Portfolio Review

2/16/2015


Earnings news and reviews

CVS Health ($103; CVS) grew per-share profits 8% to $1.21 excluding special items, easing past the consensus estimate by a penny. Revenue rose 13% to $37.06 billion, well ahead of the consensus of $36.08 billion. Growth was driven by the pharmacy-services unit, which reported sales of $23.87 billion, up 22%. For the retail business, same-store sales increased 1.6% on a 5.5% gain from pharmacy sales. Front store same-store sales slumped 7.2%, hurt by softer customer traffic and the discontinuation of tobacco sales. Looking ahead to the March quarter, CVS anticipates per-share profits of $1.06 to $1.09, implying 4% to 7% growth. The consensus was $1.09 at the time of the announcement.

Heading into the earnings report, CVS earned an Overall rank of 68, hurt by a Value rank of just 37. At 23 times trailing earnings, the stock trades at a lofty 43% premium to its five-year average. But CVS still looks reasonably valued versus its peers — the S&P 500 consumer-staples sector averages a trailing P/E ratio of 24 — and offers superior growth prospects. CVS expects 2015 per-share profits to grow 12% to 16%, while the consensus projects an average growth of 5% for consumer-staples stocks. CVS, which has delivered a total return of 51% in the past year, remains a Buy and a Long-Term Buy.


Nvidia ($21; NVDA) earned $0.43 per share in the January quarter, up 34% excluding special items to top the consensus of $0.29. Sales climbed 9% to $1.25 billion, and management noted accelerating momentum across all markets for its graphics semiconductors. Gross profit margins also widened. For the March quarter, Nvidia expects revenue to rise 5% to $1.16 billion, compared to the consensus of $1.15 billion at the time of the announcement. Nvidia is a Buy and a Long-Term Buy.

Apple spreads wide net with new projects

At a technology conference held earlier this month, Apple ($125; AAPL) CEO Tim Cook said the company has little motivation to hoard cash, hinting it could ramp up capital returns to shareholders. Despite spending more than $57 billion on stock repurchases and dividends during the 12 months ended December, Apple’s cash and marketable securities rose 12% to about $178 billion.

Just 11% of those cash assets are held in the U.S., contributing to Apple’s decision to issue nearly $8 billion of debt this month. In each of the past two years, Apple boosted its quarterly dividend and share-repurchase plan in April. Most foreign cash cannot be tapped for such uses without repatriating it to the U.S., and thus incurring tax liability.

A smattering of new business ventures could keep filling the company’s coffers with cash, and help reduce its reliance on the iPhone, which now accounts for more than two-thirds of its sales. Apple’s HealthKit service is reportedly gaining traction in hospitals. The new technology helps doctors monitor patients with diseases such as diabetes, in an attempt to reduce repeat hospital admissions. There are also rumblings that Apple may be designing an online search engine and revamping its subscription music service.

Meanwhile, speculation about the Apple TV has captivated investors for years, though Apple has made little headway with cable operators. According to a recent report, Apple is now talking with TV programmers about launching an online service that would present a bundle of programs. Separately, JetBlue ($17; JBLU) became the first major U.S. airline to allow customers to buy food and drinks with Apple Pay during flights.

In other news, Apple said it will invest $848 million to help build a solar farm to be run by First Solar ($49; FSLR). As part of the deal, Apple’s new headquarters will receive electricity for the next 25 years. Apple already uses renewable energy to run its data centers. Apple, yielding 1.5%, is a Focus List Buy and a Long-Term Buy.

Technology update

Corning ($25; GLW) shares have returned 7% so far in 2015, propelled by solid December-quarter results and positive comments from its annual meeting, held Feb. 6. Corning said Gorilla Glass is gaining market share in China, while favorable trends should stoke growth for its environmental and fiber-optics businesses. Corning also announced plans to launch a new scratch-resistant glass, currently dubbed Project Phire, for mobile devices in the second half of 2015. Corning boasts that Project Phire is nearly as durable as the sapphire screens that Apple was developing with GT Advanced Technologies, which declared bankruptcy late last year.

Management also seemed upbeat on initial interest in Iris, a new product for TV screens. Corning estimates that more than 300 million flat-screen TVs are at least six years old, signaling the potential for a wave of consumer upgrades. Corning is a Buy and a Long-Term Buy.


Micron Technology ($31; MU) shares surged after the company renegotiated a supply agreement with Inotera, which supplies Micron with wafers used to build dynamic random access memory (DRAM) semiconductors. The new terms, which go into effect in 2016, are expected to boost Micron’s gross profit margins as long as DRAM prices remain stable.

The stock has fallen 14% since the end of November, partly hurt by worries about increased competition from Samsung Electronics and doubts that it is keeping up with the industry’s technological advances. Micron shares reflect these concerns and more, trading at nine times estimated year-ahead earnings, compared to the industry median P/E ratio of 22. The company is expected to grow per-share profits 9% over the next 12 months, matching the industry median. Micron, earning a Value rank of 93 and Overall rank of 95, is a Buy and a Long-Term Buy.


Qualcomm ($70; QCOM) agreed to pay $975 million to settle a probe into business practices Chinese officials deemed anticompetitive. In addition to the fine, Qualcomm must reduce its licensing rate on key patents. Qualcomm will now collect royalties based on 65% of a device’s selling point in China, rather than 100%. That concession left investors wondering if Qualcomm will be forced to lower royalty rates in other countries. Qualcomm is rated B (average).

Health-care report

Pfizer ($34; PFE) agreed to acquire Hospira ($87; HSP), which makes generic versions of biotech drugs, in a deal worth about $17 billion including debt. That price tag represents a 39% premium to Hospira’s share price before the deal was announced. Pfizer said it will seek still more acquisitions after failed attempts last year to acquire AstraZeneca ($68; AZN) and Activis ($278; ACT). Both Pfizer and AstraZeneca are rated C (below average).


Mylan ($54; MYL) submitted an Abbreviated New Drug Application (ANDA) to U.S. regulators for a generic version of cancer drug Nexavar. Mylan believes it is the first to file an ANDA, which should lead to 180 days of exclusive rights to sell its generic version before other generic manufacturers can enter the market. Mylan will report December-quarter results on March 2, with the consensus projecting earnings per share of $1.05, up 35%, on revenue growth of 14%. Mylan is a Buy and a Long-Term Buy.

Airline stocks gain altitude

S&P 1500 airline stocks have delivered an average return of 8% in the past month. Full-year profit estimates have risen for all six stocks in the group over the last 30 days as analysts adjust for lower fuel costs and higher capacity. Southwest Airlines ($44; LUV) expects capacity to grow 6% for both the March quarter and for the entire year. Alaska Air Group ($65; ALK), profiled as this week’s Analysts’ Choice on page 8, plans to expand capacity 11% in the March quarter and 8% for the full year. Southwest reported 9% higher traffic and 10% higher capacity for January. Southwest has also described decent travel demand and steady pricing, easing some concerns that airfares will fall as a result of lower fuel prices. So far, Alaska Air has yet to pass its fuel savings on to customers.  Alaska Air is a Focus List Buy and a Long-Term Buy. Southwest Airlines is a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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