Portfolio Review

4/21/2014


Financial earnings roundup

Wells Fargo ($49; WFC) shares rose after the bank said March-quarter earnings per share jumped 14% to $1.05, topping the consensus by $0.08. Core deposits climbed 5%, while total average loans crept up 3% on growth in commercial and industrial borrowing. The bank also released $500 million in loan-loss reserves and cut operating expenses 4% to offset weakness elsewhere.

Residential-mortgage originations totaled $36 billion, down 67% from the year-ago quarter and 28% lower than the December quarter. But Wells Fargo's home-mortgage business may be stabilizing, given that the mortgage pipeline posted its first sequential gain since the June 2012 quarter. Net interest margin slipped, as did revenue — down 3% to $20.63 billion, in line with analysts' expectations. Wells Fargo is a Focus List Buy and a Long-Term Buy.


American Express ($86; AXP) grew earnings per share 16% to $1.33 per share in the March quarter, exceeding the consensus by $0.03. Total revenue net of interest expense rose 4% to $8.12 billion, below the consensus. Spending by card members advanced 6% globally and 7% in the U.S. Amex is a Long-Term Buy.


Capital One Financial ($75; COF) earned $1.96 per share in the March quarter, up 11% and $0.27 above the consensus. Revenue slipped 3% to $5.37 billion, slightly below analyst expectations. U.S. volumes for card purchases increased nearly 6%. Within the consumer-banking unit, auto-loan originations surged 25%, while average deposits fell 1%. For the commercial bank, average loans climbed 5%. Capital One is a Long-Term Buy.


U.S. Bancorp ($41; USB) said March-quarter earnings per share were flat at $0.73, in line with the consensus. Although net interest margin fell, average total deposits rose 5%, while average loans advanced 6% on strong commercial-loan growth. In other news, U.S. Bancorp agreed to acquire Ally Bank's document-custodian unit for an undisclosed amount. While the results were somewhat disappointing, 2014 expectations for U.S. Bancorp are low, and the stock remains a Long-Term Buy.

March-quarter earnings

Google ($549; GOOGL) grew adjusted per-share earnings 5% to $6.27 in the March quarter, missing the consensus estimate by $0.13. Revenue increased 19% to $15.42 billion, slightly short of the consensus, which projected $15.52 billion. Google's core advertising business reported 17% higher sales. Paid clicks surged 26%, though cost-per-click declined 9% as more and more consumers migrate to mobile devices, which command lower ad prices.

In a bid to bring the internet to remote areas, Google also agreed to acquire Titan Aerospace, which is working on sun-powered drones designed to fly without stopping for years at a time. Separately, in a one-day sale for U.S. buyers only, Google on April 15 took orders for Google Glass. The company priced its internet glasses at $1,500.

As a reminder, we are tracking Google's Class A shares (GOOGL) rather than its Class C stock ($536; GOOG) in the wake of the April 2 stock split. For now, we see no problem with investors maintaining their positions in Class C shares, though we recommend that new investments focus on Class A shares. While the quarterly disappointment was genuine, so was the advertising growth, and for now the stock remains a Focus List Buy and a Long-Term Buy.


In the March quarter, SanDisk ($75; SNDK) grew earnings per share 71% to $1.44 excluding special items, topping the consensus by $0.19. Sales jumped 13% to $1.51 billion on a 61% surge in solid-state drives and strong growth through retail channels. The share count fell 4%, or nearly 7% excluding a call option that offset some shares. Operating profit margins reached 31.5% in the quarter, up from 21.5% in the year-earlier period. SanDisk is a Buy.


United Rentals ($88; URI) said March-quarter earnings per share surged 55% to $0.90 excluding special items, topping the consensus of $0.71. Sales grew 7% to $1.18 billion, helped by higher equipment utilization. Rental revenue rose 10%. For United Rental's owned equipment, rental volumes rose 7.6% while rates increased 4.3%. Cash from operations surged 24% to $508 million. United Rentals is rated Focus List Buy and Long-Term Buy.


In what may become a recurring theme this earnings season, Intel ($27; INTC) posted weak results that topped even weaker projections made by analysts. The technology bellwether said March-quarter earnings per share slumped 5% to $0.38 per share, topping the consensus by a penny. Revenue crept 1% higher to $12.76 billion, as an 11% jump in semiconductor sales to data centers narrowly offset a 1% decline in the far larger personal-computer (PC) segment.  Intel's revenue guidance for the June quarter has a midpoint of $13 billion, slightly ahead of the consensus of $12.96 billion. Shares rose on the report. Intel is rated A (above average).

Tech giants take diverging paths to profits

Apple ($518; AAPL) and Samsung Electronics are struggling to preserve profit margins on smartphones as cheap alternatives flood the market. As a result, both must navigate the treacherous path of grabbing growth opportunities in lower-tier markets while preserving their status as luxury brands.

Seeking to put itself within the reach of a larger group of aspirational consumers, Samsung lowered the price of its marquee Galaxy S5 smartphone, released earlier this month. Apple, which has reported lower operating profit margins in five straight quarters, appears to be taking a different approach. It has reportedly entered talks with wireless carriers to increase the price of its next iPhone by $100. Carriers may push part or all of that price hike on to consumers. In other news, rumors continue to swirl that Apple will launch a smartwatch in the September quarter. Apple is a Buy and a Long-Term Buy.


Unlike Apple, Amazon.com ($316; AMZN) seems to have little interest in turning a profit on its hardware products. Instead, it views devices as a vehicle to drive its core retail business. Hoping to hasten the spread of these small, online stores into consumers' hands, Amazon reportedly plans to launch a smartphone in September. The device's four cameras will display images that look three-dimensional, and which users can view without special glasses.

The move signals Amazon's determination to expand further into hardware. Earlier this month it introduced the Fire TV set-top box and discussed plans to sell a barcode-scanning wand that lets users reorder groceries without logging on to their computers. Amazon.com is rated C (below average).


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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