Portfolio Review

5/18/2015


Rank changes

We are adding F5 Networks ($126; FFIV), a maker of networking gear, to the Focus List. The company delivered a strong March quarter, with per-share profits and revenue rising at double-digit rates. Profit margins are widening and cash from operations is rising consistently; the company expects operating cash flow to increase more than 20% to about $170 million in the June quarter. At 21 times trailing earnings, the stock trades at a 24% discount to its three-year average. F5, earning an Overall rank of 95, is also a Long-Term Buy.


CBRE ($38; CBG), initiated as a Long-Term Buy last week, now joins the Buy List. CBRE provides commercial real estate services, with about 44% of its revenue coming from outside the U.S. Operating momentum should benefit from a pair of acquisitions announced this spring, including the $1.48 billion cash deal for a Johnson Controls' ($50; JCI) business that improves energy efficiency in buildings. The stock's trailing P/E ratio of 21 represents a 10% discount to its five-year average.


J.P. Morgan Chase ($66; JPM) is being added to the Buy List. In the March quarter, growth from trading operations helped shelter the bank from the continuation of unusually low interest rates. In addition, J.P. Morgan is finally moving past the litany of settlements and expects legal costs to "normalize" in 2016. Analysts expect per-share profits to increase 10% this year, though growth may prove elusive in the June quarter. Shares trade at 11 times estimated 2015 earnings, 13% below the median for S&P 1500 diversified banks. J.P. Morgan is also a Long-Term Buy.


We are dropping Nvidia ($21; NVDA) from the Focus and Buy lists. The company blamed its disappointing guidance on the sluggish personal-computer market. Nvidia said April-quarter earnings per share advanced 14% to $0.33 excluding special items, topping the consensus estimate of $0.24. Revenue increased 4% to $1.15 billion, while operating cash flow surged 63%. But Nvidia expects sales to slip 8% in the July quarter, worse than analysts' expectations at the time of the announcement. Although the PC market will likely remain weak this quarter, management sees solid demand in gaming, data-center, and automotive markets. Nvidia also raised its quarterly dividend 15% to $0.0975 per share, payable June 12. Nvidia remains a Long-Term Buy.

Earnings reviews

CDW's ($37; CDW) per-share profits advanced 19% to $0.56 excluding special items for the March quarter, exceeding the consensus by $0.03. CDW grew sales 4% to $2.76 billion, below the consensus of $2.89 billion. CDW, a supplier of hardware and software products, posted at least 13% revenue growth from small-businesses and government customers. Despite the modest shortfall in total revenue, CDW expects hardware sales to pick up in the second half of the year and reaffirmed its 2015 target, projecting 5% to 7% growth. CDW is a Buy and a Long-Term Buy.


Macy's ($64; M) said April-quarter earnings per share fell 7% to $0.56, missing the consensus by $0.06. Revenue, down 1% to $6.23 billion, also fell short of analysts' expectations. The retailer blamed the results on the weather, inventory delays caused by port strikes, and lower spending by foreign tourists, though it reiterated its full-year guidance. Macy's hiked its quarterly dividend 15% to $0.36 per share, payable July 1, and beefed up its stock-repurchase plan. Macy's is a Long-Term Buy.

Corporate roundup

Teva Pharmaceutical Industries ($61; TEVA) has reportedly entered talks with banks to secure $25 billion in financing to help fund its proposed acquisition of Mylan ($71; MYL). The financing could allow Teva to raise its bid for Mylan, currently $40.1 billion, or $82 per share in cash and stock. Mylan still insists it will not sell itself to Teva, but told investors it may be interested in purchasing Teva at some point in the future. For now, Teva's market value of $52.48 billion dwarfs Mylan's $31.44 billion. Mylan is a Buy and a Long-Term Buy.


Gilead Sciences ($106; GILD) agreed to acquire EpiTherapeutics, a privately held company developing cancer therapies, for $65 million in cash. Gilead is a Buy and a Long-Term Buy.


U.S. regulators will reportedly approve AT&T's ($34; T) pending $49 billion acquisition of DirecTV ($91; DTV) with some conditions. Both stocks are rated B (average).


Alaska Air Group ($65; ALK) reported 10% higher traffic and 13% capacity growth in April, causing the load factor to slip to 83.6% from 86.1%. Alaska Air remains a Focus List Buy and a Long-Term Buy.

Top 15 Utilities changes

This week we're replacing two of the stocks in our Top 15 Utilities portfolio. Check out the portfolio at www.DowTheory.com/Go/Top15.

Public Service Enterprise Group ($42; PEG) has delivered per-share-profit growth of at least 13% in each of the last three quarters, topping the consensus by at least 4%. Despite that growth, the shares trade at 14 times expected current-year earnings, 17% below the average diversified utility in the S&P 1500 Index.

Public Service Enterprise's heavy spending on capital projects could, by one analyst's estimate, drive double-digit expansion of the rate base through 2016. The consensus projects flat profits in 2016, and the company seems capable of topping low expectations. Public Service Enterprise, which earns a Quadrix Overall score of 86 and 97 in both sector-specific scores, is being added to the Top 15 Utilities portfolio.


Star Gas Partners ($7; SGU) distributes heating oil and propane. Other units install or repair heating and air-conditioning systems and provide various home-related services. Star Gas earns an Overall score of 89 and exceeds 90 in both of the scores we created to assess master limited partnerships (MLPs).

The company topped analyst profit expectations by 23% in the March quarter and 13% in the December quarter. Based on our shorthand version of distributable cash flow, a metric used to gauge MLP performance, Star Gas managed growth of 31% over the last 12 months and 24% annualized over the last three years. Star Gas, yielding 5.1%, is one of two MLPs in our Top 15 Utilities portfolio.


Idacorp's ($58; IDA) per-share profits for the March quarter came in 19% lower than expected. The utility, which distinguished itself through consistent profit growth in recent years, is on pace for its first annual earnings decline since 2007. Yet the stock still sports a premium of at least 15% to the industry median based trailing price/sales and price/cash flow ratios. Idacorp, with a 12-Factor Sector score of 5, is being dropped from the Top 15 Utilities portfolio.


Otter Tail ($27; OTTR) shares have slid 10% since the company declared March-quarter results. Sales fell for the third consecutive quarter, while per-share profits declined 38% to $0.37, the second dip in the last two quarters and 33% below the consensus. The company also lowered its 2015 profit guidance. Even after their recent weakness, Otter Tail shares still trade at a premium to their industry. Otter Tail is being dropped from the Top 15 Utilities portfolio.


Rank Changes

F5 Networks ($126; FFIV) is joining the Focus List. CBRE ($38; CBG) and J.P. Morgan Chase ($66; JPM) are joining the Buy List. Nvidia ($21; NVDA) is being dropped from the Focus and Buy lists but remains a Long-Term Buy. In the Top 15 Utilities portfolio, Public Service Enterprise Group ($42; PEG) and Star Gas Partners ($7; SGU) are replacing Idacorp ($58; IDA) and Otter Tail ($27; OTTR).


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