Portfolio Review

11/3/2014


Micron added as Buy, LT Buy

Micron Technology ($32; MU), a maker of semiconductors for data storage, is being added to the Buy and Long-Term Buy lists. The stock earns the maximum Overall Quadrix score of 100, reflecting a discount valuation and outstanding operating momentum.

Micron operates in a highly cyclical industry, which has subjected the stock to volatile swings in the past. Fundamentals in the memory market currently look strong as computermakers keep introducing new tablets that require more and more memory. Micron's rising presence in the automotive and high-end server markets could also drive long-term growth.

For the 12 months ended August, Micron's sales surged 80%, while operating profit margin steadily expanded and cash from operations more than tripled to $5.70 billion. Earning a Value score of 86, shares trade at just nine times estimated year-ahead earnings, projected to grow 15%.

September-quarter results

Health care

Aetna ($80; AET) earned $1.79 per share from operations, up 11% and comfortably ahead of the consensus of $1.58. Revenue also topped analyst expectations, rising 13% to $14.73 billion on broad membership growth.

The insurer's total medical cost ratio (health-care costs divided by premiums) improved to 82% from 83% in the year-ago quarter on a sharp drop at the Medicare and Medicaid business. However, medical costs are rising within the commercial business, which accounts for 84% of Aetna's medical members. Aetna expects this trend to continue into the December quarter, reflected by implied quarterly profit guidance that fell well short of the consensus. Although Aetna has aggressively raised prices, some investors worry that costs will climb even faster.

Despite these concerns, Aetna shares seem reasonably priced at 12 times trailing earnings, in line with their 10-year average and 29% below the median for S&P 1500 Index health insurers. Aetna, earning a Value score of 86 and Overall rank of 95, remains a Buy and a Long-Term Buy.


Gilead Sciences ($111; GILD) reported September-quarter earnings per share of $2.05, compared to $0.52 in the year-ago quarter and the consensus of $1.92. Results excluded costs from acquisitions, restructuring, and stock-based compensation, along with a cumulative catch-up fee of $0.21 per share from the Affordable Care Act. Sales surged 117% to $6.04 billion, also ahead of the consensus.

Sovaldi, Gilead's blockbuster hepatitis C drug, generated revenue of $2.80 billion, down 20% from the June quarter. Results for Sovaldi softened as patients and doctors awaited the release of its successor, Harvoni. So far, Gilead says the new drug's launch has been strong, with more doctors writing prescriptions for Harvoni than they did for Sovaldi. However, the shares declined on the earnings news; management raised the low end of its guidance for full-year sales, but the top end of the range still lags the consensus. Gilead Sciences is a Long-Term Buy.

Financials

Ameriprise Financial ($124; AMP) grew per-share profits 10% to $2.10 in the September quarter, topping the consensus by $0.14. Excluding effects from the company's annual review of assumptions and models for insurance and annuity valuations, per-share profits rose 28%. Net revenue advanced 11% to $3.11 billion. Assets under management and administration rose 8% to $797 billion, helped by both net inflows and market appreciation. Shares rallied on the results but still look attractively priced at 16 times trailing earnings, 6% below the median for S&P 1500 Index asset managers. Ameriprise is a Focus List Buy and a Long-Term Buy.


Jones Lang LaSalle's ($131; JLL) per-share profits surged 55% to $2.31 excluding special items in the September quarter, well ahead of the consensus of $1.80. Revenue climbed 23% to $1.37 billion, on 17% growth from real estate services and a 113% jump at the investment-management unit. Jones Lang announced a semiannual dividend of $0.25 per share, up 9% and payable Dec. 15. Jones Lang LaSalle is a Buy and a Long-Term Buy.

Other earnings reports

Union Pacific ($115; UNP) grew per-share profits 23% to $1.53 in the September quarter, easing past the consensus by a penny. Operating revenue climbed 11% to $6.18 billion, powered by double-digit growth for agricultural, industrial, and intermodal freight. Freight volumes rose 7% and core pricing 2.5%. Cash from operations increased 29% and is now up in seven of the past eight quarters. Although management declined to offer profit guidance, optimism in the business outlook is reflected by plans to hire 3,600 workers, up 13% from what the company planned in July, and add 261 new locomotives, up 14%. Union Pacific is a Focus List Buy and a Long-Term Buy.


Whiting Petroleum ($60; WLL) earned $1.24 per share in the September quarter, down 3% but $0.02 above the consensus. Revenue dipped 2% to $813 million, missing the consensus. Although production jumped 26%, realized price slid 8%. Yet Whiting reaffirmed its full-year production target, with production expected to rise 19% to 24% in the December quarter. Whiting Petroleum is a Buy and a Long-Term Buy.


Comcast ($55; CMCSa) reported September-quarter earnings per share of $0.73 excluding tax adjustments and transaction costs, up 12% and two cents above the consensus. Revenue increased 4% to $16.79 billion on 5% growth for the cable unit and a 1% gain at NBCUniversal. Comcast shed a net 81,000 video subscribers — its best September quarter in seven years and an improvement from the 127,000 subscribers lost in the year-ago quarter. More subscribers are bundling services, helping to reduce churn. Comcast added 82,000 customer relationships in the quarter. Programming expenses rose 7%, slightly below management's expectations. Comcast is a Buy and a Long-Term Buy.

Key retailers refuse to play with Apple Pay

Battle lines are forming in the evolving landscape of mobile payments. Apple ($107; AAPL) CEO Tim Cook said more than 1 million credit cards were registered with Apple Pay in the first 72 hours after its Oct. 20 launch, vaulting it to the largest mobile-payment service in the world. More than 220,000 stores are equipped for Apple Pay. Apple has also enlisted the six largest U.S. credit-card issuers. Alibaba Group ($98; BABA) CEO Jack Ma says he wants to partner with Apple to bring a mobile-payment service to China. Alibaba affiliate Alipay has more than 300 million active users and handles more electronic payments than Amazon.com ($294; AMZN) and eBay ($51; EBAY) combined.

Some U.S. retailers are balking at Apple Pay, most notably CVS Health ($85; CVS) and Rite Aid ($5; RAD), which have disabled the service at their stores. They join Wal-Mart Stores ($76; WMT) as a part of a group of roughly 60 retailers developing their own mobile software called CurrentC. The retailers view CurrentC, designed for both iPhones and Android devices, as a way to keep control over customer data and eliminate interchange fees; it connects to shoppers' bank accounts rather than credit cards.

Apple stresses the security, privacy, and ease of its service. But CurrentC involves more steps at the checkout counter. It relies on older technology with questionable security; a CurrentC pilot program was hacked in October. And it is not expected to be ready until next year, leaving participating retailers in the lurch if Apple Pay gains popularity as more shoppers upgrade to the new iPhone. Apple is a Focus List Buy and a Long-Term Buy. CVS is a Buy and a Long-Term Buy. Wal-Mart Stores is rated B (average). Both Amazon.com and eBay are rated C (below average).


Rank Change

Micron Technology ($32; MU) is being initiated as a Buy and a Long-Term Buy.


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