Portfolio Review: August 24, 2015

8/24/2015


Rank changes

We are adding C.H. Robinson Worldwide ($71; CHRW) to the Long-Term Buy List. A third-party logistics provider, C.H. Robinson moves clients' freight by tapping its network of relationships with transportation companies. Total revenue, which includes the total dollar value of services and products sold to clients, rose just 3% in the first half of 2015. C.H. Robinson claims net revenue, which strips from total revenue transportation and related services purchased on its clients' behalf, as more indicative of operating performance. First-half net revenue rose 13%, driven by growth from trucking and ocean-transportation services.

The stock earns a middling Value score of 58, though its trailing P/E ratio of 22 offers a 12% discount to the five-year average. C.H. Robinson also trades below historical norms for price/sales and price/operating cash flow. The stock yields 2.1%. Rising analyst estimates project per-share profits will climb 9% in the September quarter.


Robert Half International ($57; RHI) joins the Long-Term Buy List. Leveraged to the improving North American labor market, Robert Half offers specialized staffing services in the accounting and finance fields. Foreign operations account for less than a quarter of its business. Revenue, up in 21 straight quarters, advanced 12% in the 12 months ended June. Cash from operations, up in 18 of the past 20 quarters, rose 17% over the past year.

The consensus expects per-share profits to grow 16% on 8% higher revenue in the September quarter — and estimates are rising. Despite its remarkably steady track record and improving outlook, the stock earns a reasonable Value score of 51. At 23 times trailing earnings, shares trade 23% below their five-year average.

Attack of the cord-cutters

TV-related stocks in the S&P 1500 Index have lost an average of 10% in the past month, far worse than the average 3% loss for consumer-discretionary stocks. Our top picks in the space have not gone unscathed, with Comcast ($60; CMCSa) shares shedding 7% of their value and Disney ($106; DIS) down 11%.

The sell-off coincides with renewed fears that cord-cutting may finally dent the pay-TV business model. Pay-TV companies lost a record 625,000 U.S. subscribers in the June quarter, according to industry researcher SNL Kagan. Satellite-TV providers fared the worst, with DISH Network ($66; DISH) and DirecTV losing a combined 284,000 subscribers in the quarter, up from 78,000 lost in the year-ago quarter. Comcast'svideo business shed 69,000 net subscribers, an improvement from 144,000 net subscribers lost in the year-ago quarter. About 100.4 million households still use pay TV, so the decline remains fairly small as a percentage of the total. However, the trend is troubling as more consumers switch to cheaper streaming services offered by Netflix ($122; NFLX) and Amazon.com ($533; AMZN).

Summer ratings have fallen by double-digits for many cable channels, providing further evidence of the Netflix effect and the resulting pressure it puts on TV advertising. The cable-networks segment of Comcast's NBCUniversal unit posted 3% lower advertising revenue in the June quarter, hurt by continued ratings declines. Disney's advertising revenue slipped 2% in the quarter.

Under the threat of cord-cutting, cable companies are searching for new growth avenues. Last month Comcast said it would launch an online-TV service to existing internet subscribers for $15 a month. NBCUniversal has agreed to invest in digital media companies by taking separate $200 million stakes in BuzzFeed and Vox Media.

Disney announced plans to add Star Wars-themed lands at its Anaheim and Orlando parks. Theme parks and resorts have helped drive Disney's growth in recent years. The segment grew operating income 16% in the nine months ended June and in excess of 15% in each of the past two fiscal years ended September. Comcast is a Focus List Buy and a Long-Term Buy. Disney is a Long-Term Buy. Amazon.com is rated C (below average).

Deal blotter

Shire ($242; SHPG) appears poised to increase its $30 billion bid for Baxalta ($40; BXLT) on the condition that the drugmaker open up its books for review. So far Shire has made little headway with Baxalta and may need to raise its bid to $35 billion, according to a published report. Shire has directly appealed to Baxalta shareholders to put pressure on management to accept a deal. Shire is a Focus List Buy and a Long-Term Buy.


