Portfolio Review

9/8/2014


All eyes on Apple

Apple ($103; AAPL) has scheduled a media event for Sept. 9, where it is widely expected to unveil a new iPhone. Apple has reportedly partnered with American Express ($90; AXP), MasterCard ($76; MA), and Visa ($215; V) to create a mobile wallet that will let consumers make payments at retailers through its forthcoming iPhone.

Casting a shadow over the event are concerns regarding Apple's ability to secure personal data and fresh competition from rival Samsung Electronics. Hackers stole images of several celebrities that were saved on Apple's iCloud service. Apple claims the theft was the result of targeted attacks on individual accounts rather than a broad breach of iCloud.

Separately, Samsung showed off its new Galaxy 4 Note smartphone, initially viewed by some experts as an incremental improvement from prior models rather than a radical overhaul. But Samsung also announced a partnership with Facebook ($77; FB) to design virtual-reality headsets to go with the smartphone.

Shares of Skyworks Solutions ($56; SWKS) and other companies that supply iPhone components have shown strength in the past month in anticipation of the new device. The group has also gotten a lift from a robust earnings report from phone-chip maker Avago Technologies ($85; AVGO), posted Aug. 28. Apple is a Focus List Buy and a Long-Term Buy. Skyworks is a Buy and a Long-Term Buy. Amex, Facebook, MasterCard, and Visa are rated B (average).

Top 15 Utilities changes

New stocks
Scana ($51; SCG) provides electricity or gas to roughly 2 million customers in North Carolina, South Carolina, and Georgia. Profit estimates for 2014 and 2015 edged higher in the wake of a stronger-than-expected June quarter.


Laclede Group ($50; LG), which has raised its dividend in each of the last 10 years, provides natural gas to 1.3 million customers in Missouri. In April, Laclede agreed to purchase Alabama Gas Corp. from Energen ($79; EGN) for $1.6 billion in cash and the assumption of debt.

Drops
National Fuel Gas ($76; NFG) shares have bounced in the last three weeks despite weak operating momentum and sector-specific scores below 20. We are selling on the strength.


Great Lakes Energy ($26; GXP) has missed profit estimates in the last two quarters. The shares look cheap, but we are no longer confident in their year-ahead potential.

B/E Aerospace can regain lost altitude

B/E Aerospace ($83; BEAV) confirmed plans to spin off its consumables-management unit, consisting of the aerospace-distribution and energy-services businesses, by the end of the year. The new company — called KLX with a pending stock symbol of KLXI — would be a leading provider of fasteners, bearings, and electrical components to more than 4,700 global aerospace customers. In 2013, the businesses reported roughly $1.3 billion in sales, or about 37% of B/E's total revenue. With sales of nearly $1.8 billion last year, the remaining manufacturing business is a leading supplier of aircraft interiors and seating.

Investors have soured on B/E in recent weeks, partly reflecting uncertainty over the proposed spin-off. And despite the company's massive $8.9 billion backlog, concerns about increased cancellations and declining orders at Boeing ($125; BA) have weighed on the shares. In 2013, Boeing accounted for 12% of total revenue.

Despite the uncertainty, B/E has solid rebound potential, reflecting healthy operating momentum and a reasonable valuation, particularly given projected profit growth. Shares trade at 19 times estimated 2014 earnings, which are expected to hit $4.46, up 26%. B/E Aerospace remains a Buy and a Long-Term Buy.

News roundup

The Federal Bureau of Investigation launched an investigation into reports that J.P. Morgan Chase ($60; JPM) suffered cyber attacks, possibly originating in Russia or Eastern Europe. In June, hackers evaded J.P. Morgan's security to steal customer information, an effort that may have continued for two months, according to Bloomberg. J.P. Morgan claims it has yet to see any "unusual fraud." The FBI says it has not uncovered any evidence that other banks suffered security breaches. Both Wells Fargo ($52; WFC) and U.S. Bancorp ($42; USB) say they have not detected any hacking activity. Wells Fargo is a Focus List Buy and a Long-Term Buy. J.P. Morgan and U.S. Bancorp are Long-Term Buys.


Halliburton ($67; HAL) agreed to pay $1.1 billion to settle most of the claims it faces from the 2010 deepwater rig explosion in the Gulf of Mexico. Halliburton had set aside $1.3 billion for the disaster at the end of June. Halliburton performed cementing and other support work for the ill-fated well. The company was not named in the civil lawsuit that heads to trial in January. Halliburton is a Buy and a Long-Term Buy.


CVS Caremark ($80; CVS) changed its name to CVS Health after ending the sale of all tobacco products nearly a month ahead of its Oct. 1 target. Tobacco products generated about $2 billion of sales, less than 2% of the company's total revenue. CVS is a Buy and a Long-Term Buy.


Alaska Air Group ($48; ALK) said both traffic and capacity increased 7% in August. Alaska Air is a Focus List Buy and a Long-Term Buy.

MLP consolidation

Kinder Morgan Inc. ($40; KMI) announced plans to stitch its four oil and pipeline concerns into one company. To purchase the three publicly traded partnerships — Kinder Morgan Energy Partners ($96; KMP), El Paso Pipeline Partners ($41; EPB), and Kinder Morgan Management ($97; KMR) — Kinder Morgan Inc. will pay $40 billion in cash, $4 billion in stock, and assume $27 billion in debt, creating a combined company valued at about $71 billion.

In recent quarters, Kinder Morgan Inc.'s flagship MLP, Kinder Morgan Energy Partners, has struggled to maintain its growth pace. Some pundits blame the slowdown on the partnership's size. It has a market capitalization of $31 billion.

Kinder Morgan Inc. is not an MLP, and the combined company will not operate as an MLP. Management expects the move will not only simplify the management of its pipeline holdings by consolidating them into one entity, but also lower borrowing costs so the consolidated company can more easily acquire smaller rivals. It has spent $24 billion on deals since 1997. Additional consolidation in the MLP space would not surprise us.


Rank Changes

We are making no changes to our buy lists today. On the Top 15 Utilities list, Laclede Group ($50; LG) and Scana ($51; SCG) are in, replacing Great Lakes Energy ($26; GXP) and National Fuel Gas ($76; NFG).


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