Portfolio Review

11/18/2013


Rank changes

Hertz Global ($23; HTZ) shares have shown some life, regaining most of the ground they lost after a disappointing September-quarter report. The stock looks cheap at 11 times estimated 2014 earnings. But its Quadrix scores are rapidly deteriorating, with the Overall rank down to 69 and just two of six category ranks exceeding 50. Analyst estimates for the December quarter and 2014 have fallen precipitously in the past 60 days, and we are not confident that Hertz can meet even the diminished expectations. We are dropping Hertz Global from the Buy and Long-Term Buy lists, and from coverage. Subscribers should sell Hertz.


We are initiating United Rentals ($65; URI) as a Buy and a Long-Term Buy. United Rentals rents and sells backhoes, forklifts, power tools, and other construction equipment. The largest equipment-rental company in the U.S., United Rentals estimates it captured a 12% share of a fragmented market last year. This is an aggressive name, with a balance sheet loaded with $7.46 billion in net debt. But United Rental is also cyclical and should continue to benefit from commercial construction and industrial activity in the recovering economy.

In the September quarter, United Rentals reported 21% higher per-share earnings on 8% sales growth and 55% growth from cash from operations. At 14 times trailing earnings, the stock trades 37% below its three-year average price/earnings ratio and 29% below the industrial-sector median.


Skyworks Solutions ($26; SWKS) is being added to the Long-Term Buy List. The company sells semiconductors used in mobile devices, automobiles, and cellular-communications infrastructure. Foxconn Technology of Taiwan and South Korea's Samsung Electronics ($1,400; SSNLF) account for nearly half of Skyworks' revenue. Skyworks is the only stock recommended by the Forecasts with a market value below $5 billion.

Recent share-price action has been choppy after a strong run, and a near-term pullback would not be surprising. But Skyworks has an outstanding balance sheet and scores in the top half of our research universe for all six Quadrix categories, contributing to an Overall rank of 99. The Overall score has also been persistently strong, exceeding 90 for 10 consecutive months. Per-share profits are projected to rise 16% to $2.56 over the next 12 months, in line with the median for S&P 1500 semiconductor stocks. But Skyworks shares trade at just 10 times estimated earnings, a 50% discount to its peer-group median.

Quarterly earnings

Cisco Systems ($24; CSCO) earned $0.53 per share in the October quarter excluding special items to top the consensus estimate by $0.02 per share. But revenue rose just 2% to $12.09 billion, missing the consensus. In other news, Cisco agreed to pay up to $863 million for the remaining stake of Insieme, a company that makes data-center technology. Management also increased its share-repurchase program by $15 billion, equating to roughly 12% of outstanding stock. Cisco provided weak guidance, projecting sales and per-share-profit declines in the January quarter, while the consensus called for 4% sales growth and 2% profit growth. Cisco is being dropped from the Buy List. But while the news is disappointing, Cisco's valuation and yield keep it on the Long-Term Buy List for now.


Macy's ($51; M) grew October-quarter earnings per share 31% to $0.47, exceeding the consensus by $0.08. Revenue, up 3% to $6.28 billion, also topped the consensus, while same-store sales rose 3.5%. Macy's reiterated its full-year guidance, implying January-quarter earnings per share of $2.06 to $2.16, versus the consensus of $2.14 and the year-ago quarter of $2.05. Shares surged on the results, as investors expressed relief that Macy's turned things around quickly after posting a disappointing July quarter. Macy's is a Buy and a Long-Term Buy.


Continental Resources ($113; CLR) reported September-quarter earnings per share of $1.61 excluding special items, topping the consensus by $0.13. Revenue climbed 70% to $824 million. Total average daily production rose 38%, as crude oil (71% of production) advanced 39% and natural gas 34%. Excluding hedging activity, the company's average sales price rose 20%, with oil up 18% and natural gas up 31%. Continental reiterated its 2014 target of production rising 26% to 32%, compared to projected growth of 38% to 40% this year. Continental is a Long-Term Buy.

Banks rack up more fines

Legal costs for the six largest U.S. banks have reportedly exceeded $100 billion since the financial crisis. And the tab keeps growing. Wells Fargo ($42; WFC) has agreed to pay $335 million to resolve claims linked to defective mortgage-backed securities. Meanwhile, the U.S. seeks $864 million from Bank of America ($14; BAC) after a jury found the bank's Countrywide business defrauded Fannie Mae and Freddie Mac with faulty mortgages in 2007 and 2008. Bank of America has reportedly entered talks with Freddie Mac to settle the dispute.

Separately, J.P. Morgan Chase ($54; JPM) is one of six banks expected to be fined by the European Union for allegedly manipulating interest rates. The fines, expected to total at least $2 billion, are likely to be announced in December. J.P. Morgan Chase and Wells Fargo are rated Focus List Buy and Long-Term Buy. Bank of America is rated B (average).

Corporate roundup

Comcast's ($47; CMCSa) NBCUniversal unit is reportedly slashing 3.5% of its work force. Comcast is a Buy and a Long-Term Buy.


U.S. regulators will reportedly study whether BlackRock ($297; BLK), Fidelity Investments, and other asset managers pose a significant risk to the financial system. New laws since the financial meltdown allow a U.S. oversight council to impose liquidity rules and require stress tests for companies deemed vital to the country's stability. So far, just three nonbanks — American International Group ($48; AIG), General Electric's ($27; GE) finance arm, and Prudential Financial ($87; PRU) — are designated as systemically important to the U.S. BlackRock is a Long-Term Buy.


Since Oct. 1, about 106,000 people have signed up for health-insurance coverage, 27,000 through the glitch-plagued federal marketplace and another 79,000 through state exchanges. The White House had targeted 500,000 sign-ups in October alone, and the enrollment so far represents just 1.5% of the 7 million people the Obama administration expects to sign up by the end of March.


Rank Changes

United Rentals ($65; URI) is being initiated as a Buy and a Long-Term Buy. Skyworks Solutions ($26; SWKS) is being initiated as a Long-Term Buy. Cisco Systems ($24; CSCO) is being dropped from the Buy List but remains a Long-Term Buy. Hertz Global ($23; HTZ) is being dropped from the Buy and Long-Term Buy lists and from coverage.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com