Portfolio Review

7/28/2014


Earnings roll call

Energy services

Halliburton ($73; HAL) and Schlumberger ($113; SLB) reported June-quarter results within days of each other. They painted similar portraits of the oilfield services and equipment industry: strong activity in North America and weakness in Latin America, particularly Mexico. Neither company has experienced material effects from the political strife in Russia, though Halliburton conceded that potential sanctions could hurt business in the second half of the year.

Halliburton earned $0.91 per share from continuing operations, up 25% and in line with the consensus. Sales, up 10% to $8.05 billion, topped analysts' expectations. Cash from operations held firm at $1.12 billion. Regarding the U.S. hydraulic-fracturing market, Halliburton CEO David Lesar said, "We see activity increasing at breakneck rate." The company also increased its share-repurchase plan to $6.0 billion, enough to buy back 10% of shares at current prices. Halliburton is a Buy and a Long-Term Buy.


Schlumberger said June-quarter earnings per share advanced 19% to $1.37, easing past the consensus by a penny. Revenue rose 8% to $12.05 billion, also ahead of the consensus. Management noted "significantly higher activity" offshore, especially in the Gulf of Mexico. Separately, Schlumberger formed a partnership to provide technology and equipment to Precision Drilling ($13; PDS), Canada's largest driller. Schlumberger is a Focus List Buy and a Long-Term Buy.

Industrials

B/E Aerospace ($95; BEAV) reported June-quarter earnings per share of $1.13 excluding special items, up 27% and $0.06 above the consensus. Revenue also exceeded the consensus, soaring 28% to $1.09 billion on a 36% jump in consumables management, while backlog rose 6% to $8.9 billion. Operating profit margins slipped by half of a percentage point. Management raised its sales target but failed to raise its 2014 per-share-profit guidance of $4.35, which lags the consensus by $0.06. Although shares fell on an otherwise strong report, B/E Aerospace remains a Buy and a Long-Term Buy.


For the June quarter, Dover ($90; DOV) reported earnings per share from continuing operations of $1.29, up 14% excluding special items. The consensus was $1.28. Sales climbed 6% to $2.05 billion, with growth evenly split between acquisitions and organic gains. Dover raised its 2014 per-share-profit guidance. Dover is a Long-Term Buy.


ManpowerGroup's ($82; MAN) per-share profits surged 29% to $1.35 in the June quarter, easing past the consensus by $0.02. Revenue advanced 6% to $5.32 billion. Looking ahead to the September quarter, Manpower expects per-share profits of $1.46 to $1.54, compared to $1.26 earned in the year-ago quarter and the consensus of $1.45 at the time of the announcement. Despite solid results and impressive guidance, the stock retreated, partly due concerns about stagnation in France's labor market, where Manpower has its largest presence. Manpower is a Focus List Buy and a Long-Term Buy.


Norfolk Southern ($108; NSC) earned $1.79 per share in the June quarter, up 23% and a $0.05 ahead of the consensus. Revenue climbed 9% to $3.04 billion on broad growth for intermodal (up 11%), general merchandise (8%), and coal (7%). Total volume increased 8%. Norfolk raised its quarterly dividend 6% to $0.57 per share, payable Sept. 10. Norfolk Southern is a Long-Term Buy.


Packaging Corp. ($66; PKG) grew per-share profits 59% to $1.16 excluding special items in the June quarter, topping the consensus by $0.05. Revenue jumped 84% to $1.47 billion, benefiting from the $2.1 billion purchase of Boise in October 2013. Packaging Corp. also reported higher volumes and prices for corrugated products. For the September quarter, management expects earnings per share to advance 37% to $1.25. Packaging Corp. is a Buy and a Long-Term Buy.

Technology

For the June quarter, Apple ($95; AAPL) said per-share profits climbed 20% to $1.28, exceeding the consensus by $0.05. Revenue increased 6% to $37.43 billion. Balanced sales growth for the iPhone (up 9%), iTunes (up 12%), and Mac (up 13%) overcame weakness from the iPad (down 8%). Apple's sales fell short of the consensus, as did its sales guidance for the current quarter. But shares rallied, likely from a combination of relief that Apple's gross profit margins are stabilizing and anticipation of the forthcoming wave of new Apple products. Apple is a Buy and a Long-Term Buy.


Google ($604; GOOGL) earned $6.08 per share excluding special items in the June quarter, up 23% but $0.16 short of the consensus estimate. However, sales topped analyst expectations, climbing 22% to $15.96 billion. Google has now posted double-digit revenue growth in each of the past 19 quarters. The average cost per click on Google websites and those on partner sites fell 6%, though the number of paid clicks by consumers on ads serviced by Google rose 25%. Google is a Focus List Buy and a Long-Term Buy.


EMC ($29; EMC) reported June-quarter earnings per share of $0.43 excluding special items, up 3%. Sales increased 5% to $5.88 billion. EMC raised its 2014 guidance for stock buybacks to $3 billion from $2 billion, translating to about 5% of outstanding shares. The quarterly results come amid calls from an activist hedge fund to spin off software developer VMware ($96; VMW). The CEO of EMC, which owns about 80% of VMware, expressed reluctance about divesting but said he would meet with the hedge fund. EMC is a Long-Term Buy. VMware is rated A (above average).


Qualcomm's ($82; QCOM) per-share profits jumped 40% to $1.44 excluding the QSI segment and special items in the June quarter, topping the consensus estimate of $1.22. Sales increased 9% to $6.81 billion, ahead of the consensus. However, the midpoint of Qualcomm's September-quarter sales and profit guidance missed analysts' expectations. Qualcomm is a Buy and a Long-Term Buy.

Other reports

Capital One Financial ($82; COF) said June-quarter earnings per share climbed 10% to $2.04 in the June quarter, well ahead of the consensus of $1.82. Revenue slipped 3% to $5.47 billion as declines in credit cards (down 9%) and consumer banking (down 4%) more than offset growth from commercial banking (up 10%). Average deposits crept 1% higher, topping $206 billion. Capital One is a Long-Term Buy.


Comcast ($55; CMCSa) grew per-share profits 15% to $0.75 in the June quarter, exceeding the consensus by $0.03. Sales increased 4% to $16.84 billion. The cable business saw revenue rise 5% to $11.03 billion. Comcast shed a net 144,000 video customers, compared to 162,000 lost in the year-ago quarter. NBCUniversal reported roughly flat sales of $6.02 billion, hurt by a 15% decline for filmed entertainment. Comcast is a Buy and a Long-Term Buy.


Dow Chemical ($52; DOW) shares rallied after the company reported June-quarter earnings per share of $0.74 excluding divestitures and special items, up 16% and $0.02 above the consensus. Adjusted for divestitures, sales rose 3% to $14.92 billion on growth across all six units. Prices increased 2%, volumes 1%. Dow expects to divest $4.5 billion to $6 billion of assets by the end of 2015. Dow Chemical is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Shire ($254; SHPG) finally relented to AbbVie's ($54; ABBV) overtures by agreeing to a takeover offer worth about $54 billion in cash and stock. AbbVie is rated B (average). Shire, downgraded in the last issue, should be sold.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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