Portfolio Review

8/12/2013


Energy roundup — with a new stock

June-quarter results backed up a popular view of Chevron ($123; CVX) and Exxon Mobil ($91; XOM) as lumbering giants straining to sustain production levels ahead of the launch of several major projects. Shares of both stocks stumbled on the quarterly results, hurt by maintenance activity at refineries that weakened profit margins. Chevron maintains its Buy rating, but Exxon is being dropped from the Buy List; both remain Long-Term Buys. In contrast, oilfield-services giant Schlumberger ($82; SLB) managed solid growth, earning an upgrade to Buy and Long-Term Buy.

Schlumberger generates nearly 70% of its revenue overseas, mitigating exposure to softness in North America. The company sees strong deepwater-drilling activity and reported "significantly higher" demand in the Middle East, China, and Australia. Revenue climbed 8% and per-share profits 14% in the June quarter. Shares seem reasonably priced at 19 times trailing earnings, a 14% discount to their three-year average. The stock earns a Quadrix Overall rank of 95.

Chevron earned $2.77 per share, down 24% and $0.19 below the consensus. Total production slipped 1.5%, as liquids declined 4% and natural gas rose 2%. Exxon said per-share profits decreased 14% to $1.55 excluding divestments and tax-related items, 18% below the consensus of $1.90. Total production dipped 1.9%, on declines of 1% for liquids and 3% for natural gas.

The disappointing results will likely weigh on the oil majors' Quadrix Overall scores, currently 67 for Chevron and 76 for Exxon. However, both companies said the bulk of the maintenance has been completed for the year, which could give their operations a boost in the second half of 2013.

June-quarter earnings

In the June quarter, Mylan Laboratories ($37; MYL) said per-share profits rose 13% to $0.68, a penny above the consensus. Revenue increased 1% to $1.70 billion. While management reiterated its 2013 guidance, its initial 2014 outlook impressed the market, as the drugmaker should benefit from U.S. health reforms boosting the market for generic treatments. Mylan expects sales to climb 12% and per-share profits 19% in 2014 relative to the midpoints of its 2013 target ranges, topping the consensus. Shares rallied on the bullish guidance. Mylan is a Focus List Buy and a Long-Term Buy.


Cigna ($78; CI) earned $1.78 per share excluding special items in the June quarter, up 19% and $0.18 ahead of the consensus. Sales advanced 8% to $7.98 billion, well ahead of analyst estimates. Premiums and fees rose 5% for the health-care business and jumped by double-digit rates at the two smaller units, supplemental benefits and group disability and life. Cigna is a Long-Term Buy.


Cognizant Technology Solutions ($74; CTSH) grew June-quarter earn ings per share 20% to $1.07 excluding stock-based compensation expenses and acquisition-related charges, to exceed the consensus by $0.10. Revenue climbed 20%, also topping analysts' expectations. Cognizant posted double-digit growth across all business segments and geographic locations, including 37% growth in Europe. For the September quarter, management expects to earn $1.09 per share, up 20%, on revenue of at least $2.25 billion, up 19%; both targets topped consensus estimates at the time of the announcement. Cognizant is a Focus List Buy and a Long-Term Buy.


CVS Caremark ($60; CVS) earned $0.97 per share in the June quarter excluding special items, up 20%, to squeeze past the consensus by a penny. Total revenue increased 2% to $31.25 billion, also ahead of the consensus. Same-store sales crept 0.4% higher, as stronger prescription volumes overcame weakness at the front of the store. CVS sees per-share profits climbing 18% to 21% in the September quarter; the consensus projected 14% growth at the time of the announcement. But management also narrowed its full-year guidance for per-share profits to $3.90 to $3.96, below the consensus of $3.98. CVS Caremark is a Focus List Buy and a Long-Term Buy.


CF Industries ($190; CF) shares edged higher after the company reported per-share earnings of $8.53 excluding special items in the June quarter, down 2% but well ahead of the consensus of $7.62. Sales slipped 1% to $1.71 billion, also exceeding the consensus. CF, a fertilizer maker, saw strong demand for nitrogen in North America, though the global market for phosphate products was weakened by soft demand in India and increased supply from Saudi Arabia and China. The company has locked in 90% of its natural-gas supplies for August through November at a price below what it paid in the June quarter. At 10 times the lowest analyst profit estimate for 2014, CF trades at a discount to its largest competitors. CF Industries, which predicts above-average corn plantings next year, is a Buy and a Long-Term Buy.

Don't touch that dial on DirecTV

DirecTV ($61; DTV) shares slumped after the pay-TV operator missed consensus June-quarter estimates for both earnings and sales. Per-share profits rose 8% to $1.18 excluding special charges versus the consensus of $1.33, on revenue of $7.70 billion, up 7%. U.S. sales climbed 5% to $5.94 billion, as higher average revenue per subscriber was partly offset by net subscriber losses of 84,000, up from 52,000 in the year-ago quarter. Sales growth in Latin America slowed to 12%, hurt by currency issues and economic weakness in Brazil. Despite the somewhat disappointing quarter, DirecTV earns an Overall score of 95 and trades at less than 13 times estimated 2013 profits, a 34% discount to the median for S&P 1500 pay-TV companies. The stock remains a Focus List Buy and a Long-Term Buy.

Corporate wrap-up

Google's ($897; GOOG) newest version of the Nexus 7 tablet, launched July 30, has garnered positive initial reviews. The base version of the tablet carries a price tag of $229, undercutting the iPad Mini by $100. Google also unveiled Chromecast, a device the size of a USB flash drive that streams video and audio from mobile devices to televisions. Chromecast costs just $35 and could potentially accelerate the shift away from cable to streaming video. Google is a Buy and a Long-Term Buy.


Apple ($465; AAPL) CEO Tim Cook met with the chairman of China Mobile ($53; CHL) about forging a partnership. China Mobile has the largest wireless subscriber base in the world, with more than 700 million customers, but has struggled to convert those customers to its faster network. Apple is a Buy and a Long-Term Buy.


Comcast ($45; CMCSa) said NBC has secured $2.1 billion in advertising commitments for its fall television season, up 17% from last year. Comcast has sold 80% of NBC's ad inventory, with advertising rates rising by an average of 7% to 8%. Comcast is a Long-Term Buy.


Union Pacific ($160; UNP) raised its quarterly dividend 14% to $0.79 per share, payable Oct. 1. Union Pacific is a Long-Term Buy.


Rank Changes

Schlumberger ($82; SLB) is being added to the Buy and Long-Term Buy Lists. Exxon Mobil ($91; XOM) is being dropped from the Buy List but remains a Long-Term Buy. Vanguard Short-Term Investment-Grade ($10.70; VFSTX) now accounts for 5.9% of the Long-Term Buy List.


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