Portfolio Review

3/31/2014


Earnings season whitewashed?

For investors trying to divine March-quarter results, the crystal ball looks a lot like a snow globe. During the first 10 weeks of 2014, S&P 500 Index companies mentioned weather in 195 earnings calls, up 81% from a year earlier, according to The Wall Street Journal.

That focus on the weather may be having an effect on analysts' March-quarter forecasts for S&P 500 companies; the consensus now projects 1.9% per-share-profit growth compared to 6.5% growth on Jan. 1, with expectations lower for all sectors save utilities. Yes, initial estimates are notoriously optimistic, and companies usually top the final numbers. Still, analysts have pegged the March quarter as the second-weakest for profit growth since September 2009.

Walgreen ($66; WAG) estimates the weather depressed gross profits by $60 million in the February quarter, the result of store closures, lower traffic, and $22 million in weather-related expenses, mostly snow removal. Per-share profits slid 5% to $0.91 per share excluding special items, missing the consensus by $0.02. A mild flu season and fewer new generic drugs also weighed on profitability. Revenue advanced 5% and same-store sales 4.3%. However, shares rose on management's increasingly bullish outlook for European partner Alliance Boots and generic-drug launches expected in the second half of the year. Walgreen is rated B (average).


Schlumberger ($96; SLB) dispelled weather-related fears raised by some analysts, saying it expects "strong" profit growth in the March quarter from market-share gains and lower costs. The oilfield-services company is projected to earn $1.22 per share, up 21%. North America accounts for about 30% of revenue. Schlumberger is a Focus List Buy and a Long-Term Buy.


Dow Chemical ($51; DOW) said the unusual cold and snow will hamper March-quarter results in the U.S. (33% of 2013 sales). Analysts have tapered expectations over the past 90 days, with the consensus currently calling for per-share earnings of $0.73, up 6%, on revenue growth of 3%. In an effort to reduce exposure to commodity prices, Dow seeks to divest $4.5 billion to $6.5 billion of assets by the end of 2015. In October, Dow had targeted asset sales of $3 billion to $4 billion in slower-growing businesses. Dow sold more than $500 million of assets last year in two separate deals in the December quarter. Dow Chemical is a Buy and a Long-Term Buy.

Corporate roundup

Technology giant Cisco Systems ($22; CSCO) pledged to invest $1 billion over the next two years as it begins to offer cloud-computing services — more than a decade after Amazon.com ($355; AMZN) and Salesforce.com ($57; CRM) carved out a niche in what has now become a crowded space. Cisco is a Long-Term Buy. Amazon.com is rated C (below average).


A U.S. appeals court reversed a prior ruling that had threatened to unravel the Fed's decision to limit interchange fees at $0.21 per debit-card transaction. MasterCard ($75; MA) and Visa ($218; V) set the swipe fees collected by banks. Although swipe fees had previously averaged $0.44, retailers including Wal-Mart Stores ($77; WMT) have fought to lower the cap below $0.21. MasterCard, Visa, and Wal-Mart Stores are rated B (average).

Pay-TV update

The U.S. pay-TV industry shed 251,000 of its roughly 100 million subscribers last year, it's first-ever annual contraction, according to researcher SNL Kagan. Comcast ($50; CMCSa) ended the year with 21.7 million subscribers, down 1%, while DirecTV ($77; DTV) fared better, growing its U.S. subscriber base 1% to 20.3 million. Industrywide, the average monthly pay-TV subscriber bill increased 4% to $89, while DirecTV's monthly fees rose 5% to $102.

Changing dynamics have caused major players in the mature pay-TV industry to rethink their strategies. DISH Network ($62; DISH) reportedly approached DirecTV about merging in response to Comcast's pending $45.2 acquisition of Time Warner Cable ($136; TWC). In the past, DirecTV CEO Mike White has talked about an improving regulatory environment, though he may still be skeptical that the U.S. would permit the two largest satellite operators to join forces. Recall that regulators prohibited the two companies from merging in 2002. DISH has about 14 million subscribers.

Comcast's bid to acquire Time Warner is unpopular with most Americans, according to a recent poll. The Justice Department, Federal Communications Commission, and at least six states are reviewing the deal. New York Gov. Andrew Cuomo has proposed new rules that would grant state regulators more power to block cable-company mergers. Perhaps no one is better positioned to benefit from the acquisition than Time Warner CEO Robert Marcus, just two months into his new role and set to collect up to $79.9 million in severance.

Not to be left out of the pay-TV scrum, Apple ($545; AAPL) is reportedly discussing a partnership with Comcast to stream live and on-demand television shows from its set-top box. A deal could eventually replace the traditional cable box and avoid network congestion that can disrupt streaming services. Apple would want customers to login with Apple IDs, with the company controlling customer data and receiving a slice of monthly subscriber fees — all potential sticking points. Apple might also need to acquire programming rights from media companies, potentially adding another level of fees.

Apple has also reportedly entered talks with record executives about launching a music-streaming service that would use its iTunes store. DirecTV is a Focus List Buy and a Long-Term Buy. Both Apple and Comcast are rated Buy and Long-Term Buy.

Bank capital-allocation plans for the next 12 months

Just one of 30 major U.S. banks failed the Federal Reserve's latest stress tests, which measures their ability to weather a jolt to the U.S. economy. The same 30 banks submitted capital-allocation plans to the Fed; five were rejected, including Citigroup's ($50; C). Bank of America ($17; BAC) and Goldman Sachs ($163; GS) were forced to modify their proposals before securing approval.

-- 2013 Proposal (March) --
---------- 2014 Proposal (March) ----------
Company (Price; Ticker)
Planned
Dividend
Hike
(%)
Planned Stock
Repurchases
($Millions)
New
Quarterly
Dividend
($)
Planned
Dividend
Hike
(%)
Planned Stock
Repurchases
($Millions)
American Express
($91; AXP)
15
4,200
0.26
13
5,400
Bank of America
($17; BAC)
0
10,500
0.05
400
4,000
Bank of New York Mellon
($35; BK)
15
1,350
0.17
13
1,740
Capital One Financial
($75; COF)
500
 1,000 †
0.30
0
2,500
Citigroup ($50; C) *
0
1,200
0.01
0
1,200
Fifth Third Bancorp
($23; FITB)
20
984
0.13
8
669
Goldman Sachs ($163; GS)
NS
NS
 NS 
NS
NS
J.P. Morgan Chase
($61; JPM)
27
6,000
0.40
5
6,500
Morgan Stanley ($32; MS)
0
500 †
0.10
100
1,000
U.S. Bancorp ($43; USB)
18
2,250
0.25
7
2,300
Wells Fargo ($49; WFC)
20
3,882
0.35
17
16,975
Note: recommended stocks are in bold.    * Citigroup had sought a quarterly dividend of $0.05 per share, up 400%, and $6.4 billion in stock repurchases.    † Capital One and Morgan Stanley announced buybacks in July 2013, months after the rest.   NS Not specified.

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