Portfolio Review

2/17/2014


Rank changes

Most of our recommended stocks have already declared December-quarter earnings, and we are tweaking our buy lists to reflect recent operating results and changes in Quadrix scores. Union Pacific ($178; UNP) goes onto the Focus List, taking the place of Alliance Data Systems ($274; ADS). Alaska Air Group ($78; ALK), reviewed in Analysts' Choice, and Raymond James Financial ($50; RJF) supplant Alliance Data and Capital One Financial ($71; COF) on the Buy List. Alliance Data also departs from the Long-Term Buy List, which welcomes Raymond James and UGI ($43; UGI) as new additions.

Union Pacific enjoys rising Quadrix scores and favorable profit-estimate trends. The railroad generated modest sales growth of 5% in 2013, while pricing gains helped expand profit margins. Cash from operations rose 11%, while free cash flow jumped 56% to $1.99 billion. On Feb. 6, Union Pacific raised its quarterly dividend by 15% to $0.91 per share, payable April 1.


Alliance Data has become a victim of its own success, as its soaring stock price outpaced steady, double-digit profit growth. It grew core earnings per share 30% to $2.39 in the December quarter, topping the consensus by $0.06. Revenue jumped 17% to $1.14 billion. Although Alliance Data remains a great company, its Quadrix Overall score of 62 signals that it may no longer be such a great stock. At 27 times trailing earnings, shares trade 20% above their five-year average. The stock has appreciated 198% since we added it to the Focus List in May 2011 — more than five times the gain of the S&P 500 Index. Alliance Data is being removed from the Monitored List and should be sold.


Raymond James sells mutual funds and other investment products, also offering underwriting, brokerage, and money-management services. A well-run company in a volatile space, Raymond James represents a bet on both the stock market and a rise in acquisitions and initial public offerings. The stock earns an 86 for both Momentum and Value. With analysts' estimates rising, the consensus targets 11% higher profits per share on 7% sales growth in fiscal 2014 ending September.


Capital One is being removed from the Buy List. The Overall score has fallen to 70, hurt by below-average ranks for Momentum and Earnings Estimates. Capital One stands to benefit from long-term trends in credit-card usage. However, growth could prove elusive in the year ahead, reflecting slowing momentum for automobile loans and the sale of its $7 billion Best Buy ($25; BBY) portfolio in the September quarter. Still, the stock trades at just 10 times estimated 2014 earnings, a 35% discount to the median for S&P 1500 Index financial stocks. Capital One remains a Long-Term Buy.


UGI, a member of our Top 15 Utilities Portfolio, is projected to grow per-share profits 11% in both fiscal 2014 and 2015 ending September. The company distributes propane in the U.S. and overseas and owns electric and natural-gas utilities in Pennsylvania. In the December quarter, UGI completed a pipeline-extension project that will transport shale gas from the Marcellus Shale formation to customers in eastern Pennsylvania. Yielding 2.6%, UGI has raised its quarterly dividend for 26 consecutive years.

