Portfolio Review

5/25/2015


Apple swipes share from Samsung, changes channel on TV plans

Apple ($130; AAPL) took a leading 14.7% share of China's smartphone market in the March quarter, according to researcher IDC. Samsung Electronics slumped to fourth place after holding the top spot last year. With smartphone penetration rates now exceeding 90% of China's cellphone users, the country's overall smartphone shipments declined 4% in the quarter.

The middle of the market has fallen apart, as consumers migrate toward high-end devices or very low-priced models. China accounts for roughly 30% of the world's smartphone sales. Apple has also entered talks with Alibaba Group ($91; BABA) and Chinese banks about launching Apple Pay in the country.

Apple scrapped plans to produce a TV set last year, according to The Wall Street Journal. Apple engineers reportedly failed to devise enough distinguishing features to make it worth Apple's while in an industry known for narrow margins and cutthroat tactics. For years, analysts have predicted that Apple would produce a TV,  speculation stoked by periodic comments from founder and former CEO Steve Jobs and current CEO Tim Cook.

Earlier this month, activist investor Carl Icahn used the TV to help build his case that Apple's stock is worth $240 a share. Even if Apple stays out of the TV-set business, it will maintain a television presence. The company is expected to announce a new set-top box and a bundle of TV channels, perhaps as soon as June.

In other news, a U.S. appeals court upheld a ruling that Samsung infringed on several of Apple's iPhone patents. However, the court dismissed Apple's claims that Samsung imitated the iPhone's design in order to trade on the public's recognition of the device, meaning the $930 million jury reward must be recalculated.

Separately, Ericsson filed a smartphone-patent lawsuit against Apple in three European countries and the U.S. Apple had paid Ericsson royalties until their licensing contract ended in January; renegotiation talks have broken down. Apple, yielding 1.6%, is a Focus List Buy and a Long-Term Buy.

Technology roundup

Lam Research ($80; LRCX) hiked its quarterly dividend 67% to $0.30 per share, payable July 1. Lam, which yields 1.5% after this latest increase, initiated its payout in April 2014. Free cash flow slipped 5% to $475 million in the 12 months ended March, but net cash on Lam's balance sheet rose 12% to $1.60 billion, or $9 per share. Shares rallied on the dividend announcement and an analyst report that key customer Samsung is likely ramping capacity for NAND semiconductors at a higher rate than previously expected. In April, Lam cited growth in NAND semiconductors, used for solid-state drives, when it issued surprisingly strong June-quarter guidance. Lam said it expects industrywide spending on wafer-fabrication equipment to increase 6% this year and continue to grow in 2016. Lam's revenue surged 23% in calendar 2014, nearly double the industry's growth. Lam is a Focus List Buy and a Long-Term Buy.


Shares of Skyworks Solutions ($104; SWKS) surged after the company introduced a new generation of radio-frequency switches that can operate at high temperatures, making them ideal for powering smart lighting and connected homes. Skyworks is a Buy and a Long-Term Buy.


For the April quarter, Cisco Systems ($30; CSCO) said per-share profits rose 6% to $0.54 excluding special items, squeaking past the consensus by a penny. Revenue advanced 5%, also slightly ahead of the consensus. Cisco said solid demand for higher-end switches and routers helped offset weakness from gear aimed at cable companies and lackluster sales in emerging markets. Cisco is rated A (above average).

Corporate report

Airline stocks took a nosedive on fears that higher fuel costs and aggressive capacity growth will squeeze profit margins. Southwest Airlines ($37; LUV) tweaked its guidance, raising targets for 2015 capacity and per-gallon fuel costs for both the June quarter and the full year. June-quarter passenger revenue per available seat mile is now projected to fall about 3%, worse than analyst expectations of a 2% decline, due to higher capacity and some pricing weakness at Dallas Love Field. Some analysts expressed concern that the industry's capacity growth will pressure airfares, though Southwest CFO Tammy Romo stressed that "pent-up demand" will support the added flights. Southwest Airlines is a Long-Term Buy.


CDW ($37; CDW) announced a secondary public offering of 10 million shares at $36.80 a share, not including an option for the underwriters to purchase an additional 1.5 million shares. CDW also plans to buy back 2 million shares. The sellers include several members of CDW's management team and two large shareholders; combined, these sellers will own at least 38 million shares (22% of the company) after the secondary offering and repurchase. CDW shares closed at $37.54 on the day before the announcement and have held up fairly well, closing slightly below the offering price on May 19. CDW is a Buy and a Long-Term Buy.


Lear ($117; LEA) rejected an investor's proposal to split into two separate companies, citing a $400 million tax bill and the loss of synergies between its automotive seating and electrical units. Lear, which yields 0.9%, is a Focus List Buy and a Long-Term Buy.

Retail review

Retailers' April-quarter results reflect the uneven economic recovery. In many parts of the U.S., lower-income families struggle to find their footing while more affluent households see incremental gains.

Wal-Mart Stores ($76; WMT) reported 7% lower per-share profits on flat revenue. Citing the rising U.S. dollar and higher payroll costs, Wal-Mart said June-quarter results would likely fall short of analysts' expectations. Catering to a somewhat more upscale crowd, Target ($78; TGT) impressed investors by growing per-share profits 20% on 3% higher revenue.

Meanwhile, TJX ($68; TJX) grew per-share profits 8% and sales 6%, while Home Depot ($112; HD) posted 16% higher earnings per share excluding a tax-related gain on 6% revenue growth. The retailers topped consensus estimates for both metrics and also raised their full-year guidance. TJX reported strong traffic trends as shoppers sought deals on popular clothing brands.

Home Depot signaled the housing recovery still has legs as homeowners push ahead with bigger renovation projects. Conversely, Lowe's ($69; LOW) missed analysts' expectations, partly due to mismanaging its spring promotions. Home Depot, Target, and Lowe's are rated A (above average). TJX and Wal-Mart Stores are rated B (average).


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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