Jones Lang LaSalle ($174; JLL) agreed to purchase Oak Grove Commercial Mortgage, which provides financing for multifamily and senior-housing properties. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.

Technology update

In the weeks since its June-quarter earnings report, Apple ($115; AAPL) has been the subject of a steady stream of chatter concerning new and rumored products. Apple postponed plans to launch an online-TV service after talks stalled on the price it would pay TV networks to license shows, according to Bloomberg. Apple had reportedly planned to announce the new service in September, but now may have to wait until next year. Separately, Apple Watch took 42% of revenue and 11% of units sold in the smartwatch/activity tracker industry in the first half of 2015, according to researcher 1010data.

In other news, Apple has reportedly begun searching for locations near San Francisco to test a self-driving car, dubbed Project Titan. Finally, Samsung's new mobile payment service, launched on Aug. 20, could experience a faster adoption rate than Apple Pay, according to Moody's Investors Services. Apple is a Focus List Buy and a Long-Term Buy.


CDW ($39; CDW) announced a secondary offering involving 11.25 million shares, or 6.5% of outstanding stock, at $38.25 per share. Members of CDW's management and two large shareholders, presumably Madison Dearborn Partners and Providence Equity Partners, are selling the block of shares. CDW plans to repurchase 2.25 million of the shares.

Madison Dearborn and Providence Equity completed a leveraged buyout of CDW in 2007, then took the company public in July 2013. Through multiple secondary offerings, both firms have gradually trimmed their combined stake in CDW to 29% at the end of 2014 from 87% before the initial public offering. They will collectively retain less than 17% of outstanding shares after this latest sale and the resulting buyback. CDW is a Focus List Buy and a Long-Term Buy.


The European Union extended Google's ($694; GOOGL) deadline to respond to antitrust charges to Aug. 31. In April the EU accused Google of altering search results to improve visibility of its own websites and services. In other news, Google launched a low-cost Android phone in the six African countries of Egypt, Ghana, Ivory Coast, Kenya, Morocco, and Nigeria. The phone will cost less than $100. Google is a Focus List Buy and a Long-Term Buy.


Skyworks Solutions ($87; SWKS) plans to expand capacity in Japan. Yet it is China's growth prospects that remain on investors' minds, reflected in the stock's 15% decline over the past month. China accounted for 69% of the semiconductor maker's revenue in fiscal 2014 ended September, up from 55% in fiscal 2014. But it's worth noting that geographic sales are determined by manufacturer's location, not the end-market where the consumer products are eventually sold. Skyworks CEO David Aldrich says China's end-market generates 20% to 25% of the company's sales.

Some investors worry that analyst estimates for semiconductor stocks are too aggressive. However, consensus estimates for Skyworks' September-quarter earnings per share and revenue have risen in recent weeks and stand near where management guided less than a month ago. Despite the recent sell-off, Skyworks shares have generated a total return of 62% over the past year and remain a Buy and a Long-Term Buy.

Retail earnings roundup

Wal-Mart Stores ($69; WMT) shares slumped after the retailer posted disappointing July-quarter results and slashed its full-year guidance. Total revenue held flat at $120.23 billion, while same-store sales for Walmart U.S. increased 1.5%. But higher labor costs cut into profits, as earnings per share from continuing operations slid 11% to $1.08, missing the consensus by $0.04. Wal-Mart Stores is a B (average).


In the July quarter, adjusted earnings per share rose 13% for Home Depot ($123; HD) and 15% for Lowe's ($74; LOW). Same-store sales grew 4.2% at Home Depot and 4.3% at Lowe's. Both home-improvement retail stocks are rated A (above average).


Rank Changes

C.H. Robinson Worldwide ($71; CHRW) and Robert Half International ($57; RHI) are being added to the Long-Term Buy List.


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