Portfolio Review

4/28/2014


Fifth Third downgraded

Fifth Third Bancorp ($21; FITB) is being removed from the Buy and Long-Term Buy lists after the regional bank posted disappointing results in a March quarter marred by a rash of one-time items. Fifth Third earned $0.36 per share including special items, down 22% and $0.05 below the consensus. The bank earned about $0.39 per share excluding a $36 million decline in valuation for warrants it holds on Vantiv ($30; VNTV), its former payment-processing business. It also took a $60 million hit in loan charge-offs and a $51 million charge for litigation reserves. 

Total average loans increased 4%, with consumer loans flat and commercial loans up 7%. Citing weakness in mortgage banking, Fifth Third lowered its 2014 profit guidance. Shares slipped on the results but have appreciated 47% since we first recommended the stock in August 2012, outstripping the S&P 1500 Index's 27% gain. Fifth Third is being dropped from the Monitored List and should be sold.

Earnings roll call

Schlumberger ($102; SLB) continues to report healthy demand for its oilfield services despite unusually harsh weather in North America and unrest in Ukraine. The company earned $1.21 per share in the March quarter, up 16% excluding special items and a penny above the consensus. Total revenue increased 6% to $11.24 billion, with Middle East and Asia up 19% and North America up 12%. Management blamed an 8% sales decline in Latin America on Brazil's deepwater market, which will likely remain weak for the remainder of the year. Schlumberger is a Focus List Buy and a Long-Term Buy.


Qualcomm's ($81; QCOM) per-share profits rose 12% to $1.31 excluding special items in the March quarter, topping the consensus by $0.09. Sales increased 4% missing the consensus. The midpoint for Qualcomm's June-quarter guidance calls for sales of $6.5 billion, up 4%, and earnings per share of $1.20, up 17%; both below the consensus. Despite management's disappointing outlook, Qualcomm shares look reasonably valued at 16 times projected fiscal 2014 earnings. For now, the stock remains a Focus List Buy and a Long-Term Buy.


Union Pacific's ($192; UNP) per-share profits jumped 17% to $2.38 in the March quarter, easing past the consensus by a penny. Operating revenue grew 7% to $5.64 billion on growth across all types of freight, including 16% higher agricultural and 10% higher industrial. Results also benefited from 5% higher volumes, pricing gains, and a 3% decline in the average price of diesel fuel. Shares rallied on the results. Union Pacific is a Focus List Buy and a Long-Term Buy.


Apple ($532; AAPL) grew March-quarter earnings per share 15% to $11.62, topping the consensus of $10.18. Revenue advanced 5% to $45.65 billion, also ahead of the consensus. Sales rose 14% for the iPhone and 1% for the Mac, though iPad sales fell 13%. Apple anticipates June-quarter sales growth of 2% to 8%, compared to the consensus target of 7%. Apple hiked its quarterly dividend 8% to $3.29, payable May 15. It also bolstered its stock-buyback plan to $90 billion from its prior target of $60 billion. Finally, Apple announced a 7-for-1 stock split, set to occur in June.  Apple is a Buy and a Long-Term Buy.


Dow Chemical ($49; DOW) said March-quarter earnings per share rose 14% to $0.79 excluding special items, topping the consensus by $0.08. Cost-savings measures taken in recent years helped Dow expand its profit margins. Revenue crept 1% higher to $14.46 billion. Dow Chemical is a Buy and a Long-Term Buy.


B/E Aerospace ($84; BEAV) grew per-share profits 22% to $1.06 in the March quarter excluding acquisition-related items, exceeding the consensus by a nickel. Sales surged 20% to $1.01 billion on double-digit growth from all three units. Management now expects 2014 sales in excess of $4 billion, implying at least 15% growth, compared to the consensus of $4.03 billion. Shares rallied on the results. B/E Aerospace is a Buy and a Long-Term Buy.


Raymond James Financial ($51; RJF) said March-quarter earnings per share increased 6% to $0.72 excluding special items, missing the consensus by $0.05. Net revenue climbed 3% to $1.18 billion, or 7% excluding asset sales in the year ago quarter. The asset-management unit grew sales 26%, the investment bank 34%. Despite the profit shortfall, Raymond James' story seems intact, and the stock remains a Buy and a Long-Term Buy.


BlackRock ($308; BLK) grew March-quarter earnings per share 21% to $4.43, well ahead of the consensus estimate of $4.11. Revenue advanced 9% to $2.67 billion. Assets under management rose 12% to $4.40 trillion on positive net inflows for equity, bond, alternative, and multiasset funds. Net inflows into long-term funds amounted to $26.73 billion, with 52% of that total coming from retail investors. However, the fund inflows were concentrated in index funds, which generate smaller fees than actively managed products. BlackRock is a Long-Term Buy.


Norfolk Southern ($97; NSC) earned $1.17 per share in the March quarter, down 4% excluding special items but $0.02 above the consensus estimate. Hurt by 1% lower volumes, revenue slipped 2% to $2.69 billion, missing the consensus. Peeking ahead to the June quarter, management says shipments across all its business units are rebounding. Norfolk Southern is a Long-Term Buy.


In the March quarter, EMC ($27; EMC) earned $0.35 per share, down 10% but in line with the consensus. Sales increased 2% to $5.48 billion, ahead of the consensus. Although EMC raised its 2014 sales target above the consensus, its new profit guidance of $1.90, implying 6% growth, fell short of market expectations of $1.94 and the company's January projection of $1.95. EMC also raised its quarterly dividend 15% to $0.115 per share, payable July 23. EMC is a Long-Term Buy.


For the March quarter, Dover ($86; DOV) earned $1.01 per share from continuing operations, up 9% excluding special items to match the consensus. Sales climbed 7% to $1.88 billion, powered by 26% growth from the fluids segment. Year-earlier results excluded Knowles, spun off on Feb. 28. Dover is a Long-Term Buy.

Comcast's earnings show dazzles investors

Comcast ($51; CMCSa) shares rallied after March-quarter earnings per share jumped 33% to $0.68 per share excluding special items, topping the consensus by $0.04. Revenue surged 14%, or 6% excluding the Winter Olympics. The cable business grew sales 5%, as Comcast added 24,000 net video subscribers, its second straight quarter of growth after more than six years of quarterly declines. Comcast ended the quarter with 22.6 million video subscribers. Excluding the Winter Olympics, NBCUniversal's sales rose 8% on growth of 1% for cable networks, 17% for broadcast, 11% for filmed entertainment, and 5% for theme parks.

In other news, Comcast reportedly entered preliminary talks with Charter Communications ($127; CHTR) about shedding nearly 4 million subscribers, a deal potentially worth $18 billion to $20 billion. According to published reports, the deal on the table involves the sale of some subscribers, a swap of others, and spin-off with Charter buying a minority stake. The final result could be the above combination, pieces of it, or no deal at all; it's too early to tell. Comcast's management has promised to keep its video-subscriber market share below 30% if it wins approval to acquire Time Warner ($138; TWC). Comcast is a Buy and a Long-Term Buy.


Rank Changes

Fifth Third Bancorp ($21; FITB) is being dropped from the Buy List, Long-Term Buy List, and from coverage. Vanguard Short-Term Corporate Bond Index ($80; VCSH) now accounts for 3.2% of the Buy List and 6.6% of the Long-Term Buy List.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com