Portfolio Review

12/29/2014


Tech leaders chase new revenue streams

Early results for Apple's ($113; AAPL) mobile-payment service, Apple Pay, indicate that shoppers are becoming comfortable making purchases with their iPhones. Apple Pay reportedly accounted for 1% of all digital-payment dollars in November, its first full month since launching on Oct. 20, according to researcher ITG.

On average, Apple Pay users made 1.4 transactions per week, a positive signal for consumer engagement. Apple is hoping to take a piece of credit- and debit-card market, which processes about $4 trillion a year in transactions in the U.S. alone. The initial results are particularly impressive, considering that Apple Pay remains unavailable at several major retailers, including stores operated by CVS Health ($97; CVS), Rite Aid ($7; RAD), and Wal-Mart Stores ($87; WMT).

In other news, Apple suspended online sales in Russia for about a week due to volatile swings in the value of the ruble. Upon reopening its online store, Apple raised the price of its iPhone 6 by about 35%. Apple is a Focus List Buy and a Long-Term Buy. CVS is a Buy and a Long-Term Buy. Wal-Mart Stores is a B (average).


Google ($536; GOOGL) is developing a version of its Android mobile operating system that would be built directly into vehicles. Google's current entertainment and navigation package requires an Android smartphone and a car with a built-in screen.

Looking further out, Google is hoping to partner with automakers and suppliers to bring a self-driving car to the market in the next five years. Auto executives may find that timeline aggressive, though General Motors ($34; GM) expects to outfit some 2016 Cadillac sedans with the ability for hands-free driving in traffic jams and in light highway traffic.

Google has showed off a new prototype vehicle that lacks a steering wheel, brakes, and a gas pedal. The company plans to test the vehicle on public roads in the coming year. Google is a Buy and a Long-Term Buy. GM is rated B (average).

Express Scripts pulls rug out from under Gilead shares

Gilead Sciences ($89; GILD) sold off after its blockbuster hepatitis C drugs lost the support of a major pharmacy-benefit manager. Express Scripts ($86; ESRX), frustrated by its failure to get a bigger discount from Gilead for Sovaldi and the newer Harvoni, agreed to cover AbbVie's ($64; ABBV) newly approved oral treatment for hepatitis C; AbbVie offered Express Scripts a discount on the price. Express Scripts, which manages pharmacy benefits for about 90 million people, will no longer cover Harvoni and will only cover Sovaldi in some cases.

AbbVie's Viekira Pak costs $83,319 for a 12-week treatment cycle, slightly undercutting prices of $84,000 for Sovaldi and $94,500 for Harvoni for the same duration. In studies, the drugs showed a similar effectiveness, though AbbVie's drug involves six pills taken daily; Gilead's versions require just one. An estimated 3.2 million Americans are afflicted with hepatitis C.

Terms of the deal between AbbVie and Express Scripts were not released, but AbbVie shares dipped on the news, suggesting it may have agreed to a significant discount. Shares of other biotechs fell in sympathy on concerns that other drugs will have difficulty preserving premium prices. Trading at just nine times estimated 2015 earnings, Gilead remains a Long-Term Buy. Express Scripts is rated A (above average). AbbVie is rated B (average).

Don't fall for head fake — stick with Foot Locker

Foot Locker ($55; FL) shares tumbled on mixed November-quarter results for a key supplier and a close rival. Nike's ($96; NKE) per-share profits rose 25% on 15% higher revenue — both metrics topped analyst expectations. Meanwhile, Finish Line ($23; FINL) reported a per-share loss of $0.02, missing the consensus estimate of a $0.01 gain. Finish Line also warned of weak results in the the February quarter.

A closer look at the results suggests the sell-off of Foot Locker shares is overdone. Nike, which accounts for about 65% of Foot Locker's sales, said global futures orders advanced 11% excluding currency fluctuations, slightly below the consensus. Futures orders rose 13% at constant currency in both North America and Western Europe — Foot Locker's primary markets.

Foot Locker has a track record of superior execution, evident by its 19 straight quarters of higher same-store sales. Finish Line has more exposure than Foot Locker to running shoes, which have experienced soft sales industrywide this year, and a relatively smaller presence in basketball shoes, which have seen stronger sales. In an additional encouraging sign, analysts' profit estimates have held up for Foot Locker since Finish Line's report. The consensus expects 12% higher per-share profits in the January quarter and 11% growth in fiscal 2016 ending January.

Foot Locker shares trade at 16 times trailing earnings, a 15% discount to their five-year average and 16% below the average for S&P 1500 apparel retailers. At 14 times estimated earnings for the upcoming fiscal year, the stock fetches a 15% discount to its peer group. Foot Locker remains a Focus List Buy and a Long-Term Buy. Nike is rated A (above average).

Corporate roundup

Flight attendants for Alaska Airlines, a subsidiary of Alaska Air Group ($57; ALK), approved a new five-year contract. The two sides had been in negotiations over the past three years.

About 75% of the company's roughly 13,200 workers are represented by labor unions. In the airline industry, contracts do not expire, but become amendable. Earlier this year, the company secured long-term contracts with clerical and office workers at Alaska Airlines and dispatchers and aircraft technicians at another subsidiary, Horizon Air.

Horizon is currently negotiating contracts with its maintenance staff. Two additional employee groups, representing about 140 workers, have contracts that are either amendable or will become amendable next year. Alaska Air is a Focus List Buy and a Long-Term Buy.


The Federal Communications Commission once again paused its review of Comcast's ($58; CMCSa) pending $45 billion acquisition of Time Warner Cable ($151; TWC). Regulators blamed the delay on Time Warner's failure to deliver documents in a timely manner. The FCC plans to restart its 180-day clock on Jan. 12. Comcast, yielding 1.5%, is a Buy and a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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