Portfolio Review


Focus List review: 1 up, 1 down, 2 holds

CF Industries ($177; CF) is being added to the Focus List. The fertilizer maker earns the maximum Quadrix Overall rank of 100, with all six category scores above 70. The stock has pulled back 8% from its August high, even as Wall Street profit estimates keep marching higher. The September-quarter consensus (up 32% in the past 60 days) now calls for per-share earnings of $4.52, equating to 311% growth. For the December quarter, the consensus projects profits will jump 111% to $5.58 per share, with that estimate up 31% over the last 60 days.

CF Industries' 2012 growth prospects could get an additional boost, considering that on Sept. 12 the U.S. Department of Agriculture lowered its forecast on 2011 corn production for the second time in as many months as the crop withered under the hottest summer since 1936. The smaller crop could encourage farmers to increase the amount of acreage for corn next year, boosting fertilizer demand. CF Industries is also a Long-Term Buy.

We are removing Dover ($51; DOV) from the Focus List. Dover's broad mix of products tilts toward industrial goods, and results are vulnerable to an economic slowdown. The stock's Overall score has dipped below 80 in the last month, hurt by weaker operating momentum and downward earnings-estimate revisions. Wall Street's 2011 per-share-profit target of $4.57 falls in line with management's range of $4.50 to $4.60, raised in July. But Dover, having topped the consensus by 6% or more in four straight quarters, could find it tough to deliver big positive surprises in coming quarters. The 2012 profit estimate of $5.12 per share, implying 12% growth, appears achievable but could be at risk if economic growth slows.

Yet the shares remain attractively valued at less than 13 times trailing earnings, 16% below their five-year average and 8% below the median for industrial-machinery stocks in the S&P 1500 Index. Given that valuation and the recent rebound in technology stocks, Dover seems capable of a near-term bounce to $57 or $58. Dover remains a Buy and a Long-Term Buy, although a breakdown below recent lows could jeopardize its position on the Buy List.

CSX ($20; CSX) CFO Oscar Munoz says most of the railroad's markets are either matching or exceeding growth achieved in the June quarter and that U.S. industrial companies are generally maintaining a positive outlook. Nevertheless, less-favorable conditions in the U.S. and global economies prompted CSX to lower its 2011 forecast for coal exports. The company now expects 40 million to 42 million tons, versus its earlier range of 42 million to 45 million tons.  Management also anticipates up to a $15 million earnings impact from Hurricane Irene. Accordingly, Wall Street analysts have slightly lowered their profit estimates.

However, the railroad still enjoys favorable fundamentals, with operating profit margins steadily expanding and operating cash flow climbing 36% in the 12 months ended June. At 13 times trailing earnings, CSX trades 20% below its five-year average and 11% below the median for railroad stocks in the S&P 1500 Index. And the company seems likely to continue delivering solid growth, with profits expected to rise 26% in the second half of 2011. CSX remains a Focus List Buy and a Long-Term Buy.

Walter Energy ($84; WLT) named Walter Scheller as its CEO, replacing Keith Calder, who resigned in July. Scheller joined the miner in June 2010 and previously served as chief operating officer of subsidiary Jim Walter Resources. Calder announced his resignation just three months after taking the reins, and Scheller's tenure could end up even shorter.

According to a published report, Anglo American ($19; AAUKY) is reportedly considering a $120-per-share bid for Walter. Anglo American has since tried to blunt the speculation — without actually saying it was not interested in Walter. Four of the 10 largest mining acquisitions this year involved metallurgical coal assets, reported The Wall Street Journal, with interest driven by strong demand and pricing.

For example, Australian miner Macarthur Coal accepted a $5.2 billion takeover bid last month. Anglo American had considered a counteroffer for MacArthur but ultimately found the price too rich and bowed out of the bidding. Walter trades at seven times estimated 2012 earnings, and $120 per share would equate to less than 10 times earnings, while the Macarthur deal values the company at more than 15 times estimated 2012 earnings. Walter is a Focus List Buy.

Corporate roundup

Microsoft ($26; MSFT) unveiled Windows 8, boasting that the company's flagship operating system underwent its most radical overhaul in 16 years. Microsoft hopes Windows 8 will gain traction with  mobile devices, though the system as yet has no official release date. The company has said that it tries to release a new operating system every three years, which suggests the company may have an internal target of fall 2012. Microsoft is desperate to breathe new life into Windows, which posted a 1% sales decline in the June quarter.  Microsoft is a Long-Term Buy.

With its iPhone and iPad pushing into new geographic markets, Apple ($385; AAPL) has also expanded its presence in courts around the globe. Citing patent violations, Apple has asked a Japanese court to block the sale of smartphones and tablets made by Samsung. In Germany, a court upheld a ban on some Samsung tablets, while Samsung agreed to delay its tablet launch in Australia until a court ruling later this month. Apple is a Focus List Buy and a Long-Term Buy.

Bank of America ($7; BAC) plans to carve $5 billion out of its annual expenses by 2014 as it combines data centers and eliminates 30,000 jobs. Many industry watchers expected deeper cuts. Bank of America is rated C (below average).

Technology researcher Gartner slashed its 2011 growth outlook for personal computers to 4% from 9% due to weakness in the U.S. and Western Europe, unwelcome news for Hewlett-Packard ($23; HPQ), which hopes to spin off its PC business. H-P is a Buy and Long-Term Buy.

New-drug review

A U.S. Food and Drug Administration advisory panel recommended the approval of Xarelto, an anti-clotting pill developed by Johnson & Johnson ($64; JNJ) and Bayer. However, concerns about effectiveness could drive the FDA to demand more trials before approval. In other news, J&J failed to secure U.S. approval for the expanded use of arthritis drug Simponi. Johnson & Johnson is rated B (average).

A trial of Pfizer's ($18; PFE) experimental pill for rheumatoid arthritis showed that the treatment was as effective as Abbott Laboratories' ($51; ABT) injectable Humira. However, while Pfizer's drug was no more likely to have side effects than Humira, the experimental drug's adverse events tended to be more serious. Abbott Laboratories is a Long-Term Buy. Pfizer is rated B (average).

Rank Changes

CF Industries ($177; CF) is being added to the Focus List. Dover ($51; DOV) is being removed from the Focus List.

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