Portfolio Review


Buy MasterCard

MasterCard ($252; MA) is being added to the Buy List and Long-Term Buy List. The company generates its revenue from processing credit-card and debit-card transactions and issuing cards. With little exposure to credit losses, MasterCard grew sales and operating earnings throughout the recession. Per-share profits have grown at an annualized rate of 39% in the past five years, while cash flow and free cash flow rose even more quickly. MasterCard generated $11.89 per share in free cash flow last year, backstopping a balance sheet with net cash of about $32 per share. The Overall Quadrix® score of 95 reflects above-average ranks in all six categories.

The stock slumped in December after U.S. lawmakers proposed to cap transaction fees on debit cards at $0.07 to $0.12, versus the current average of $0.44. The Federal Reserve said it will miss its April 21 deadline for issuing the finalized regulations. Even if limits on debit-card fees go through unchanged, which seems unlikely, MasterCard's profit momentum should remain intact. U.S. debit-related fees represent less than 15% of revenue, and the ongoing shift toward electronic payments has a long way to go. For the March quarter, Wall Street sees per-share profits rising 18% on 11% sales growth. Shares trade at 18 times trailing earnings, a 24% discount to the five-year average. MasterCard is a Buy and a Long-Term Buy.

February-quarter results

Oracle's ($33; ORCL) shares rallied after the company reported February-quarter profits of $0.54 per share excluding special items, up 42% and $0.04 above the consensus. Revenue, boosted by the Sun Microsystems acquisition, jumped 37% to $8.76 billion. Sales from new-software licenses increased 29%, while services rose 23%. For the May quarter, Oracle sees per-share earnings of $0.69 to $0.73 excluding special items, a range that exceeded the consensus estimate at the time of the announcement. Oracle, which derives about 5% of sales from Japan, does not anticipate the earthquake having a “material impact” on May-quarter revenue. The company also raised its quarterly dividend 20% to $0.06 per share, payable May 4. Oracle is a Long-Term Buy.

Research In Motion ($57; RIMM) grew per-share profits 40% to $1.78 in the February quarter, exceeding the consensus by $0.02. Revenue increased 36% to $5.56 billion. But shares tumbled on RIM's weak May-quarter guidance that gave a profit midpoint of $1.51 per share, well short of Wall Street's forecast of $1.65. RIM blamed a shift toward less expensive products, possible supply-chain disruptions caused by the Japan disasters, and heavy spending to promote its PlayBook tablet due out on April 19. RIM said the Japan earthquake will not hinder the launch of the PlayBook, which will be capable of running applications made for Google's ($586; GOOG) Android. However, the earnings report did contain a touch of optimism; RIM issued guidance in excess of $7.50 per share for fiscal 2012 ending February, versus the consensus of $6.81. RIM remains a Buy and a Long-Term Buy, partly because it seems unduly cheap at eight times expected fiscal 2012 earnings.

Technology review

Apple's ($351; AAPL) iPad 2 received a similar greeting in Mexico, Canada, and 23 other countries as it had for its U.S. launch — long lines and even longer wait times for orders placed through the company's Website. Whether Apple can keep up with demand remains a concern, but the wait time for online U.S. orders has declined to 20 to 25 business days.

Analysts are left to grapple with quantifying the device's spectacular success. Based on one survey, March-quarter sales estimates range from 5 million units to more than 8 million. And the international release prompted one analyst to raise his iPad target for fiscal 2011 to 30 million units from 20 million. Apple is a Focus List Buy and a Long-Term Buy.

Accenture ($54; ACN) reported February-quarter earnings of $0.75 per share, up 25% and $0.03 above the consensus. Excluding reimbursements, revenue surged 17% on double-digit growth in all business segments. The results, along with Accenture's strong guidance for the next two quarters, should bode well for rivals IBM ($163; IBM) and Hewlett-Packard ($41; HPQ). Accenture is rated B (average). IBM is a Focus List Buy and a Long-Term Buy. H-P is a Buy and Long-Term Buy.

Texas Instruments ($35; TXN) said that two Japan facilities damaged by the March earthquake remain on track to resume full production. Its Miho fabrication plant, located about 40 miles northwest of Tokyo and responsible for producing about 10% of TI's 2010 revenue, will come back online in mid-April — several weeks earlier than TI had previously stated — and reach full production in mid-July. A second plant has restarted initial production and should reach full production by at least mid-April. Texas Instruments is a Focus List Buy and a Long-Term Buy.

Health-care update

Abbott Laboratories ($48; ABT) agreed to settle a lawsuit filed by CVS Caremark ($34; CVS) and other retail pharmacies that accused the drugmaker of unfairly raising the prices on a HIV drug. Terms were not disclosed. Abbott awaits a jury's decision on a separate lawsuit over the same issue brought by GlaxoSmithKline ($38; GSK). Abbott is a Long-Term Buy. CVS Caremark is rated B (average).

Walgreen ($40; WAG) agreed to purchase Drugstore.com ($3.85; DSCM) for $429 million, or $3.80 per share, a 112% premium to the price prior to the deal. Drugstore.com has yet to produce an annual profit. Walgreen is rated A (above average).

Financial roundup

NASDAQ OMX Group ($26; NDAQ) and potential partner IntercontinentalExchange ($126; ICE) are still trying to muster a competing bid for NYSE Euronext ($35; NYX). The two companies have yet to settle on a maximum price, though they seem to agree a successful bid would cost at least $10.5 billion, about 12% more than Deutsche Borse offered for the exchange. NASDAQ, which has reportedly secured $5 billion in financing, and ICE could be waiting for the pending deal to hit a snag with regulators. Concerns that NASDAQ will make an expensive takeover bid have caused shares to slip 13% from the February high. But the stock remains an attractive pick based on strong operating momentum, rising analyst estimates, and a modest valuation of less than 11 times expected 2011 earnings. NASDAQ is a Buy and a Long-Term Buy.

BlackRock's ($199; BLK) shares surged on news that the investment-management firm will be added to the S&P 500 Index on April 1. BlackRock is a Buy and a Long-Term Buy.

Rank Changes

MasterCard ($252; MA) is being added to the Buy List and Long-Term Buy List.

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