Portfolio Review

8/5/2013


June-quarter earnings review

Health care

Celgene ($145; CELG) earned $1.52 per share in the June quarter excluding special items, up 25% and $0.08 above the consensus. Total revenue jumped 17% to $1.60 billion. Sales of Revlimid, Celegene's blockbuster treatment for blood cancer, grew 13% to $1.05 billion. Management hiked its 2013 guidance for per-share earnings by $0.25 to a range of $5.80 to $5.90, implying growth of 18% to 20%. Celgene is a Buy and a Long-Term Buy.


In the June quarter, Express Scripts ($65; ESRX) grew earnings per share 26% to $1.11 excluding special items, easing past the consensus by a penny. Revenue slipped 4% to $26.43 billion but topped the consensus. For September-quarter earnings per share, the company provided a guidance range with a midpoint of $1.07, implying 5% growth; the consensus stood at $1.08 at the time of the announcement. Express Scripts also announced CFO Jeff Hall has resigned after holding his post for about five years. He will remain with the company through August as Express Scripts searches for his replacement. Express Scripts is a Focus List Buy and a Long-Term Buy.

Additional earnings reports

Alliance Data Systems ($194; ADS) grew earnings per share 13% to $2.41 in the June quarter, topping the consensus by $0.12. Sales surged 19% $1.03 billion, in line with analysts' expectations. The private-label business delivered 19% sales growth, while Epsilon, which manages marketing and loyalty programs, jumped 41%.  For the current quarter, management guided per-share profits $0.12 below the consensus of $2.72 at the time of the announcement, though that target still projects double-digit growth. The company targets at least 12% profit growth for the year. The share count rose 7% from the year-earlier quarter. Alliance says it has reached the high point of share issuance, with 10.6 million phantom shares on the books, accounting for 16% of the share base. These phantom shares stem from convertible debt, and they should slough off over the next year as the debt matures without Alliance having to economically settle them. Alliance Data is a Focus List Buy and a Long-Term Buy.


Aflac ($61; AFL) reported operating earnings of $1.62 per share for the June quarter, up 1% and $0.11 above the consensus. Stripping out currency effects, Aflac's operating earnings per share rose 14%. Sales increased 2% to $6.04 billion, also above analysts' expectations. The strength of Aflac's Japan business was partly muted by the yen's depreciation against the U.S. dollar. U.S. growth remains sluggish due to the soft hiring environment, especially at smaller employers, which account for about 90% of Aflac's U.S. business. Aflac anticipates September-quarter earnings per share of $1.41 to $1.51, versus the consensus of $1.53 at the time of the announcement. Aflac is a Buy and a Long-Term Buy.


Comcast ($45; CMCSa) grew per-share earnings 30% to $0.65 in the June quarter, exceeding the consensus estimate by $0.02. Sales, up 7% to $16.27 billion, also topped the consensus. Comcast's cable business posted 6% higher revenue on growth from all major products, including a 26% surge in business services. Comcast shed 159,000 net video subscribers, fewer than the 176,000 lost in the year-ago quarter, while the subscriber base for internet and voice continues to expand. At NBCUniversal, sales rose 9%. Shares rallied on the results. Comcast is a Long-Term Buy.


Helmerich & Payne ($63; HP) earned $1.44 per share in the June quarter excluding one-time tax benefits, up 5%, to top the consensus by $0.10. Revenue crept 2% higher to $840 million, as weakness in the U.S. land-drilling market was offset by double-digit revenue gains for offshore and international rigs. In the U.S., utilization of land rigs fell to 83% from 89% a year ago but rose from 82% in the March quarter. Average rig margin per day rose 4.4% year-over-year and 1.6% sequentially.  H&P is a Focus List Buy and a Long-Term Buy.


Hertz Global's ($25; HTZ) June-quarter earnings per share rose 29% to $0.45 excluding special items, in line with the consensus estimate. Sales climbed 22% to $2.71 billion, while the average number of company-operated cars surged 27%. Results benefited from Hertz's $2.6 billion acquisition of Dollar Thrifty, completed in November. Hertz is a Buy and a Long-Term Buy.

Corporate roundup

CF Industries ($197; CF) shares surged after Third Point, an activist hedge fund, disclosed it had taken a stake in the fertilizer company. Third Point, headed by Daniel Loeb, said CF shares appear undervalued and that strong cash flow could support a higher dividend. CF yields just 0.8%, lagging peers such as Agrium ($87; AGU) at 2.3% and Potash Corp. of Saskatchewan ($32; POT) at 4.4%. The hedge fund recently help shake up Yahoo ($28; YHOO), which has returned 75% in the past year. CF Industries is a Buy and a Long-Term Buy.


J.P. Morgan Chase ($55; JPM) has placed on the auction block its physical-commodities business as regulators step up efforts to patrol how banks participate in commodities markets. J.P. Morgan also agreed to pay $410 million to settle claims that it manipulated power markets in California and the Midwest. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.


Visa ($177; V) shares plunged after a U.S. judge invalidated a $0.21 ceiling on debit-card fees that had been in effect since October 2011. The judge ruled that the Federal Reserve lacked the authority to set the cap, which allowed Visa to inflate debit-card transaction fees by billions of dollars. The Fed had originally proposed a cap of $0.12 before settling on $0.21. Debit cards account for about 26% of Visa's transaction volume. Separately, a group of retailers based in the United Kingdom sued Visa over interchange fees charged for processing payments. Visa is a Buy and a Long-Term Buy.

Obama proposes lower corporate tax but targets foreign earnings

President Obama laid out plans to revamp the corporate tax code in the hopes of encouraging growth in the U.S. and eliminating tax-free safe havens that have become popular for U.S. companies. He proposed lowering the corporate tax rate to 28% — and 25% for manufacturers — from the current 35%.

He also proposed a special tax on profits generated overseas; currently, companies only pay U.S. taxes when they bring offshore profits back to the U.S. Other potential changes include slowing the rate at which companies can depreciate assets and requiring U.S. firms to follow international accounting standards for reporting inventory.

With U.S. companies holding roughly $1.5 trillion in cash overseas, in many cases simply to avoid paying U.S. corporate taxes on the money, Obama's tax reform would be a game-changer. Not surprisingly, Republicans started panning the plan even before the details became public.


Rank Changes

Lear ($69; LEA), already a Long-Term Buy, is being added to the Focus List and Buy List. Cognizant Technology Solutions ($72; CTSH), already a Buy and a Long-Term Buy, is being added to the Focus List. B/E Aerospace ($69; BEAV) and Google ($891; GOOG) are being dropped from the Focus List but remain Buys and Long-Term Buys. BlackRock ($282; BLK) is being dropped from the Focus and Buy lists but remains a Long-Term Buy. Vanguard Short-Term Investment-Grade ($10.69; VFSTX) now accounts for 2.5% of the Buy and Focus lists and 8.1% for the Long-Term Buy List.


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