Portfolio Review

5/12/2014


Amex downgraded

Our Quadrix stock-rating system tells a worrisome story about American Express ($86; AXP). In response to that story, we're dropping the stock from the Long-Term Buy List.

The Overall score has dipped to 50 from 77 at the end of March, dragged down by weakness in the Momentum, Value, and Earnings Estimates scores. Sales growth of 4% for the March quarter lagged the consensus, and cash from operations fell for the third time in the last four quarters. Since the earnings announcement, consensus profit targets for the June quarter as well as full-year 2014 and 2015 have dipped. The Value score of 49 suggests Amex isn't particularly cheap relative to other financials, nor does the company stand out based on our sector-specific scores.

Amex remains a solid company, but the loss of operating momentum and weakening fundamentals suggest it is no longer a top pick. Amex now earns a B (average) rating on our Monitored List.

Earnings reviews

CVS Caremark ($74; CVS) grew March-quarter earnings per share 23% to $1.02 excluding special items, missing the consensus by $0.02. Management estimates harsh weather and an unexpectedly higher tax rate reduced per-share profits by at least $0.03. Revenue advanced 6% to $32.69 billion on 10% growth for the pharmacy-services unit and a 3% gain for the retail business. Same-store sales climbed 1.4%. In other news, CVS said it is being investigated for its relationship with certain drugmakers, similar to the probe facing rival Express Scripts ($67; ESRX). Both CVS Caremark and Express Scripts are rated Buy and a Long-Term Buy.


For the March quarter, Quanta Services ($34; PWR) said per-share profits rose 16% to $0.44 per share excluding special items, topping the consensus by $0.07. Sales climbed 11% to $1.76 billion, also ahead of the consensus. The backlog surged 29% to $9.05 billion. Quanta's June-quarter target of 21% to 27% profit growth missed the consensus of 33%. But management expects growth to pick up in the second half of the year, with the midpoint of its full-year profit guidance range equating to 26%. Although back-loaded outlooks can make investors nervous, even the low end of Quanta's full-year profit range exceeded the consensus of 18% growth. Quanta is a Buy and a Long-Term Buy.


EOG Resources ($104; EOG) shares rallied after the exploration-and-production company said March-quarter earnings soared 56% to $1.40 excluding special items, topping the consensus by $0.20. Revenue jumped 22% to $4.08 billion, well ahead of the consensus of $3.79 billion, on an 18% surge in total production. EOG raised its 2014 production-growth target to 12% from 11.5%, with crude oil now projected to climb 29%, up from a prior forecast of 27%. EOG is a Long-Term Buy.


Cognizant Technology Solutions ($49; CTSH) grew March-quarter earnings per share 22% to $0.62 excluding special items, topping the consensus by $0.07. Revenue advanced 20% to $2.42 billion as growth in Europe, up 35%, outpaced North America, up 16%. However, shares fell on concerns regarding Cognizant's guidance. For the June quarter, management expects per-share profits of $0.62, implying 16% growth and ahead of the consensus of $0.58. But the June-quarter sales target fell short of the consensus, causing some analysts to wonder if Cognizant's full-year outlook is at risk. Cognizant is a Focus List Buy and a Long-Term Buy.


UGI ($46; UGI) earned $1.90 per share excluding special items in the March quarter, up 26% to exceed the consensus by $0.32. Revenue jumped 24% to $3.16 billion, also ahead of the consensus. UGI raised its per-share-profit guidance range for fiscal 2014 ending September by $0.35 to $2.95 to $3.05, well above the $2.72 consensus. UGI is a Buy and a Long-Term Buy.

Deals chatter

B/E Aerospace ($98; BEAV) shares soared after the company said it hired advisers to explore strategic alternatives, including a possible outright sale or the divestitures of its airplane-consumables or cabin-equipment segments. The announcement is somewhat surprising given B/E's recent push into energy services, with five acquisitions since August for a total of about $530 million.

The shares are not cheap at 22 times estimated 2014 earnings, a 32% premium to the median S&P 1500 aerospace and defense stock. But management would probably avoid making its plans public unless a deal was near. B/E also canceled its annual investor meeting, which would seem to signal that talks are already under way. However, the negotiations are not advanced, according to a published report. The stock is a Buy and a Long-Term Buy.


DirecTV ($88; DTV) shares rallied on a strong March-quarter results and reports that it may be acquired by AT&T ($35; T). AT&T reportedly approached DirecTV about a merger, and the satellite-TV operator has reportedly hired Goldman Sachs ($155; GS) to explore the possibility of a sale. In DirecTV, AT&T would gain roughly 38 million TV subscribers, including 20.3 million in the U.S. AT&T has fewer than 6 million TV subscribers but offers broadband internet, a gaping hole in DirecTV's product portfolio.

For the March quarter, DirecTV earned $1.63 per share, up 14% excluding charges for the revaluation of assets held in Venezuela, which has undergone currency deflation. The consensus profit estimate was $1.50 per share. Sales rose 4% to $7.86 billion. U.S. sales climbed 5%, helped by 12,000 net subscriber additions and 4% growth for average monthly revenue per subscriber. Currency headwinds held sales flat in Latin America despite the net addition of 361,000 new subscribers; revenue rose by double-digits at constant currency.  DirecTV is a Focus List Buy and a Long-Term Buy. AT&T is rated A (above average). Goldman Sachs is rated B (average).


Merck ($57; MRK) agreed to sell its consumer-products unit to Bayer ($138; BAYRY) for $14.2 billion in cash. Merck is rated C (below average).

Corporate roundup

A U.S. jury awarded Apple ($594; AAPL) $120 million in a patent lawsuit filed against Samsung Electronics. Apple had sought $2.19 billion — or $40 per phone Samsung sold that violated its patents; Samsung had suggested a penalty of $38 million — roughly $0.70 per phone. The jury found that Samsung violated two of Apple's four patents in question, while Apple violated two Samsung patents. Apple is a Buy and a Long-Term Buy.


J.P. Morgan Chase ($53; JPM) said trading revenue from equities and fixed income would fall 20% in the June quarter. The Federal Reserve's decision to curtail bond repurchases contributed to weakness in trading revenues at major banks in the March quarter. J.P. Morgan is on pace for its weakest first half of trading since the financial meltdown. J.P. Morgan Chase is a Long-Term Buy.


Rank Changes

American Express ($86; AXP) is being removed from the Long-Term Buy List. Vanguard Short-Term Corporate Bond ($80; VCSH) now accounts for 5.9% of the Long-Term Buy List.


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