Portfolio Review

8/19/2013


Chevron off Buy List

Chevron ($123; CVX) is being removed from the Buy List due to weak June-quarter results, deteriorating Quadrix scores, and limited near-term growth opportunities. The oil giant reported an 8% decline in revenue and 24% lower per-share profits in the quarter, pushing its Momentum score down to 25 and its Overall score to 57. Although Chevron appears positioned to post sharply higher per-share profits in the September quarter, growth will remain a challenge in the December quarter and into next year. Looking further out, Chevron has several major projects in the works to help ease pressure on production. In the meantime, income-minded investors with a longer time horizon will appreciate the generous dividend yield of 3.3%. Chevron remains a Long-Term Buy.

MLP review — and a Top 15 Utilities change

In an effort to diversify the Top 15 Utilities portfolio and boost its growth potential, we added two master limited partnerships (MLPs) last year. Both operate pipelines that transport oil, natural gas, or refined products.

MLPs have performed poorly in recent weeks, hurt by concerns about higher interest rates, which could make the securities known for high yields less attractive relative to other sources of income. The threat of lower energy prices also weighs on some pipeline and storage MLPs. Despite recent weakness, the Alerian MLP Index has returned 21% for the year, slightly above the S&P 500 Index's 20% return.

We intend to maintain our MLP exposure, but this week we are making a change. Plains All American Pipeline's ($54; PAA) Overall score has dipped to 53, hurt by an erosion of its operating momentum. In its place we are adding AmeriGas Partners ($42; APU), the largest U.S. propane seller, which serves more than 2 million customers in all 50 states, equating to about 15% of the market. AmeriGas shares fell in July, hurt by a public offering staged by its largest unitholder, as well as concerns about oversupply. However, sales and profits topped expectations in the June quarter on higher demand.

On our Alternative Income Watch List, AmeriGas is being upgraded to A (above average), while Holly Energy Partners ($37; HEP), which has seen its Overall score dip to 32, is being downgraded to C (below average).

Earnings

In the July quarter, Cisco Systems ($26; CSCO) earned $0.52 per share excluding special items, up 11%, squeezing past the consensus by a penny. Revenue advanced 6% to $12.42 billion on balanced growth from the products and services units. The company projected October-quarter profits roughly in line with the consensus but targeted sales growth of 3% to 5%, versus the 5% consensus. Cisco is a Focus List Buy and a Long-Term Buy.


Macy's ($46; M) shares fell after the retailer missed July-quarter projections and cut its guidance for fiscal 2014 ending January, blaming weakness among its budget and middle-class shoppers. Macy's reported per-share earnings of $0.72, up 7% but $0.06 short of the consensus. Total revenue slipped 1% to $6.07 billion, also below analyst expectations, with same-store sales down 0.8%. Macy's now expects earnings per share of $3.80 to $3.90 in the year ending January 2014, up 10% to 13% but below the consensus of $3.94. Macy's remains a Buy and a Long-Term Buy.


Magna International ($82; MGA) said June-quarter earnings per share surged 20% to $1.78, exceeding the consensus by $0.14. Revenue grew 16% to $8.96 billion on double-digit gains for production sales in all three geographic segments. Magna, a maker of automotive systems, raised its full-year guidance for sales to a range with a midpoint of $34 billion, implying 10% growth. Magna is a Focus List Buy and a Long-Term Buy.

Apple looks to bounce back

Apple ($490; AAPL) will reportedly unveil its new iPhone Sept. 10. Rumors swirl that the device will feature a fingerprint sensor and that Apple could also introduce the much-discussed low-end iPhone. Apple hopes the new device will reverse recent market-share losses. Its slice of the global smartphone market fell to 13% in the June quarter from 17% in the year-ago quarter. Google's ($881; GOOG) Android took a 79% share, up from 69%. A new iPad is also expected to be released in time for the holidays.

Apple shares rose on both the iPhone reports and news that activist investor Carl Icahn has taken a "large" position in the company. Icahn added that he told CEO Tim Cook the company should expand its stock-repurchase program. In April, Apple raised its buyback authorization to $60 billion, and the share count fell 2% between the end of March and the end of June. The stock has jumped 23% since June, ahead of the S&P 500 Index's 5% gain.

Meanwhile, Apple's army of lawyers battles rivals and the U.S. government on multiple fronts. A federal judge is considering an order that would keep Apple from negotiating on e-books with more than one publisher at a time. Apple still awaits a trial to determine the penalties it must pay to 33 states related to e-book pricing. Separately, a U.S. federal appeals court overturned the International Trade Commission's dismissal of Apple's lawsuit against Google's Motorola Mobility. The decision breathes new life into Apple's claim that some Motorola phones violate its patents. Finally, the International Trade Commission banned the sale of certain smartphones and tablets made by Samsung Electronics ($1,075; SSNLF) because they infringed on patents held by Apple. It's not clear whether any of Samsung's newer devices will be affected. Both Apple and Google are rated Buy and Long-Term Buy.

Corporate roundup

Exxon Mobil ($89; XOM) will reportedly partner with PetroChina ($120; PTR) to develop an Iraqi oilfield, the largest in the Middle East open to foreign investment. Exxon Mobil is a Long-Term Buy.


The European Commission approved Celgene ($138; CELG) to sell Pomalidomide to patients with multiple myeloma who haven't responded to at least two prior treatments. U.S. regulators approved the drug in February, and analysts project Pomalidomide could deliver annual sales of $1 billion by 2017. Celgene is a Buy and a Long-Term Buy.


News Corp.'s ($16; NWSa) June spin-off 21st Century Fox ($33; FOXa), which operates U.S. television networks, film studios, and most of the former company's pay-TV business, has a stock-market value of $75 billion. Fox inherits News Corp.'s price and operational history, which equates to a Quadrix score of 56. The new News Corp., with a stock-market value of $9 billion, operates mostly newspapers and digital properties and no longer has enough historical data to generate a Quadrix Score. We are assuming coverage of Fox with a rating of B (average) and dropping coverage of News Corp.


Rank Changes

Chevron ($123; CVX) is being removed from the Buy List but remains a Long-Term Buy. Vanguard Short-Term Investment-Grade ($10.68; VFSTX) now accounts for 5.5% of the Buy List. In our Top 15 Utilities portfolio, AmeriGas Partners ($42; APU) is replacing Plains All American Pipeline ($54; PAA).


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