Portfolio Review

3/24/2014


Two rank changes

We are adding UGI ($45; UGI) to the Buy List. Reviewed as the Analysts' Choice in our March 3 issue, UGI is our top pick in the utility sector and helps diversify our Buy List. Besides its traditional utility business, UGI owns a 26% stake in AmeriGas Partners ($42; APU), the largest retail distributor of propane in the U.S. The unusually harsh winter has depleted supplies of propane, which heats almost 5% of U.S. homes, pushing prices to record highs in some areas.

Analyst estimates are drifting higher, and UGI seems capable of topping the consensus target of 12% per-share-profit growth for fiscal 2014 ending September. The stock looks cheap, earning a Quadrix® Value rank of 84 and trading at a discount to its peer group relative to trailing earnings, sales, and cash flow. With both sector-specific scores exceeding 95, UGI is also a Long-Term Buy. Both UGI and AmeriGas are components of our Top 15 Utilities portfolio.


Aflac ($64; AFL) is being removed from the Buy List, though it remains a Long-Term Buy. The insurer's share-price action stalled this month after bouncing from the early-February low below $61. Currency headwinds weigh on the core Japan unit, while U.S. operations continue to suffer from weak hiring trends by small businesses. Aflac earns a Momentum rank of just 11 and seems unlikely to restart its growth engine any time soon, with the consensus projecting flat earnings per share in 2014 on a 2% sales decline. Still, Aflac offers steady dividend growth and looks cheap at 10 times trailing earnings. The shares should reward patient investors willing to stick with them over the next two or three years.

Banks await Fed decision

S&P 500 Index financials have roughly matched the broader index in 2014. Regional banks have been a bright spot, helped by robust growth in commercial and industrial loans during the early months of 2014. A new catalyst was slated to hit the sector March 20, with the Federal Reserve unveiling results of its stress tests. Then, on March 26, the Fed will rule on banks' capital plans.

Investors generally expect modest dividend hikes. U.S. Bancorp ($42; USB) says it seeks to increase its dividend, Capital One Financial ($74; COF) wants to ramp share repurchases, and Wells Fargo ($48; WFC) plans to do both. Fifth Third Bancorp ($23; FITB) pre-empted the Fed by announcing plans to repurchase 100 million shares, replacing a similar-sized plan from 2013, which still had room for 38 million shares.

At some banks, however, buybacks have failed to offset dilution caused by employee stock awards. The total share count for S&P 500 banks rose 1% last year, despite $31.80 billion spent on buybacks.

Under regulatory pressure to trim exposure to riskier trading activities, J.P. Morgan Chase ($58; JPM) agreed to sell its physical-commodities business for $3.5 billion in cash to Mercuria Energy Group, based in Switzerland. The bank expects to complete the deal by the end of September. Separately, American Express ($92; AXP) agreed to sell a 50% stake in its business-travel unit for $900 million to a group of investors that includes BlackRock ($301; BLK). Both J.P. Morgan Chase and Wells Fargo are Focus List Buys and Long-Term Buys. Fifth Third is a Buy and a Long-Term Buy. Amex, BlackRock, Capital One, and U.S. Bancorp are rated Long-Term Buy.

BANKS BUYING BACK
Below we present stock-repurchase data for stocks on our Monitored List that are subject to Federal Reserve oversight.
---------- Stock Repurchases, Last 12 Months ----------
Company (Price; Ticker)
Share-
Count
Change
(%)
Number
Repurchased
(Millions)
Total
Spent
($Mil.)
Average
Price Paid
($)
American Express ($92; AXP)
(3.9)
55
4,004
72.52
Bank of America ($17; BAC)
4.8
80
1,009
12.59
Bank of New York Mellon ($33; BK)
(1.4)
35
1,024
29.24
Citigroup ($48; C)
0.6
19
933
48.61
Capital One Financial ($74; COF)
(0.5)
15
1,032
69.38
Fifth Third Bancorp ($23; FITB)
(5.2)
66
1,231
18.79
Goldman Sachs ($168; GS)
(3.3)
39
6,200
157.1
J.P. Morgan Chase ($58; JPM)
(0.6)
96
4,789
49.83
Morgan Stanley ($32; MS)
1.7
27
691
25.74
U.S. Bancorp ($42; USB)
(2.6)
69
2,439
35.44
Wells Fargo ($48; WFC)
0.4
124
5,056
40.72
Note: Recommended stocks are in bold.


Technology update

Despite a chorus of complaints, the European Commission is unlikely to review its pact with Google ($1,211; GOOG) to curb anticompetitive practices, antitrust commissioner Joaquín Almunia said. Last month the EU accepted Google's concessions in a somewhat abrupt resolution to a three-year investigation of the company's search engine. In other news, Standard & Poor's broke from precedent by deciding to keep both classes of Google shares in the S&P 500 Index following the stock's split on April 2. The index will now include 501 stocks, and S&P will consider adding to the index multiple share classes for other companies. Google is a Focus List Buy and a Long-Term Buy.


Qualcomm ($77; QCOM) seems poised to collect higher licensing fees after China Mobile ($45; CHL) decided all fourth-generation smartphones on its network must support five different mobile-communication standards by the end of May. Qualcomm also reportedly plans to produce some of its semiconductors at China-based Semiconductor Manufacturing International ($4; SMI) in a move that could improve its relationship with Chinese officials, who have opened an antitrust probe against the American company. Qualcomm is a Focus List Buy and a Long-Term Buy.


Cisco Systems ($22; CSCO) launched an investigation into bribery allegations in Russia, Eastern Europe, and Central Asia. Cisco maintains the probe's results should not have a material effect on its business. Cisco is a Long-Term Buy.


Microsoft ($40; MSFT) shares rallied to their highest level since July 2000 on reports that new CEO Satya Nadella will introduce a version of its popular Office software for Apple's ($531; AAPL) iPad later this month. One analyst estimated Microsoft could generate up to $1.5 billion a year in revenue if 10% of iPad owners subscribed to Office. Apple is a Buy and a Long-Term Buy. Microsoft is rated A (above average).

Corporate roundup

Kroger ($44; KR) announced a fresh $1 billion share-repurchase plan, equating to about 4% of outstanding shares at current prices. The grocer's share count held roughly flat in the past year, consistent with management comments made last July. The company said it would ease up on share repurchases through fiscal 2015 ending January as it repays debt from the $2.5 billion acquisition of Harris Teeter. From February 2010 to January 2013, Kroger repurchased 20% of its outstanding shares at an average price of $23. Kroger is a Focus List Buy and a Long-Term Buy.


United Rentals ($92; URI) issued $1.38 billion of debt to redeem higher-interest-rate bonds and fund its pending $780 million acquisition of National Pump. National Pump will join United Rentals' specialty unit, which enjoys higher profit margins than the rest of its rental business.

Separately, Hertz Global ($27; HTZ) plans to spin off its equipment-rental subsidiary (HERC), which has a 5% slice of the U.S. market, compared to United Rentals' 12% share. Analysts viewed United Rentals as a potential suitor of HERC (12-month operating earnings of $667 million on sales of $1.54 billion) before it announced plans to acquire the smaller but more profitable National Pump ($103 million on $211 million). United Rentals is a Focus List Buy and a Long-Term Buy.


Rank Changes

UGI ($45; UGI) is being added to the Buy List, replacing Aflac ($64; AFL), which remains a Long-Term Buy.


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