Portfolio Review


March-quarter profit report

CSX ($76; CSX) earned $1.06 per share in the March quarter, up 36% and $0.02 above the consensus. Sales also eased past Wall Street’s target, growing 13% to $2.81 billion as volume advanced 7% and revenue per unit increased 5%. Fuel expense surged 42%. CSX is a Focus List Buy and Long-Term Buy.

IBM ($165; IBM) earned $2.41 per share excluding special items in the March quarter, up 21% and $0.11 above Wall Street’s target. Revenue increased 8% to $24.61 billion, also exceeding the consensus. IBM’s hardware business grew sales 19%, while services and software both gained 6%. IBM raised its full-year forecast for per-share profits to at least $13.15, implying 14% growth and topping the $13.08 consensus at the time of the announcement. IBM is a Focus List Buy and a Long-Term Buy.

Texas Instruments ($35; TXN) grew March-quarter earnings 10% to $0.57 per share, excluding a $0.02 impact from the Japan disaster, missing the consensus by a penny. Revenue rose 6% to $3.39 billion. For the June quarter, management targets per-share profits of $0.52 to $0.60, which includes a $0.05 impact from Japan, versus $0.62 earned last year and the consensus of $0.63. Texas Instruments is a Focus List Buy and a Long-Term Buy.

Apple’s ($338; AAPL) March-quarter profits surged 92% to $6.40 per share, exceeding the consensus estimate by $1.04. Revenue advanced 83% to $24.67 billion, well ahead of Wall Street expectations. Apple sold 4.7 million iPads in the quarter. Unit sales of Macintosh computers grew 28% to 3.8 million, while iPhone sales leapt 113% to 18.7 million. Apple, with a history of conservative guidance, issued June-quarter sales and profit targets below analyst projections. Apple is a Focus List Buy and a Long-Term Buy.

Lam Research ($50; LRCX) earned $1.45 per share in the March quarter, up 54% and $0.09 better than the consensus. Revenue rose 28% to $809 million, supported by double-digit growth across all geographic regions. Cash provided by operations surged 121% to $242 million. Lam Research is a Focus List Buy.

Intel ($20; INTC) said per-share profits jumped 37% to $0.59 excluding special items in the March quarter, well ahead of the consensus estimate of $0.46. Revenue surged 25%. For the June quarter, Intel expects revenue of $12.3 billion to $13.3 billion, representing growth of 14% to 24%, versus the consensus growth estimate of 10%. Intel is a Buy and a Long-Term Buy.

St. Jude Medical ($51; STJ) grew March-quarter profits 7% to $0.80 per share excluding special items, topping the consensus by $0.02. The medical-device maker grew sales 9% to $1.38 billion. St. Jude now expects per-share profits of $3.28 to $3.33 this year, versus the $3.28 consensus. St. Jude is a Long-Term Buy.

For the March quarter, Abbott Laboratories ($51; ABT) earned $0.91 per share excluding special items, up 12% and a penny above the consensus. Revenue advanced 17% to $9.04 billion, as sales from emerging markets jumped 38%. Sales for arthritis treatment Humira rose 18%. Abbott Labs is a Long-Term Buy.

Stryker’s ($61; SYK) March-quarter earnings rose 13% to $0.90 per share, excluding acquisition and integration charges, exceeding the consensus by a penny. Revenue advanced 12%. Stryker dipped on the report but remains a Long-Term Buy.

Financial review

NASDAQ OMX Group ($27; NDAQ) and Intercontinental Exchange ($119; ICE) offered more details regarding their $11.1 billion bid for NYSE Euronext ($39; NYX). In addressing criticism that their offer was highly conditional, the two companies said they have lined up $3.8 billion of committed funding and pledged to pay a $350 million breakup fee should regulators reject the deal. NASDAQ and ICE have begun discussions with antitrust regulators. In other news, NASDAQ earned $0.61 per share excluding special items in the March quarter, up 42%, matching the consensus. Net exchange revenue grew 15% to $415 million, boosted by 31% higher derivatives trading. NASDAQ is a Buy and a Long-Term Buy.

U.S. regulators ordered some of the largest U.S. banks, including Bank of America ($12; BAC), Citigroup ($5; C), J.P. Morgan Chase ($45; JPM), and Wells Fargo ($30; WFC), to revamp their mortgage-servicing processes. These banks must also reimburse homeowners for losses caused by improperly handling foreclosures and loans, though the size of the penalties has not yet been determined. J.P. Morgan took a $1.1 billion charge against earnings related to the order. In other news, Bank of America said March-quarter per-share profits slumped 39% to $0.17, missing the consensus by $0.10. Citigroup earned $0.10 in the March quarter, a penny above the consensus. Net income fell 31%. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy. Wells Fargo is rated A (above average). Bank of America and Citigroup are rated C (below average).

Ameriprise Financial ($61; AMP) plans to record roughly $110 million in legal expenses during the March or June quarters as it settles a lawsuit against subsidiary Securities America. Ameriprise reserved an additional $40 million to help cover the lawsuit in the December quarter. Ameriprise will face additional damages from investors who chose not to settle, less than 10% of the number who filed arbitration claims. Ameriprise is a Buy and a Long-Term Buy.

Ireland’s government debt was downgraded by Moody’s Investor Service to one notch above junk status. Aflac ($52; AFL) doesn’t hold any Ireland sovereign bonds but does own $659 million in bonds issued by Irish banks. The insurer’s investment exposure to sovereign debt and financial institutions in Portugal, Ireland, Italy, Greece, and Spain (the PIIGS countries) is $3.59 billion, representing 4.1% of Aflac’s portfolio. Aflac’s balance sheet — net cash equals $1.68 billion, or $3.54 per share — should be able to absorb any losses. Aflac is a Focus List Buy and a Long-Term Buy.

A Senate inquiry accused Goldman Sachs ($152; GS) of deceiving investors who bought mortgage-linked derivatives. In addition, Sen. Carl Levin asked the U.S. Justice Department to investigate whether CEO Lloyd Blankfein committed perjury during a Senate hearing last April. Goldman is rated C (below average).

DPL selling itself

AES ($13; AES) agreed to purchase DPL ($30; DPL) for $30 per share, a 9% premium to the stock’s price prior to the announcement. AES will pay $4.7 billion including the assumption of debt, and the deal should close in six to nine months. DPL is a component of our Top 15 Utilities portfolio, and it will remain there until we will provide a replacement in next week’s issue.

Corporate roundup

Starting May 1, the United Arab Emirates plans to ban individuals and small businesses from sending e-mails through the most secure channels offered by Research In Motion’s ($53; RIMM) BlackBerry. Only companies with at least 20 BlackBerry Enterprise Services accounts will be allowed to use the highly encrypted messages. RIM stressed that policy extends across the wireless industry and is not specific to BlackBerry devices. Research In Motion is a Buy and a Long-Term Buy.

Johnson & Johnson ($63; JNJ) is in talks to acquire medical-device maker Synthes for roughly $20 billion, which would be J&J’s biggest deal ever. J&J is rated B (average).

Newmont Mining ($59; NEM) said it will pay a quarterly dividend of $0.20, up 33% from the March dividend, on June 29. The payout reflects an average realized gold sales price of $1,382 an ounce during the March quarter. Newmont, which plans to adjust its dividend based on gold prices, is a Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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