Portfolio Review

2/2/2015


Box-maker shipped out of buy lists

We are removing Packaging Corp. ($77; PKG) from the Buy and Long-Term Buy lists after the company's disappointing earnings report and guidance. In the December quarter, PCA earned $1.16 per share excluding special charges, up 10% but a penny below the consensus. Sales rose 13% to $1.43 billion but also fell short of analyst expectations. Management blamed the miss on mill outages, pricing weakness, and an unfavorable product mix. Some of those problems are expected to continue into the March quarter, and PCA's per-share-profit guidance of $1.07 to $1.10 badly missed the consensus of $1.26 at the time of the announcement. Up 15% since we first recommended the stock last April, PCA should be sold.

Earnings roll call

Technology

Apple ($115; AAPL) earned $3.06 per share in the December quarter, up 48% and $0.46 above the consensus estimate. Revenue surged 30% to $74.60 billion, compared to the consensus of $67.69 billion. Sales growth was driven by the iPhone, up 57%, and greater China, up 70%. iPad sales slumped 22%. The company said Apple Pay has gotten off to a strong start, taking more than a 67% share of the market for contactless payments. Management expects to begin shipping the Apple Watch in April. Shares surged on the results. Apple is a Focus List Buy and a Long-Term Buy.


Lam Research's ($80; LRCX) per-share profits increased 8% to $1.19 excluding special items, topping the consensus by $0.06. Revenue grew 10% to $1.23 billion. For 12 months ended December, sales grew 23%. For the March quarter, Lam sees per-share profits of $1.30, implying 3% growth and matching the consensus, on revenue of $1.37 billion, implying 11% growth and slightly ahead of the consensus of $1.34 billion. Lam is a Focus List Buy and a Long-Term Buy.

Industrials

Alaska Air Group ($69; ALK) said per-share earnings soared 71% to $0.94 in the December quarter, easing past the consensus by a penny. Operating revenue grew 8% to $1.31 billion on 9.5% higher traffic and 10.6% higher capacity. Strong ticket demand has allowed Alaska Air to avoid passing its fuel savings on to customers through lower prices. The company expects to expand capacity 11% in the March quarter and 8% for the full year. Alaska Air also hiked its quarterly dividend 60% to $0.20, payable March 10. Management mentioned that the airline is trying to join the S&P 500 Index. With a market value of $9.2 billion, Alaska ranks among the biggest companies in the S&P 400 Index and exceeds the market value of about 100 companies currently in the S&P 500. Shares rallied on the report. Alaska Air is a Focus List Buy and a Long-Term Buy.


Southwest Airlines ($46; LUV) shares jumped after the company reported per-share earnings of $0.59 in the December quarter excluding special items, up 79% and $0.04 ahead of the consensus estimate. Operating revenue climbed 5% to $4.63 billion. Traffic increased 4.3%, capacity 2.4%. Per-gallon fuel prices declined 14% to $2.62 in the quarter; Southwest has abandoned its fuel hedges for 2015. Southwest expects capacity to rise 6% for both the March quarter and the full year. Southwest Airlines is a Long-Term Buy.


Union Pacific's ($119; UNP) December-quarter earnings per share surged 27% to 1.61, topping the consensus by $0.10. Operating revenue advanced 9% to $6.15 billion, driven by 15% growth from industrial products and 11% growth from intermodal. Freight volumes rose 6%, while core prices increased 3%. Management said shale drillers account for just 4.5% of the railroad's freight volumes, easing some concerns over the railroad's exposure to slumping oil prices. Union Pacific sees opportunities to raise rates further in 2015.

Union Pacific's stock rose on the report and has now delivered a total return of 40% in the past year, dragging its Quadrix Value rank down to 40. But its trailing and forward P/E ratios fall in line with the medians for S&P 1500 railroad stocks, despite Union Pacific offering superior growth prospects to its peer group. The consensus calls for Union Pacific to grow per-share profits 15% and revenue 5% in 2015. Union Pacific, yielding 1.7%, remains a Focus List Buy and a Long-Term Buy.

Financials

Ameriprise Financial ($126; AMP) said operating earnings per share advanced 23% to $2.30, exceeding the consensus estimate by $0.08. Net revenue increased 5% to $3.09 billion, slightly ahead of the consensus. Ameriprise attributed the growth to client net inflows, improved adviser productivity, and the market's appreciation. Total assets under management and administration rose 5% to $806 billion. Ameriprise is a Focus List Buy and a Long-Term Buy.


For the December quarter, Travelers ($105; TRV) grew earnings per share 15% to $3.07, topping the consensus of $2.54. Total revenue crept 1% higher to $6.78 billion, while net written premiums increased 4%. Results benefitted from lower losses from natural disasters. The combined ratio — the percentage of premiums paid out on claims and expenses — improved to 85.0% from 87.7%. Travelers, earning an Overall rank of 99, is a Buy and a Long-Term Buy.

Corporate roundup

In approving Natpara, a drug that treats a rare hormone disorder, U.S. regulators removed some of the risks of Shire's ($219; SHPG) pending $5.2 billion acquisition of NPS Pharmaceuticals ($46; NPSP). Natpara, made by NPS, is expected to launch in the June quarter and could generate annual sales of more than $500 million by 2019. NPS relied on one drug, Gattex, which treats a rare bowel disorder, for 43% of its $157 million in sales for the first nine months of 2014. In other news, Shire said U.S. regulators will accelerate their review of an experimental drug designed to treat the neurocognitive decline caused by Hunter syndrome. Shire is a Focus List Buy and a Long-Term Buy.


Google ($512; GOOGL) is planning to offer wireless phone plans directly to U.S. consumers later this year. Details of the venture remain vague, though Google is expected to resell wireless service across networks maintained by Sprint Nextel ($4; S) and T-Mobile US ($30; TMUS). Google could undercut established wireless carriers, though it risks alienating carriers that subsidize Android smartphones. Google was slated to report December-quarter results on Jan. 29, after our deadline. Google is a Buy and a Long-Term Buy. Sprint is rated C (below average).


Mylan ($55; MYL) won approval from European Union regulators to complete its $5.3 billion acquisition of Abbott Laboratories' ($43; ABT) branded specialty and generics business in developed markets outside the U.S. Mylan agreed to divest several of its businesses in Germany, the United Kingdom, France, Ireland, and Italy. In other news, Mylan expanded its licensing agreement with Gilead Sciences ($102; GILD) to sell in developing countries a new regimen of hepatitis C drugs, still in development, that would treat all six genomes of the disease. Mylan is a Buy and a Long-Term Buy. Gilead is a Long-Term Buy. Abbott is rated B (average).


Rank Changes

Corning ($24; GLW) is being added to the Buy List. Packaging Corp. of America ($77; PKG) is being dropped from the Buy List, Long-Term Buy List, and from coverage. Vanguard Short-Term Corporate Bond ($80; VCSH) now accounts for 5.8% of the Buy List and 12.5% of the Long-Term Buy List.


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