Portfolio Review

4/7/2014


EOG joins the Long-Term Buy List

With an Overall score of 98, EOG Resources ($99; EOG) is the highest-rated large-cap in the exploration-and-production industry. It scores above 80 for five of six Quadrix categories. Even the exception, Value, is a respectable 66. The stock's forward P/E ratio of 21 falls in line with the industry median and reflects projected 18% profit growth in 2014. EOG is being initiated as a Long-Term Buy.

The strong Quadrix scores reflect EOG's impressive track record and outstanding operating momentum. With operations in most of the key energy deposits in North America, EOG grew total production 9% last year. About 95% of EOG's reserves and 88% of production are located in the U.S. and Canada. Capital spending has begun to stabilize, allowing EOG to generate $70 million in free cash flow in 2013 — its first year of positive free cash flow since 2005. Sales and cash from operations have grown at annualized rates of at least 35% over the past three years. Note that EOG underwent a 2-for-1 stock split on April 1.

Health-care review

Despite a rocky start, the Affordable Care Act enrolled 7.1 million by the March 31 deadline, topping officials' initial target of 7 million. In a late surge, nearly 1 million Americans signed up during the final week. Excluded from the final tally were those unable to enroll because of technical glitches; they may receive an extension in order to avoid facing tax penalties.

Baxter International ($74; BAX) shares rallied after the company announced plans to spin off its biotechnology business into a publicly traded company next year. The biotech operations, which include drugs that treat hemophilia, generated about $6 billion in sales last year, roughly 40% of Baxter's total revenue. Baxter, which will retain its medical-products unit, is rated B (average).


Johnson & Johnson ($98; JNJ) agreed to sell its diagnostics unit for about $4 billion to Carlyle Group ($35; CG), a private-equity partnership. The diagnostics business delivered 2013 sales of $1.89 billion, less than 3% of J&J's revenue. This divestiture furthers J&J's focus on businesses that rank first or second in their markets. J&J is rated B (average).

Google splits

Google ($1,135; GOOG) was scheduled a 2-for-1 stock split on April 2, after the close of trading and the Forecasts' deadline. For every Class A share (new ticker symbol GOOGL), investors were slated to receive one Class C share (symbol GOOG), which lacks voting rights. The S&P 500 Index will include both share classes. The Nasdaq 100 and Russell indexes will also keep both share classes for now. In June, the Nasdaq 100 plans to drop the Class A shares, while the Russell indices will remove an as-yet-unidentified share class.

These moves could create some temporary volatility as index funds adjust their positions. However, if Class C shares trade more than 1% lower than Class A shares during the first 12 months, Google will issue Class C shareholders some combination of cash, Class A shares, and Class C shares to make up part of that difference in June 2015. We recommend investors keep shares of both classes. For the purposes of the Monitored List, we will track the Class A shares (GOOGL). We plan to revisit Google's stock split in the coming month. Google remains a Focus List Buy and a Long-Term Buy.

Cognizant should escape Accenture's problems

Accenture ($80; ACN) grew earnings per share 3% to $1.03 excluding special items in the February quarter, missing the consensus by a penny. Revenue crept 1% higher to $7.57 billion, also below analyst expectations. Still, Accenture increased its guidance for fiscal 2014 ending August for per-share profits, revenue, and bookings.        

Accenture shares fell on the report, as did those of rival Cognizant Technology Solutions ($52; CTSH). While Cognizant could experience some of the pricing pressure Accenture saw in the quarter, other problems appear specific to Accenture, particularly its struggle to convert bookings into revenue. Accenture also reported relatively strong sales growth for financial services (up 4%), Cognizant's largest industry market (42% of 2013 sales). And while Accenture's sales in Asia slumped 7%, that region accounts for less than 5% of Cognizant's revenue.

Cognizant shares recovered in the days following the earnings report, helped by news reports suggesting the U.S. Congress is unlikely to pass an immigration bill this year, delaying proposed reforms on visas used by Cognizant. At the same time, we are closely monitoring Cognizant's valuation. Among Focus List stocks, Cognizant has the second-lowest Quadrix Value score and the second-highest trailing P/E ratio (23) and forward P/E ratio (20). Cognizant remains a Focus List Buy and a Long-Term Buy. Accenture is rated A (above average).

Corporate roundup

Apple ($542; AAPL) suppliers plan to begin producing displays for the forthcoming iPhone in May, according to published reports. Suppliers will likely start by building 4.7-inch screens, followed by 5.5-inch screens. The production schedule hints of a September release, though the larger iPhone could be delayed. Current iPhone screens are 4.0 inches. Apple is a Buy and a Long-Term Buy.


Comcast ($50; CMCSa) said it will boost its current $3 billion share-repurchase program for 2014 to at least $5.5 billion if shareholders approve its bid to acquire Time Warner Cable ($138; TWC). Michael Angelakis says the 3 million subscribers the cable giant has offered to divest could be worth at least $17.6 billion. Comcast is a Buy and a Long-Term Buy.


Magna International ($99; MGA) launched an automatic stock-buyback plan, allowing the auto-parts maker to repurchase shares during periods when it would otherwise be required to sit out of the market. It has 6.9 million shares remaining under the 12 million share repurchase plan launched in November. That implies Magna repurchased 2.7 million shares in the final two weeks of March alone, or about 1% of its outstanding shares. Buybacks trimmed the share count 4% in 2013. Magna, earning a Value rank of 85, is a Focus List Buy and a Long-Term Buy.


Wells Fargo ($50; WFC) named John Shrewsberry as its new CFO, replacing Tim Sloan, who leaves his post to head up the wholesale-banking unit. Some analysts say the move could signal Wells Fargo's push into investment banking, while others think it will help groom Sloan to eventually become the bank's CEO. Wells Fargo is a Focus List Buy and a Long-Term Buy.


Rank Changes

EOG Resources ($99; EOG) is being initiated as a Long-Term Buy.


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