Portfolio Review


Stick with Apple, IBM, J.P. Morgan

After years of coming up woefully short, Wall Street analysts finally overshot Apple's ($399; AAPL) growth trajectory. Apple delivered earnings of $7.05 per share in the September quarter, up 52% but missing the consensus by $0.19. Sales advanced 39% to $28.27 billion, also disappointing Wall Street. Apple had not missed a consensus profit estimate since 2004.

The shortfall stemmed from disappointing iPhone sales, as consumers postponed purchases ahead of the iPhone 4S launch. But Apple, known for conservative guidance, sees both per-share earnings and revenue exceeding the current consensus in the December quarter. The company said it sold more than four million iPhone 4S units in the product's launch weekend, about three weeks after the end of the September quarter. Samsung has already filed to block Apple from selling the new device in Australia, France, Italy, and Japan. So far, Apple has gotten the better of its rival, with an Australian court imposing a temporary ban on Samsung's computer tablet. Apple remains a Focus List Buy and a Long-Term Buy.

IBM ($179; IBM) said September-quarter earnings per share were $3.28, up 15% and $0.06 above the consensus. Revenue increased 8% to $26.16 billion, slightly below expectations. The tech bellwether reported a disappointing number of signed service contracts, an indication of potential sales, and the order backlog declined nearly 5% from the June quarter. Shares dipped on the news as investors worried about the prospects for technology spending, particularly by governments.

As it did after the last two quarters, IBM raised its profit target for 2011. Per-share earnings should approach $13.35, up about $0.10 from July guidance.

Last year, IBM earned $11.52 per share. The shares had rallied to a 52-week high prior to the earnings report, and expectations were running high after Google ($591; GOOG) delivered an impressive quarter. Despite the mixed quarter and concerns that hardware revenue growth is slowing, IBM remains a Buy and a Long-Term Buy, given its growth in emerging markets and strong software franchise.

J.P. Morgan Chase ($33; JPM) boasts the strongest balance sheet of any major bank, and it continues to take a conservative approach, with minimal draw-down of reserves for loan losses in the September quarter. In the quarter, the financial giant earned $1.02 per share, up 1% and $0.09 above the consensus. However excluding a paper gain of $1.9 billion related to changes in the value of the company's debt, J.P. Morgan earned about $0.73 per share. Revenue was roughly flat but fell 8% excluding the debt-valuation gain.

The news wasn't all bad, with delinquency trends improving and commercial loans and deposits rising. However, operating expenses rose 8%, and mounting regulatory burdens suggest costs will continue to rise. J.P. Morgan is cheap relative to its history as measured by a variety of valuation metrics. The shares look somewhat less attractive compared to J.P. Morgan's largest rivals, but the company's financial strength warrants a premium to its peers.

The stock's Quadrix Overall score has fallen to 66, dragged down in part by an Earnings Estimates score of 2, reflecting declines in analyst profit targets. J.P. Morgan said raising its dividend is a top priority in the year ahead. The stock, yielding 3.0%, has few near-term growth catalysts. But investors with a three- to four-year time horizon should benefit from owning this Long-Term Buy.

September-quarter earnings

In the September quarter, Intel ($23; INTC) grew per-share earnings 33% to $0.69 excluding special items, topping the consensus by $0.07. Sales surged 28% to $14.23 billion, easily outpacing expectations, as notebook computers delivered double-digit unit growth. Looking ahead to the December quarter, Intel gave revenue guidance of $14.7 billion, implying 28% growth and topping Wall Street's outlook of $14.3 billion. Intel added $10 billion to its share-repurchase program, increasing the authorization to $14.2 billion, enough to buy back about 11% of shares outstanding. Intel is a Focus List Buy and a Long-Term Buy.

CSX ($21; CSX) earned $0.43 per share in the September quarter, up 19% but a penny below the consensus. Revenue climbed 11% to $2.96 billion, in line with Wall Street expectations. Volume crept 1% higher, as rising demand for phosphates, fertilizers, and metals helped offset weakness in agricultural products and coal. CSX is a Focus List Buy and Long-Term Buy.

UnitedHealth Group ($45; UNH) said earnings per share rose 3% to $1.17 in the September quarter, topping Wall Street's forecast by $0.05. Revenue advanced 7% to $25.28 billion on growth across all four segments. Management raised revenue and profit guidance for 2011, yet cautioned that medical costs will likely rise in the December quarter and 2012 as the number of physician visits ticks higher. Total enrollment reached 34.4 million members at the end of September, up nearly 8% from a year earlier. UnitedHealth Group is a Buy and a Long-Term Buy.

In the September quarter, Abbott Laboratories ($52; ABT) reported per-share profits of $1.18 excluding special items, up 12% and a penny better than the consensus on 13% sales growth. The company booked a $1.5 billion charge for a pending federal investigation into the way it marketed an antiseizure drug. Abbott also said it will split into two publicly traded companies. The medical-products company will keep Abbott's name and include the devices, diagnostics, nutritional, and generic pharmaceutical units, amounting to $22 billion in annual revenue. Pharmaceuticals and biologics, with about $18 billion in annual sales, will comprise the second business. Abbott Labs is a Long-Term Buy.

St. Jude Medical ($37; STJ) shares rallied after the company said it grew earnings per share 8% in the September quarter to $0.78 excluding special items, topping the consensus by $0.02. Sales advanced 12% to $1.38 billion, driven by growth across all segments. St. Jude Medical is a Long-Term Buy.

Hospira ($30; HSP), a maker of injectable generic drugs, slashed its 2011 outlook and warned of disappointing September-quarter results. The company has struggled to resolve quality-control problems at a plant in North Carolina. Excluding special items, Hospira expects per-share earnings of $0.66 for the quarter, down 11% and $0.29 below the consensus. Sales should rise 3% to $977 million, versus the consensus of $1.07 billion. Hospira is rated C (below average).

Johnson & Johnson ($64; JNJ) earned $1.24 per share in the September quarter, up 1% and $0.03 above the consensus, as revenue climbed 7% to $16.01 billion. J&J is rated B (average). 

Coca-Cola ($67; KO) grew September-quarter profits 12% to $1.03 per share excluding special items, topping the consensus by a penny. Operating revenue surged 45% to $12.25 billion, boosted by the acquisition of its North American bottling operations. Coca-Cola is rated B (average).

Corporate roundup

Newmont Mining ($66; NEM) suspended production at a gold mine in Peru after protestors set fire to excavation equipment and blocked a road. Newmont and partner Buenaventura are being pressured to give $72 million to local communities as the companies proceed with a $4.8 billion project to expand a nearby mine. Newmont is a Buy and a Long-Term Buy.

Global shipments of personal computers rose 3% in the September quarter, said Gartner, falling short of the industry tracker's 5% forecast. Hewlett-Packard's ($26; HPQ) PC shipments grew 5%, extending its market-leading global to 18%. H-P is a Long-Term Buy.

Hulu's owners canceled their auction for the online-video service, following disappointing bidding action and confusion over digital rights to the streamed shows. DISH Network ($26; DISH) had reportedly submitted the highest offer of about $1.9 billion. DISH is a Buy and a Long-Term Buy.

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No changes were made this week in Dow Theory Forecasts.

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