Portfolio Review


Wal-Mart posts solid July quarter

Wal-Mart Stores ($52; WMT) earned $1.09 per share from continuing operations in the July quarter, up 12%, and a penny above the consensus. Revenue grew 5% to $108.6 billion. Walmart U.S. same-store sales dipped 0.9%, the ninth decline in as many quarters. Management says it remains committed to reversing that trend by the close of its fiscal year, ending in January. International sales rose 7.1% excluding currency translation.

Wal-Mart is exploring a couple of options to offset the persistent weakness in its U.S. operations. Seeking to integrate its retail stores with the budding e-commerce industry, Wal-Mart announced plans to reorganize its online business. Wal-Mart is also reportedly considering a takeover bid for Carrefour's Brazilian operations. The deal, potentially worth upwards of $8 billion, would form Brazil's biggest retailer with a market share of about 27% and annual revenue of $31.5 billion. Carrefour's CEO said the unit is not for sale but added that he would consider a strategic partnership.

A quick turnaround at the core U.S. stores seems unlikely. But Wal-Mart shares seem cheap at less than 12 times expected current-year earnings, versus averages of 16 times for general-merchandise chains and 13 for food and staples retailers. The stock, yielding 2.9%, seems capable of reaching $63 to $68 over the next 24 months. Wal-Mart is a Long-Term Buy.

July-quarter earnings

Advance Auto Parts ($56; AAP) shares rallied after the company said July-quarter earnings per share grew 26% to $1.46, exceeding the consensus by $0.08. Same-store sales increased 2.5%, while total revenue climbed 4% to $1.48 billion, slightly below expectations. The company also approved a new $300 million share-repurchase program, representing 7% of the share count at current prices. Advance Auto, modestly valued at 12 times expected 2011 earnings, is a Long-Term Buy.

In the July quarter, Dell ($16; DELL) earned $0.54 per share excluding special items, up 69% and a nickel above the consensus. Revenue crept 1% higher to $15.66 billion, falling short of the consensus. But shares slumped after the computer maker cut its revenue guidance for fiscal 2011 ending January. Dell's disappointing guidance could bode poorly for rival Hewlett-Packard ($33; HPQ), set to report results on August 18, after our deadline. H-P, trading at less than seven times expected current-year earnings, remains a Buy and a Long-Term Buy for now. Dell is rated A (above average).

Google goes mobile

Google ($539; GOOG) offered to purchase Motorola Mobility Holdings ($38; MMI) for $40 per share, a 63% premium to the price prior to the announcement. The pending $12.5 billion deal — Google's biggest to date — includes a $2.5 billion breakup fee. Google is attracted to Motorola Mobility's war chest of wireless patents — and could sell off the hardware business that manufactures smartphones, computer tablets, and set-top TV boxes. But assuming Google clears the regulatory hurdles and keeps the hardware unit, reverberations from the acquisition could be felt by many of our recommended stocks.

Until now, Google's mobile strategy has centered on collecting advertising revenue from its Android operating system, used by nearly 40 smartphone makers for free. But the Motorola Mobility takeover puts Google in a potentially awkward position, with device makers becoming both customer and competitor. For that reason, the deal could improve Microsoft's ($25; MSFT) standing with device makers as the company scrambles to increase the presence of its own licensed Windows Phone software. The success of the Google takeover could also dictate whether Microsoft will eventually bid for mobile partner Nokia ($6; NOK) or reeling Research In Motion ($27; RIMM). At least one analyst has suggested that Microsoft might make a counteroffer for Motorola Mobility.

In acquiring Motorola Mobility, Google will be able to combine its mobile software with the hardware, moving into direct competition with Apple's ($380; AAPL) iPhone and iPad. That integrated business model has produced enviable results for Apple, which holds an estimated 67% share of the tablet market. But emulating Apple's success has proved difficult. Skeptics note that Hewlett-Packard's ($33; HPQ) and RIM's integrated products, conceived from acquisitions (Palm and QNX Software, respectively), have struggled to gain traction. H-P slashed the price on its TouchPad tablet by 20% barely one month after its launch. And Sprint Nextel ($4; S) dropped plans to offer RIM's PlayBook on its fourth-generation network due to weak sales.

Google would step further into the Pay-TV market with Motorola Mobility's set-top box business, which counts Comcast ($21; CMCSa) as one of its largest customers. The deal could lift the fledgling Google TV, a service that lets viewers access the Internet from their televisions. Google TV and the other "over-the-top" online streaming services have aspired to upend the Pay-TV model and lure subscribers from Pay-TV companies such as Comcast, DirecTV ($44; DTV), and Dish Network ($23; DISH).

Perhaps most important of all, Google would obtain a trove of 17,000 wireless patents after missing out on the $4.5 billion Nortel patent auction. Google and others find themselves in an arms race to build up patent portfolios to defend against a recent burst of litigation.

Microsoft alleged that Motorola Mobility violated patents in a lawsuit filed last October. Samsung and Apple have traded patent lawsuits in multiple countries. Apple even got Samsung's Android-based Galaxy tablet temporarily banned in most of the European Union. Part of the ban has since been lifted, and a court hearing is scheduled for August 25. Meanwhile, HTC seeks to halt virtually all of Apple's products from being imported into the U.S. That comes in response to a lawsuit Apple filed in March 2010 claiming HTC, a smartphone maker that also uses Android software, infringed on 20 patents.

For Google, combining the Motorola Mobility patents with its nearly $35 billion in cash would help protect its Android operating system, which controls a leading 43% share of the global market for smartphone operating systems. Apple and DirecTV are Focus List Buys and Long-Term Buys. H-P is a Buy and Long-Term Buy. DISH is a Buy. Both Comcast and Microsoft are Long-Term Buys. Google and RIMM are rated B (average). Sprint Nextel is rated C (below average).

Corporate roundup

Intel ($21; INTC) said that manufacturers Lenovo and Asustek will launch their lightweight Ultrabooks computers in the second half of 2011. By the end of next year, Intel sees the Ultrabooks accounting for 40% of notebook computers sold to consumers. The company also plans to create a $300 million fund to encourage the development of hardware software for Ultrabooks, which run on Intel's high-performance processors. Intel is a Buy and a Long-Term Buy.

Newmont Mining ($59; NEM) said it is discussing the sale of some of its assets in Australia. Newmont's Indonesian unit is preparing to begin exploratory work for gold and copper in a new block of forest land awarded to the company in 1986 by Indonesia's government. Newmont is a Buy and a Long-Term Buy.

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