The portfolio's largest holding, Intel Corp. (Nasdaq: INTC), reported its first-quarter results after the close of trading yesterday, right on schedule and as it always does every three months. As was written in the brief overview of the results in this morning's Breakfast With the Fool, there were not a lot of surprises out of Mr. Chips. The company is having difficulty coming up with enough product to satisfy burgeoning demand, but we already knew that based on what PC marketers such as Gateway and Dell have been saying for several months now.
Apparently, there are plenty of observers who are never quite satisfied with Intel's quarterly performances, and this Q1 was no different. Some analysts complained that revenues were "soft" at only $8 billion, up 13% from a year ago. Others opined that Intel has more or less shot itself in the foot and will end up ceding market share in microprocessors by not anticipating the current strong demand environment. It's interesting to reflect on what the particular Q1 gripes have been in the past. For example, two years ago demand was in the dumps and first-quarter revenues declined 7% to $6 billion. Now, which scenario -- today's or that of 1998 -- would you prefer as an investor?
Today's bout of hand-wringing aside, Intel is expecting a strong second half, in line with the normal "first half blues, second half cruise" nature of the PC business. This is a cycle we have seen play out over and over again in the past. Elsewhere, the firm's Q1 gross margin of 63%, above the 61% target for this year, did not go unnoticed. We will be interested to see how this ratio changes in the coming quarters with the rollouts of new chips like Itanium and Willamette. In the interim, we probably won't have all that much to say (or worry about) with regard to Intel's business.
On to healthcare holding Johnson & Johnson (NYSE: JNJ), which turned in Q1 revenue growth of 8.6% yesterday. That rate was about half of the 15% year-on-year growth recorded in last year's Q1, when the company admittedly had easier comparisons due to a rather lackluster 1998. As usual, the pharmaceutical segment outgrew the firm's other two core business areas, with drug sales rising 18% worldwide. Consumer segment sales grew a rather anemic 1.4% year-on-year while sales in the professional segment rose 3.7%, way down from what in hindsight was an unsustainable 18.6% advance last year.
Despite the single-digit sales growth, the firm's selling, marketing, and administrative expenses (SG&A) as a percentage of revenues declined, helping net profit margins widen to 18% from 16.9% a year ago. When combined with a lower average sharecount, the improvement allowed EPS to jump 16% to $0.93, which topped analysts' estimates by $0.02.
The big issue causing J&J to have Tylenol-sized headaches of late has been the firm's decision to stop marketing the heartburn medication Propulsid, as Jeff discussed last month. But even with the loss of Propulsid's sales, the company believes it is in good shape to meet analysts' projections for 13% EPS growth for this year. And today, the company boosted its quarterly dividend 14.3% to $0.32 per share from $0.28 per share. As Martha would put it, "That's a good thing."
Meanwhile at Mellon Financial (NYSE: MEL), it's business as usual. Ongoing fee revenue and earnings per share both increased at double-digit rates in Q1 as compared to a year ago. As usual, the company's key profitability ratios improved from the previous quarter. Cash operating return on tangible assets ticked up to 2.50% from 2.38% in Q4, while cash operating return on annualized equity improved to 51.8% -- practically unheard of for a financial services company of Mellon's size.
The only downers that we could find were higher sequential credit quality expense (although it was still lower than a year ago) and a higher ratio of non-performing assets to total loans, which jumped to 0.74% from 0.53% in Q4. We'll take a closer look at that ratio if the negative trend continues into Q2. Finally, like J&J, Mellon also boosted its quarterly dividend with a 10% hike to 0.22 per share.
We'll end with a quick word about the individual valuations of our holdings, something we rarely do. For the most part, last month's Propulsid developments knocked J&J's shares down to levels not seen in a few years. In fact, even some of the well-known financial weeklies have started paying attention in recent weeks, prompting more than one glowing article about the company. We like the additional coverage of the company, but with or without Propulsid, our opinion on J&J is unchanged. We are glad when we can add to our position when the opportunity presents itself. Last month's round of money went to J&J -- it wouldn't surprise me in the slightest if Jeff made a similar decision this month.
As for Mellon, one of these days more folks are going to wise up and recognize the value that this company is consistently creating with its focus on high-growth, high-return businesses. When that happens, the firm's share price will head north after going basically nowhere over the past two years. But until then, we will continue to treat Mellon as "our little secret," and that's just fine with us. We will happily buy more of its shares at what we believe are reasonable levels.
There is some concern between Jeff and me about Intel's current market price, truth be told. While we remain strong supporters of the firm's business and its prospects, we've been surprised at how fast Intel's stock has doubled from its lows almost a year ago. In short, there is a higher risk today that the firm's share price is "borrowing from the future," so to speak, than at any other time in our holding period. For Drippers who are dollar cost averaging into Intel, this is no great shakes. But for a little while at least, expect us to sit on the low cost-basis Intel shares we already have in the portfolio in order to add to our J&J and Mellon positions. Then again, we might change our minds tomorrow.