name — is being added to the Long-Term Buy List. With a market capitalization of about $5.23 billion, NASDAQ is smaller than any other stock on the Long-Term Buy List. But it has produced solid results in recent quarters, and a favorable outlook suggests the stock can provide attractive returns over the next two to three years. Wall Street sees 22% higher per-share profits in 2011 on 6% revenue growth. The five-year earnings forecast calls for 10% annualized growth.

Shares surged after NASDAQ said per-share profits climbed 20% to $0.55 excluding special items in the December quarter, topping Wall Street's forecast by $0.04. Net revenues (excluding rebates and some fees) grew 8% to $400 million, also above the consensus. Results were bolstered by growth in derivatives markets, strength from business in Europe, and a string of acquisitions. NASDAQ is now a Buy and a Long-Term Buy.

Baxter International ($49; BAX) is being dropped from the Long-Term Buy List. The medical-product maker reported December-quarter profits of $1.11 per share excluding special items, up 8% and a penny above the consensus estimate. Revenue increased 1%. For 2011, Baxter expects per-share profits of $4.15 to $4.20, up 4% to 7%. The midpoint of that range fell short of the consensus of $4.23 at the time of the announcement.

In the latest of a string of quality-control problems, Baxter said it received a new warning letter from the U.S. Food and Drug Administration concerning two facilities in Puerto Rico. Baxter's Quadrix® Overall score has dipped to 60, dragged down by a Momentum score of 21 and a 5 in Earnings Estimates. On our Monitored List, the stock is being downgraded to B (average).

December-quarter earnings

Aflac ($59; AFL) said December-quarter operating profits rose 13% to $1.33, missing the consensus by $0.02. Revenue of $5.29 billion fell short of Wall Street expectations. The U.S. business grew sales 2%, while Aflac's Japanese unit managed 12% growth. For 2011, Aflac sees per-share profits ranging from $6.09 to $6.34, versus the consensus of $6.17 at the time of the announcement. Aflac is a Focus List Buy and a Long-Term Buy.

Shares of Lubrizol ($110; LZ) rallied after the company reported that December-quarter earnings grew 26% to $2.45 per share excluding impairment and restructuring charges, surpassing the consensus by $0.26. Revenue advanced 11% to $1.32 billion, the result of higher prices, a better product mix, and 4% higher volume. For 2011, the company issued per-share-profit guidance of $11.05 to $11.55, implying growth of 3% to 7% and exceeding the consensus of $10.82 at the time of the announcement. Lubrizol is a Buy and a Long-Term Buy.

AstraZeneca ($47; AZN) said December-quarter earnings slipped 2% to $1.39 per share excluding restructuring costs, $0.05 ahead of the consensus. Revenue fell 4% to $8.62 billion. Looking ahead, the company said growth in emerging markets will be offset by generic competition as drugs continue to lose patent exclusivity. AstraZeneca is rated A (above average).

Biogen Idec ($65; BIIB) said December-quarter earnings rose 18% to $1.42 per share excluding special items, exceeding the consensus estimate by $0.19. Revenue increased 8% to $1.22 billion, driven by the growth of two key multiple sclerosis treatments: Tysabri, up 12%, and Avonex, up 10%. Biogen projects 2011 per-share profits of $5.70, versus the consensus of $5.63 at the time of the announcement. Biogen Idec is rated A (above average).

In the December quarter, Chevron's ($96; CVX) per-share profits jumped 73% to $2.64, topping the consensus by $0.23. Profits from upstream operations rose 16% to $4.85 billion, while the downstream business earned $742 million, reversing a $673 million loss in the same quarter last year. Revenue and other income climbed 11% to $54.03 billion. Chevron is rated A (above average).

For the December quarter, Energen ($57; EGN) reported per-share profits of $1.11, up 37% and $0.03 above the consensus, the result of stronger energy prices and 6% higher production. Operating revenue rose 3% to $374 million. In other news, Energen raised its quarterly dividend 4% to $0.135 per share, payable March 1 and marking the 29th straight year of dividend growth. Energen, rated A (above average), is a component of our Top 15 Utilities portfolio.

Procter & Gamble's ($63; PG) profits from continuing operations increased 3% to $1.13 per share, 3% above the consensus. Revenue crept up 2% to $21.35 billion. Procter & Gamble is rated B (average).

Tech roundup

Intel ($21; INTC) discovered a design flaw in its new Sandy Bridge semiconductor, launched in January. About 8 million units of the semiconductor, installed in the motherboards of personal computers, had already shipped. Intel expects costs related to repair and replacement will reach $700 million; it projects another $300 million in lost revenue for the March quarter. Computermakers Hewlett-Packard ($47; HPQ), Samsung Electronics, and NEC have already announced that Intel's problems will delay the production of certain types of computers.

Intel plans to begin shipping a new version of the microchip later this month. Intel partially allayed the disappointment by raising its March-quarter revenue guidance by $200 million to reflect two recent acquisitions. Shares were flat on a day the S&P 500 Index gained nearly 1%. In other news, specifications for H-P's new Palm tablet computer leaked online, and an early review suggests the device could be less than awe-inspiring. The tablet, for now called Topaz, features a front-facing Webcam, Wi-Fi, and an eight-hour battery. H-P is expected to unveil the device on Feb. 9. Intel and H-P are rated Buy and Long-Term Buy.

Corporate digest

Wal-Mart Stores ($56; WMT) is apparently carrying a glut of excess inventory — from food and cosmetics to toys and clothing — possibly signaling light sales for the January quarter, reported the New York Post. Wal-Mart Stores is a Long-Term Buy.

Varian Medical Systems ($67; VAR) won a three-year contract worth about $450 million to supply medical-imaging components to Toshiba Medical Systems. Varian Medical is a Buy and a Long-Term Buy.

BP ($48; BP) said it will resume its quarterly dividend at $0.42 per share, payable March 28. Last June BP suspended its dividend — $0.84 per share at the time — to conserve cash for the massive cleanup in the Gulf of Mexico. BP is rated B (average).

Follow a regulatory review that lasted 13 months, Comcast ($23; CMCSa) completed its acquisition of a 51% stake of NBC Universal from General Electric ($21; GE), which maintains a minority interest in the business. Comcast is a Long-Term Buy. GE is rated B (average).

Freeport-McMoRan ($57; FCX) completed a two-for-one stock split announced on Dec. 9. Freeport-McMoRan is rated A (above average).

Rank Changes
Baxter International ($49; BAX) is being dropped from the Long-Term Buy List. NASDAQ OMX Group ($25; NDAQ), already a Buy, is being added to the Long-Term Buy List.

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