Portfolio Review

6/9/2014


Two new Long-Term Buys

Halliburton ($66; HAL), one of the world's leading providers of oilfield services, is being added to the Long-Term Buy List. After three quarters of year-to-year sales growth below 3.5%, the company has delivered three consecutive quarters of at least 4.8% growth. Profit margins remained under pressure in the March quarter but should expand as improvement in the North American drilling market leads to better pricing and faster sales growth. Halliburton seems capable of meeting the consensus 2015 profit estimate of $5.09 per share. If the company meets that estimate and the trailing P/E returns to the 10-year norm of 17, the stock would trade for $87.

Cash provided by operations has shown dramatic improvement in recent quarters, with at least 18% year-to-year growth in five of the last six quarters. The company spent $500 million on share buybacks in the March quarter, and we expect continued repurchases to keep the share count moving lower. The dividend, increased by 20% in November, is likely to see another double-digit increase this year. Halliburton, with an Overall Quadrix score of 91, is a Long-Term Buy.


Alaska Air Group ($100; ALK), already a Focus List Buy, is being added to the Long-Term Buy List. Late last month, Delta Air Lines ($41; DAL) announced a series of new flights out of Seattle, while Alaska said it would boost its daily departures out of Seattle by 11% as it establishes routes to six new cities. Despite the threat of price wars and expensive expansion, Alaska closed at an all-time high June 2 and up 36% so far this year. Recent price action suggests the market isn't overly worried about stiffening competition in Seattle. Despite its recent strength, Alaska still looks reasonably valued at less than 17 times trailing earnings, 17% below the industry median.

The consensus projects per-share-profit growth of 31% this year, 12% in 2015, and 14% annually over the next five years, and profit estimates are on the rise. Given the economy's modest-but-steady recovery, consumers' continued willingness to spend, and the airline industry's improving fundamentals, we like Alaska's chances of topping expectations over the next 24 to 36 months. A midcap airline stock could boost the Long-Term Buy List's volatility, but in our view, Alaska's upside is worth the risk.

Stick with B/E Aerospace

It's been more than a month since B/E Aerospace ($97; BEAV) unexpectedly announced it was exploring "strategic alternatives," including a possible sale, merger, or spin-off. Shares rallied 9% on May 5, the day after the news, and hit an all-time high three days later. But the stock has languished in recent weeks, partly reflecting the uncertain timing of any move. On June 3, B/E postponed its annual meeting to allow for exploration of the strategic alternatives mentioned earlier. Some analysts speculate the total company could be worth as much as $130 to $140 per share, with the core interiors business potentially attracting bids as high as $80 to $90.

A leading maker of aircraft interiors and fasteners, B/E Aerospace is leveraged to burgeoning production at Airbus and Boeing ($136; BA). Over the last 12 months, per-share earnings surged 23% on sales growth of 15%. For 2014, rising estimates call for per-share earnings growth of 24%, with sales up 18%.

On June 2, B/E announced deals to acquire a maker of aircraft lighting systems and a maker of seating products for helicopters for a total of $470 million. The deals should begin contributing to per-share earnings in 2015. At 22 times expected 2014 earnings and 18 times expected 2015 earnings, B/E trades at a premium to its historical norms. Still, we are maintaining the stock as a Buy and a Long-Term Buy for now. Even without a rich takeover bid, we think the stock's downside is limited by strong underlying trends in global air traffic, expanding airline fleets, and a robust aircraft-replacement cycle.

Technology report

Skyworks Solutions ($46; SWKS) shares jumped 6% after the company raised its sales and profit targets for the June quarter. The company expects per-share profits to jump 48% to $0.80 (up from $0.73 at the time of the announcement) on sales growth of 31% (up from the 23% consensus). Skyworks credited the higher profit guidance to strong demand for increasingly complex analog semiconductors. Also, a joint venture with Panasonic should boost gross profit margins by 100 basis points (1%) in fiscal 2015 ending September. As of the afternoon of June 4, roughly two trading days after the announcement, the profit consensus for fiscal 2015 had already risen 5%. Skyworks is a Buy and a Long-Term Buy.


While rumors call for Apple ($638; AAPL) to release a new iPhone late this year, investors looking for a hardware game-changer from Apple at the company's Worldwide Developers Conference June 2 came away disappointed. Apple did announce plans for health and home-networking apps for the iPhone, a new programming language for developers, and upgrades to its operating system. The stock remains a Buy and a Long-Term Buy.

Banks' trading troubles

According to Federal Deposit Insurance Corp. data, U.S. banks' securities-trading revenue fell 18% in the first quarter of 2014, suggesting J.P. Morgan Chase ($56; JPM) is not alone with its trouble; early last month, the banking giant projected a 20% decline in June-quarter trading revenue. Bank executives admit the trading slowdown has no quick fix. The stricter regulatory climate may have permanently dampened banks' appetite for trading. Consensus profit estimates for J.P. Morgan have fallen steadily over the last three months but still target per-share-profit growth of 23% this year and 11% next year. In other news, the city of Los Angeles sued J.P. Morgan over allegedly discriminatory lending practices. For now, J.P. Morgan remains a Long-Term Buy.

Corporate roundup

Rumors about Shire's ($176; SHPG) potential purchase of NPS Pharmaceuticals ($32; NPSP) drove the price of both stocks higher. However, NPS said June 1 that Shire had not contacted the company about a takeover. While deal speculation can be fun to follow, Shire, rated Long-Term Buy, is an attractive investment in its own right.


Helmerich & Payne ($109; HP) raised its quarterly dividend 10% to $0.6875 per share, payable Sept. 2. The contract driller also announced contracts to build and operate nine new FlexRigs in the U.S., bringing new-build commitments to 53 for the year. H&P is a Focus List Buy and a Long-Term Buy.


Rank Changes

Alaska Air Group ($100; ALK), already a Focus List Buy, is being added to the Long-Term Buy List. Halliburton ($66; HAL) is also being added to the Long-Term Buy List. Vanguard Short-Term Corporate Bond Index ($80; VCSH) now accounts for 1.5% of the Long-Term Buy List.


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