Portfolio Review

8/18/2014


Macy's dropped from Buy List on shortfall

Macy's ($56; M), hurt by a disappointing July-quarter earnings report and mixed guidance, is being dropped from the Buy List. Per-share earnings were $0.80, up 11% but below the consensus of $0.86. Revenue rose 3% to $6.3 billion and was in line with expectations. Same-store sales rose 3.4%. Macy's trimmed its full-year revenue outlook, saying it no longer expects to make up for weather-impacted weakness in the April quarter. For fiscal 2015 ending January, the retailer now targets same-store sales growth of 1.5% to 2.0%, versus a prior range of 2.5% to 3%. Management did reaffirm its per-share profit guidance of $4.40 to $4.50 for the year ending January, with the midpoint implying 11% growth. Prior to the report, the consensus was $4.47 per share. Macy's, which earns a solid 94 Quadrix Overall score, remains on the Long-Term Buy List based on its modest valuation and solid 24-month prospects. But the stock no longer ranks among our top year-ahead picks.

Magna on a roll

Fueled by higher vehicle production in North America (up 3%) and Europe (2%), Magna International ($111; MGA) said June-quarter adjusted earnings per share surged 33% to $2.37, topping the consensus of $2.22. It was the 11th consecutive positive earnings surprise. Revenue increased 6% and also beat the consensus. Management now targets full-year sales of $35.6 billion to $37.3 billion, versus a prior outlook of $34.9 billion to $36.6 billion. The consensus calls for sales of $36.6 billion and per-share earnings of $8.58 — up from $8.22 three months ago.

Bolstered by robust domestic demand and a recovery in foreign markets, auto-parts makers Lear ($96; LEA) and Magna have rallied 19% and 35% this year, respectively. Yet the stocks, with Quadrix Value scores above 75 and Overall scores above 97, seem reasonably valued considering recent earnings momentum and strong industry trends. Lear and Magna are Focus List Buys and Long-Term Buys.

Dover lifts payout

Dover ($86; DOV), an industrial conglomerate, boosted its quarterly dividend 7% to $0.40 per share, payable Sept. 15. Dover says it has now raised its dividend in 59 straight years, the fourth-longest streak of any publicly listed company.

Dover uses a steady stream of midsized acquisitions to supplement organic growth, spending $2.7 billion to buy 26 businesses from 2011 to 2013. It purchased three companies in the first half of 2014 for about $143 million. On Aug. 11, it announced an agreement to purchase Liquip International, an Australian manufacturer of bulk storage solutions in the petroleum, aviation, and chemicals markets.

Acquisitions should contribute 3% to 2014 revenue. Dover now sees organic growth near the high end of its prior outlook of 3% to 4% growth. Consensus profit estimates have risen since July 17, when management raised its full-year per-share profit guidance to a midpoint of $4.80. The shares, at 18 times expected current-year earnings, trade at a 5% discount to the median for S&P 1500 industrial stocks. Dover is a Long-Term Buy.

Walgreen boosts dividend

Walgreen ($62; WAG) raised its quarterly dividend 7% to $0.3375 per share, payable Sept. 12. The company, which has raised its dividend for 39 consecutive years, also initiated a $3 billion share-repurchase program that runs through August 2016. The drugstore giant said July revenue rose 6.1% to $6.39 billion, reflecting a 5.2% gain in same-store sales. Pharmacy sales accounted for 67% of total revenue, as prescriptions filled increased 3.7%.

On Aug. 6, Walgreen said it would spend roughly $15 billion to buy the remaining 55% of European drug wholesaler Alliance Boots — a deal which would create the world's largest wholesale distribution network, with more than 180,000 pharmacies and hospitals in 20 countries. Management also offered a mixed long-term outlook, saying revenue for fiscal 2016 should range from $126 billion to $130 billion, versus a prior view of $130 billion. Hurt by rising generic-drug prices and unfavorable reimbursement rates, the company now targets per-share earnings of $4.25 to $4.60 for fiscal 2016, versus the consensus estimate of $5.00 at the time of the announcement. Walgreen is rated B (average).

Cisco earnings report

Cisco Systems ($25; CSCO) reported July-quarter earnings per share of $0.55 excluding items, exceeding the consensus of $0.53 and the year-earlier total of $0.52. Revenue of $12.4 billion was flat with the year-earlier period but above the consensus of $12.1 billion. Cisco is having a hard time generating any sales momentum, but the stock is cheap at less than 12 times the consensus profit estimate for the year ending July 2015. Cisco, yielding 3.0%, is a Long-Term Buy.

Quanta contract award

Quanta Services ($35; PWR) won a contract to install 684 miles of transmission lines in eastern Canada, the company's largest individual transmission project to date. Quanta, which expects to complete the project in 2017, says it will maintain a long-term presence in the area. The contract lifted the stock, which had traded sideways since the company reported June-quarter results on July 31.

Per-share earnings increased 13% to $0.43, beating the consensus by a penny. Sales surged 27%. But backlog trends disappointed investors, as total orders dipped 4% from March-quarter levels, hurt by a 5% decline in orders for electric infrastructure. During the quarter, the electric business represented 67% of total sales, with oil and gas at 31%. For 2014, the consensus calls for per-share earnings of $1.98, up 28% on sales growth of 18%. Trading at less than 18 times estimated current-year earnings, Quanta is a Buy and a Long-Term Buy.

Corporate roundup

Dow Chemical's ($52; DOW) sodium-borohydride business has attracted the interest of multiple private-equity groups and could ultimately fetch $200 million, according to Reuters. Part of Dow's performance-additives unit, this business generates $28 million in annual earnings before interest, taxes, depreciation, and amortization — less than 1% of Dow's annual EBITDA. Dow seeks to divest up to $6 billion of assets by the end of 2015. Dow Chemical, under pressure from activist investors who want the chemical giant to slim down and improve its return on capital, is a Focus List Buy and a Long-Term Buy.


J.P. Morgan Chase ($56; JPM) agreed to sell roughly half its stake in its floundering private-equity unit. The sale is valued at roughly $2 billion and has been in the works for more than a year, as J.P. Morgan de-emphasized its private-equity operations to better focus on its lucrative investment banking business. Separately, J.P. Morgan has come under scrutiny regarding potential conflicts of interest. The Securities Exchange Commission is investigating whether the bank directed its private-banking clients to its own investment products rather than those offered by competing firms. J.P. Morgan Chase is a Long-Term Buy.


Schlumberger ($108; SLB) said September-quarter earnings per share could be trimmed by up to $0.03 because of economic sanctions in Russia that are limiting workers and equipment. Prior to the announcement, the consensus projected per-share earnings would advance 17% to $1.51 on a sales gain of 9%. Schlumberger, which is making adjustments to adapt to the sanctions, is expected to earn $5.71 per share this year, up 20%. The stock is a Focus List Buy and a Long-Term Buy.


Rank Change

Macy's ($56; M) is being downgraded from the Buy List but retained as a Long-Term Buy. Vanguard Short-Term Corporate Bond ($80; VCSH) now accounts for 6.4% of the Buy List.


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