Portfolio Review

3/2/2015


Earnings reviews

Magna International ($110; MGA) earned $2.52 per share in the December quarter, up 8%, to top the consensus estimate of $2.25. Revenue increased 2% to $9.40 billion, also ahead of analysts' expectations. Magna raised its 2015 guidance for light-vehicle production in both North America and Europe but lowered its sales target to reflect foreign-currency headwinds. Encouragingly, Magna boosted its full-year outlook for operating profit margins. The company announced plans for a 2-for-1 stock split on March 25. Magna also raised its quarterly dividend, payable March 27, by 16% to $0.44 per share — or $0.22 per share after the split. In other news, Magna opened a chassis factory in Mexico. Magna is a Focus List Buy and a Long-Term Buy.


Comcast ($60; CMCSa) grew December-quarter earnings per share 17% to $0.77 excluding special items, a penny short of the consensus. However, revenue rose 5% to top analyst expectations. Sales rose 6% for the cable business, as Comcast reported net additions of 504,000 video, internet, or voice subscribers. Management still expects to complete the $45 billion purchase of Time Warner Cable ($155; TWC) by the end of March. Separately, Comcast and Time Warner face a $20 billion lawsuit accusing them of discriminating against African-American-owned media firms. The same group sued AT&T ($34; T) and DirecTV ($88; DTV) for $10 billion in December.

Comcast boosted its quarterly dividend 11% to $0.25 per share, payable April 22. The company also increased its stock-repurchase plan to $10 billion, with about $4.25 billion expected to be used this year, nearly 3% of outstanding shares at current prices. Comcast shares rallied on the news. Comcast is a Buy and a Long-Term Buy. DirecTV is rated B (average). AT&T is rated C (below average).


For the January quarter, Macy's ($64; M) reported per-share earnings of $2.44 excluding special items, up 6% and $0.03 above the consensus. Revenue crept 2% higher to $9.36 billion, while same-store sales increased 2.5%. For fiscal 2016 ending January, Macy's expects earnings per share of $4.70 to $4.80, implying growth of 7% to 9% but short of the consensus at the time of the announcement. Management sees total revenue rising 1% in the coming year, also below the consensus, with same-store sales up 2%. Macy's is a Long-Term Buy.

Technology review

Giving credence to an earlier report that Apple ($129; AAPL) has been secretly designing an electric automobile, car-battery maker A123 Systems has sued the company for allegedly poaching some of its top engineers. Apple officials reportedly met with Magna Steyr, a subsidiary of Magna International, to discuss building an electronic car, according to The Wall Street Journal. Magna did not deny the report while talking with analysts about its quarterly results. Apple could begin production on an electric car by 2020. In other news, Apple plans to invest $1.9 billion in two new data centers in Europe. Apple is a Focus List Buy and a Long-Term Buy.


Google ($547; GOOGL) is scrambling to revive Google Wallet, launched in 2011 but struggling against the newer Apple Pay, which is handling two-thirds of contactless mobile-phone payments in the U.S. Google bought patents from Softcard, a mobile-wallet service backed by AT&T ($34; T), Verizon Communications ($49; VZ), and T-Mobile USA ($32; TMUS), which agreed to pre-install Google Wallet on Android smartphones. However, Samsung Electronics, the largest maker of Android phones, plans to introduce its own mobile-payment service in March, giving it little incentive to cooperate with Google. In other news, Google Chairman Eric Schmidt plans to meet with the EU's new antitrust chief in early March to discuss a four-year probe into the company's search engine. Google is a Buy and a Long-Term Buy. AT&T and Verizon are rated C (below average).


Micron Technology ($30; MU) shares fell on a report that Samsung secured a deal to supply about 50% of dynamic random-access memory (DRAM) semiconductors for Apple's next iPhone. However, some analysts expect Apple and other smartphone makers to increase the amount of DRAM used in upcoming handsets, which could boost sales for all suppliers. Others speculated Micron may have turned down the deal with Apple to reserve manufacturing capacity for rival smartphone makers that pay higher prices. Separately, pricing trends for DRAM have reportedly softened in the February quarter, typically a seasonally weak period for Micron. Micron is a Buy and a Long-Term Buy.

Health-care update

Aetna ($100; AET) says the reimbursement rate for its Medicare Advantage business should slip about 1% in 2016. The announcement comes after U.S. health officials proposed an average decline of 0.95% for Medicare Advantage reimbursement rates in 2016. Yet total payments for health insurers are expected to rise more than 1% on higher volumes. About 5% of Aetna's medical members are enrolled in Medicare Advantage. Aetna is a Focus List Buy and a Long-Term Buy.


Mylan ($57; MYL) formed a pact to exclusively supply Gilead Sciences' ($104; GILD) hepatitis C drugs in India, starting in the June quarter. Mylan also gained nonexclusive rights to manufacture and distribute Gilead's hepatitis C drugs in 91 developing countries. Mylan is a Buy and a Long-Term Buy. Gilead is a Long-Term Buy.


Shire ($245; SHPG) bolstered its drug pipeline by agreeing to acquire Meritage for $70 million, with the potential for additional milestone payments. Meritage is developing a treatment for a rare inflammatory gastrointestinal disease. Shire is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Southwest Airlines ($44; LUV) canceled 80 flights and temporarily grounded 128 planes — about 20% of its fleet — after discovering it had missed mandatory inspections on the jets' rudders. U.S. regulators allowed Southwest to resume using the planes as long as the airline completed the inspections within five days. Southwest Airlines is a Long-Term Buy.


Foot Locker ($56; FL) hiked its quarterly dividend 14% to $0.25 per share, payable May 1. The retailer also approved a fresh $1 billion stock-buyback program over the next three years, enough to shrink Foot Locker's share count by 12%, based on the stock's current price. Foot Locker has reduced its share count by 5% over the past three years. Foot Locker is a Focus List Buy and a Long-Term Buy.


During its investor day, J.P. Morgan Chase ($61; JPM) emphasized the value of its massive size, refuting recent calls to break itself up. But the bank will scale back some operations, including the closure of 300 retail branches over the next two years as part of a plan to reduce the consumer-banking group's annual expenses by $2 billion. J.P. Morgan will also begin charging fees on some deposits made by institutional clients in the hope of shrinking its deposit base by $100 billion this year. New rules prohibit banks from making loans with uninsured deposits (likely the first funds to be withdrawn during a crisis), limiting the profitability of such deposits. J.P. Morgan also said it expects core loans to grow 10% this year. J.P. Morgan is a Long-Term Buy.


Looking to expand operations in France, ManpowerGroup ($81; MAN) acquired the desk-side and end-user support business previously owned by Atos, a digital-services provider. Manpower is a Buy and a Long-Term Buy


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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