Portfolio Review

6/2/2014


Foot Locker sets a vigorous pace

Foot Locker ($48; FL) shares rose after the retailer said it grew earnings per share 22% to $1.11 excluding special items in the April quarter, topping the consensus by $0.05. Total revenue jumped 14% to $1.87 billion, also ahead of the consensus estimate. Same-store sales advanced 7.6%, marking the 17th consecutive quarter of growth. Foot Locker says same-store sales were up by mid-single-digits for the period from the start of April through late May. During the April quarter, the retailer also expanded its gross profit margin for the first time since the year-earlier period.

Four of Foot Locker's six Quadrix® category scores exceed 80, and both sector-specific scores top 90.The stock has surged 17% so far this year, yet it still earns an above-average Value score of 69. Its trailing P/E ratio of 16 remains 26% below its five-year average and 14% below the median for S&P 1500 apparel retailers. Rising analyst estimates project Foot Locker will grow per-share earnings 15% to $3.29 in fiscal 2015 ending January. The stock trades at less than 15 times estimated earnings for the current fiscal year, an 11% discount to its peer group. Foot Locker, earning an Overall score of 97, is a Focus List Buy and a Long-Term Buy.

Technology review

To preserve corporate control for its founders, Google in April split its stock 2-for-1, creating new Class C shares (GOOG; $566), which lack voting rights but trade alongside the Class A shares (GOOGL; $575). Since the split, the Class C shares are down 0.7%, while the Class A shares have risen 0.3%. Even if shareholders cannot mount more than a symbolic challenge to the desires of Google's founders — who maintain control via ownership of nontraded Class B shares with 10 times the voting power of Class A shares — the voting rights have monetary value. For now, that value is $9 per share. In 54% of trading days since the split, the Class A shares have outperformed the Class C shares, though neither stock's return has deviated from the other by more than a percentage point for a given day.

In the first few weeks following the split, the Class C shares experienced heavier trading volume. But the Class A shares now consistently see more volume. Recall that if Class C shares trade more than 1% lower than Class A shares on average during the first 12 months after the split, Google will issue Class C shareholders some combination of cash, Class A shares, and Class C shares to help offset the difference.

In other news, Google is reportedly designing a tablet featuring multiple cameras and infrared sensors to create three-dimensional images of objects or surroundings. The device could help visually impaired users better navigate indoors and create a more immersive experience for video-game players. To bolster its mapping business, Google has reportedly entered preliminary talks to acquire Skybox Imaging in a deal that could be worth about $1 billion. Skybox uses satellites to capture detailed photographs.

Separately, Google wants to build 100 prototype driverless cars that lack a steering wheel, gas pedal, and brakes, according to published reports. Earlier reports indicate that Google has talked with Magna International ($103; MGA) about manufacturing the cars. Google is a Focus List Buy and a Long-Term Buy. Magna, profiled in Analysts' Choice, is a Focus List Buy and a Long-Term Buy.


Apple ($626; AAPL) shares have rallied 19% since the company posted its March-quarter report and announced a 7-for-1 stock split, set to occur after the market closes June 2. Some experts anticipate that at Apple's annual developer's conference, also occurring June 2, the company will introduce a fitness application. Others expect Apple to announce plans for something far more ambitious — a smart-house platform. Speculation is also building that Apple could unveil a new hardware product, such as an iWatch, a television, or new MacBook. In other news, Apple has agreed to acquire Beats Music (streaming music) and Beats Electronics (headphones and audio electronics) for $3 billion. Apple is a Buy and a Long-Term Buy.

Corporate roundup

Wells Fargo ($51; WFC) continues to chip away at its overhanging legal concerns, most recently agreeing to pay at least $67 million in homeowners assistance and customer-service upgrades to settle a civil lawsuit linked to the so-called robo-signing scandal. Wells Fargo was one of five banks that agreed in 2012 to pay a total of $25 billion over botched foreclosure proceedings, in which workers approved legal documents for home foreclosures without proper review. The company estimated potential legal losses in excess of the bank's litigation reserve were no more than $911 million at the end of March, down 4% from the estimate at the end of 2013 and down 17% from a year earlier.

With legal storm clouds lifting, Wells Fargo CFO John Shrewsberry said the bank plans to return 55% to 75% of net income to shareholders through dividends and net stock buybacks, up from its prior target of 50% to 65%. The stock has generated a 13% total return this year — more than triple the average return for S&P 500 financial stocks. Wells Fargo, earning a Quadrix Value rank of 80, is a Focus List Buy and a Long-Term Buy.


Determined to continue its push into Brazil, CVS Caremark ($77; CVS) resumed talks to acquire Drogarias Pacheco São Paulo. Brazil's third-largest drugstore chain, with 840 stores, DPSP, has already rejected a $2 billion takeover offer from CVS and reportedly seeks $2.7 billion. In February 2013, CVS acquired Brazil's eighth-largest drugstore chain. CVS Caremark is a Buy and a Long-Term Buy.


Continental Resources ($138; CLR) CEO Harold Hamm predicted U.S. lawmakers could repeal a ban on exporting crude oil as early as 2015. The ban dates back to the 1970s. Without the ban, U.S. drillers would likely ramp production at sites such as North Dakota's Bakken Shale, where Continental claims to be the largest leaseholder. Bakken fields produce a type of crude many U.S. refiners cannot process. Continental Resources is a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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