RECOMMENDED STOCKS THAT TOPPED EPS ESTIMATES
% Change,
Day After
--- Earnings ---
Quarterly
--- Change ---
---- Surprise ----
Company (Price; Ticker)
Earnings
Date
Stock
(%)
S&P
500
(%)
EPS
($)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
Aflac ($62; AFL)
2/4/14
0.5
(0.2)
1.40
(5.4)
(9.1)
0.7
(1.8)
Alaska Air ($78; ALK)
1/23/14
(0.6)
(0.9)
1.10
57.1
6.9
2.8
1.0
Apple ($536; AAPL)
1/27/14
(8.0)
0.6
14.50
5.0
5.6
2.9
0.2
BlackRock ($305; BLK)
1/16/14
1.6
(0.1)
4.92
24.2
9.4
13.6
3.3
CVS Caremark ($69; CVS)
2/11/14
2.7
1.1
1.12
16.7
4.6
0.9
0.5
EMC ($25; EMC)
1/29/14
(2.9)
(1.0)
0.60
11.1
10.8
1.7
0.8
Fifth Third Bancorp ($21; FITB)
1/23/14
(1.8)
(0.9)
0.43
0.0
(9.7)
2.4
5.8
Helmerich & Payne ($88; HP)
1/30/14
3.0
1.1
1.59
13.6
5.3
8.9
2.6
J.P. Morgan Chase ($57; JPM)
1/14/14
0.1
1.1
1.40
3.7
(1.1)
3.7
4.0
Qualcomm ($76; QCOM)
1/29/14
3.0
1.1
1.26
0.0
9.6
6.8
(1.0)
Raymond James Fin'l ($50; RJF)
1/22/14
(1.2)
(0.9)
0.81
17.4
6.3
11.0
4.0
Schlumberger ($90; SLB)
1/17/14
1.8
(0.4)
1.35
25.0
7.5
1.5
(0.8)
Skyworks Sol. ($31; SWKS)
1/16/14
6.7
(0.4)
0.67
21.8
11.4
1.5
0.5
U.S. Bancorp ($40; USB)
1/22/14
(0.3)
0.1
0.76
1.3
(4.3)
1.3
0.0
UGI ($43; UGI)
2/3/14
(1.4)
0.8
1.06
22.2
14.5
2.9
(1.6)
Union Pacific ($178; UNP)
1/23/14
3.3
(0.9)
2.55
16.4
7.2
2.4
1.1
United Rentals ($82; URI)
1/22/14
2.1
(0.9)
1.59
25.2
7.2
8.2
0.8
Wells Fargo ($46; WFC)
1/14/14
0.1
1.1
1.00
9.9
(5.9)
2.0
(0.1)


Earnings reviews

Cigna ($77; CI) said December-quarter operating earnings fell 11% to $1.39 per share excluding special items, reflecting unexpectedly high Medicare costs. The consensus was $1.49. Revenue climbed 7% to $8.15 billion. The insurer's 2014 profit outlook, with a midpoint of $7.00 per share, implied 3% growth and missed the consensus of $7.32. The prospect of medical costs rising further in 2014 warrants monitoring. However, the stock could be due for a bounce after slumping 9% on the disappointing results and guidance. Cigna remains a Long-Term Buy.


CVS Caremark ($69; CVS) grew per-share earnings 16% to $1.12 excluding special items in the December quarter to top the consensus by a penny. Same-store sales advanced 4.0%, with total revenue up 5%. CVS raised its March-quarter guidance for earnings per share to $1.03 to $1.06, implying growth of 24% to 28% and exceeding the consensus of $0.98. CVS also said it will discontinue the sale of tobacco products by October, the first such move by a national drugstore chain. Despite the loss of an estimated $2 billion in revenue from tobacco shoppers, CVS didn't lower its 2014 sales estimate. CVS Caremark is a Buy and a Long-Term Buy.


For the January quarter, Cisco Systems ($23; CSCO) said per-share profits declined 8% to $0.47 excluding special items, easing past the consensus by a penny. Sales fell 8%, slightly better than analysts expected. The company issued guidance roughly in line with expectations for declines of 7% in sales and 6% in per-share profits in the April quarter. Cisco raised its quarterly dividend 12%, but its lack of optimism beyond that could weigh on the shares in the near term. For now the stock remains a Long-Term Buy.

Corporate roundup

Apple ($536; AAPL), amid a $60 billion stock-buyback plan, repurchased $14 billion of stock in the two weeks following its December-quarter profit report. In related news, activist investor Carl Icahn withdrew his proposal for Apple to increase repurchases by another $50 billion after two proxy advisers panned his plan. Apple is a Buy and a Long-Term Buy.


Continental Resources ($108; CLR) said production jumped 39% and proved reserves 38% in 2013. It expects production to rise 26% to 32% in 2014. Continental is a Long-Term Buy.


Lear ($75; LEA) hiked its quarterly dividend 18% to $0.20 per share, payable March 20. Lear is a Focus List Buy and a Long-Term Buy.


Rank Changes

Union Pacific ($178; UNP) is being added to the Focus List, replacing Alliance Data Systems ($274; ADS), which is being dropped from all recommended lists and from coverage. Alaska Air ($78; ALK) and Raymond James Financial ($50; RJF) are being initiated as Buys, with Raymond James also a Long-Term Buy. UGI ($43; UGI) is being initiated as a Long-Term Buy. Capital One Financial ($71; COF) is being dropped from the Buy List but remains a Long-Term Buy.


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