Portfolio Review


Altera off Long-Term Buy List, Alliance on

Shares of Alliance Data Systems ($99; ADS) bolted to a 52-week high on a solid September-quarter report. The marketing-services company said core per-share earnings rose 39% to $2.16, $0.26 above the consensus. Revenue jumped 20% to $845 million, buoyed by improved credit quality and healthy credit-card sales.

Alliance now sees full-year earnings per share of $7.40, implying 26% growth and above the consensus of $7.31 at the time of the announcement. However, the company expects December-quarter earnings per share of $1.46, versus the consensus of $1.64, because a higher stock price means more warrants and convertible bonds are included in the share count. For 2012, management targets per-share profits of $8.30, in line with Wall Street expectations.

Despite management's somewhat mixed near-term outlook, we see reasons to be optimistic. Consumer spending through Alliance's private-label and loyalty operations remains solid. In addition, the company is expanding its international footprint, particularly in high-growth countries such as Brazil and India. Finally, the company had $240 million in cash at the end of September, which could translate into share repurchases or acquisitions. Alliance, already a Focus List Buy, is being added to the Long-Term Buy List.

Altera ($38; ALTR) fell short of Wall Street expectations for the September quarter and issued sharply lower revenue guidance for the December quarter, putting additional pressure on earnings estimates already trending downward. Yet the shares jumped 12% on the news, possibly because investors expected even gloomier tidings. The semiconductor maker earned $0.57 per share in the quarter, down 17%. Altera blamed the poor results on weakness in a number of its end markets.

Despite sluggish overall demand, Altera reported growth for some of its newer products and discussed pending launches of several 28-nanometer semiconductors designed to use very little power. A steady stream of new products appears to be driving market-share gains. Yet Altera's sales and profit growth have slowed in each of the last four quarters.

The stock trades at a discount to its three-year average as measured by price/earnings, price/operating cash flow, and price/book ratios. However, the company commands a premium to its peer group in all three metrics — not a new development, but more difficult to justify now that growth has slowed. Altera earned a Quadrix Earnings Estimates rank of 13 before the sales warning. Altera is being dropped from the Long-Term Buy List and is now rated B (average).

Quarterly results

AGCO ($41; AGCO) earned $0.87 per share in the September quarter, rising 34% excluding unusual expenses, topping the consensus by $0.12. Sales surged 27%, also exceeding Wall Street's target. AGCO raised its 2011 guidance and now projects per-share earnings of $4.30, up 85% and 5% above the consensus at the time. AGCO is a Buy.

Aflac ($42; AFL) grew per-share operating profits 14% to $1.66 in the September quarter, above the consensus of $1.60. Results excluded investment losses of $83 million, or $0.07 per share. Sales rose 11% to $5.99 billion. The company said December-quarter profits will likely fall short of the consensus, though full-year guidance is roughly in line with expectations. Aflac also raised its quarterly dividend 10% to $0.33 per share, payable Dec. 1. Aflac is a Buy and a Long-Term Buy.

BMC Software ($39; BMC) earned $0.87 per share excluding special items in the September quarter, up 6% and $0.06 above the consensus. Sales climbed 11% to $557 million, also exceeding analyst forecasts, though bookings fell 16%. BMC projects per-share profits of $3.21 to $3.31 in fiscal 2012 ending March, versus the $3.29 consensus. BMC is a Buy and a Long-Term Buy.

Dover ($55; DOV) said September-quarter profits from continuing operations excluding tax benefits rose 25% to $1.20 per share, exceeding the consensus by $0.08. Revenue jumped 22% to $2.20 billion on growth across all four business segments. The company lowered its 2011 projection for per-share earnings and now expects $4.45 to $4.50 after accounting for assets sold last month for $290 million. Dover is a Long-Term Buy.

Rogers Communications ($35; RCI) said September-quarter earnings per share rose 7% to $0.89 excluding special items, $0.07 ahead of the consensus. Operating revenue crept 1% higher to $3.15 billion. Rogers reported 161,000 total net wireless subscriber additions, down 24% from the same quarter last year. Average revenue per user slipped 4% to $62 as cheaper prepaid subscriptions became a larger portion of Rogers' customer base. Rogers is a Long-Term Buy.

September-quarter results from a pair of industrial titans provided more evidence of an expanding economy. Caterpillar's ($90; CAT) earnings per share jumped 40% to $1.71, exceeding the consensus by $0.17. Revenue advanced 41%, and management sees 20% growth in 2012, well above Wall Street's 13% target. Meanwhile, General Electric ($16; GE) reported per-share profits of $0.31 excluding the effects of preferred stock redemption, up 11% and in line with Wall Street's forecast. For 2012, GE anticipates "solid" organic growth and wider profit margins. Caterpillar and GE are rated B (average).

Corporate roundup             

Oracle ($32; ORCL) agreed to pay about $1.43 billion for RightNow Technologies ($43; RNOW), a company that makes Web-based customer-service software. According to The Boston Globe, Oracle earlier this month agreed to pay up to $1.1 billion for Endeca Technologies, a software maker that helps online retailers with customer service. Oracle is a Focus List Buy and a Long-Term Buy.

IBM ($180; IBM) said Virginia Rometty will become CEO and president at the start of 2012. Rometty, currently a senior vice president at IBM, succeeds Samuel Palmisano, who will remain the chairman. Rometty leads the sales, marketing, and strategy division but also has experience directing operations. Separately, IBM approved another $7 billion in share repurchases, increasing the size of its program to $12.2 billion, or nearly 6% of outstanding shares. IBM is a Buy and a Long-Term Buy.

A South African union has asked an appeals court to reconsider the $2.4 billion deal that gave Wal-Mart Stores ($57; WMT) a 51% stake in African retailer Massmart. In other news, Wal-Mart reopened 13 Chinese stores after overhauling procedures that led to ordinary pork being mislabeled as organic. Wal-Mart is a Long-Term Buy.

Abbott Labs review

The split of Abbott Laboratories ($53; ABT) into two companies should occur by the end of 2012, and management insists both entities will maintain investment-grade balance sheets. The medical-devices company (about $22 billion in annual sales) will encompass Abbott's diagnostic, nutrition, and generic-drug businesses. It will retain Abbott's name and its CEO, who sees long-term sales growth in the high single-digits and per-share-profit growth in the double-digits. Emerging markets could account for half of the company's sales by 2015.

Humira, Abbott's blockbuster rheumatoid-arthritis drug, figures to generate more than 40% of revenue for the new pharmaceutical company. That dependence on a single drug raises questions about the business's long-term growth potential, though Abbott sees opportunities for Humira to treat a wider range of diseases. Moreover, Abbott said an experimental hepatitis C combination treatment could deliver $2 billion in annual revenue by 2015. Based on a pair of small studies, the Abbott cocktail shows a potential cure rate above 90% in just 12 weeks, versus the 24-week cycle required by treatments currently on the market.

In other news, Abbott reportedly agreed to pay at least $1.3 billion to end an investigation into the way it marketed epilepsy drug Depakote. Abbott Labs is a Long-Term Buy.

Rank Changes

Alliance Data Systems ($99; ADS) is being added to the Long-Term Buy List. Altera ($38; ALTR) is being dropped from the Long-Term Buy List.

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