Portfolio Review: September 7, 2015

9/7/2015


Technology roundup

Apple ($112; AAPL) is expected to show off its next generation of iPhones at a media event Sept. 9. The new iPhone is rumored to feature a touch-sensitive display that gauges the force a user presses on the screen. Apple may also introduce its new Apple TV with voice-recognition software Siri, priced from $149 to $199, up from less than $100 for prior models.

Apple appears to enjoy a strong adoption rate in two new product categories. Apple said its new streaming-music service has retained 79% of subscribers who signed up for a three-month trial. Industry researcher MusicWatch had previously said that Apple Music, launched June 30, had a retention rate of 52%, based on an online survey of 5,000 people. Separately, Apple sold 3.6 million Apple Watches in the June quarter to take a 66% share of the smart-wearables market, defined as gadgets that can run third-party applications, said researcher IDC. Samsung is preparing to launch a new smartwatch, called Gear S2. Unlike the Apple Watch and most other smartwatches, Gear S2 will be capable of connecting to the internet without an accompanying smartphone. It will also offer longer battery life.

In other news, Apple and Cisco Systems ($26; CSCO) announced a partnership aiming to expand the use of iPhones and iPads at businesses. The two companies will work together to improve the performance of the devices on corporate networks. This latest pact comes about a year after Apple and IBM ($145; IBM) announced plans to design business software for the devices. Apple is a Focus List Buy and a Long-Term Buy. Cisco is rated A (above average). IBM is rated B (average).


Google ($645; GOOGL) challenged antitrust charges brought by the European Union that accuse the company of skewing online-search results to benefit its own websites and services. Citing the strength of rivals Amazon.com ($511; AMZN) and eBay ($27; EBAY), Google claims its practices have not hurt competition for online shopping.

A study by the Centre for European Reform found that prices on Google Shopping tended to be 3% lower than the first retailer to appear in search queries, which could bolster Google's case. However, EU antitrust regulators have stepped up their probe by sending companies a questionnaire about Google's business practices. At least one law firm has begun soliciting plaintiffs to build a class-action lawsuit against Google.

In other news, Apple's new mobile operating system, due out in September, will let developers design applications that block advertisements from appearing on its Safari web browser. The move threatens to cut into the $70 billion market for mobile advertising; Google is the leading player in this industry. About 6% of internet users employ ad blockers on personal computers. Separately, Google has partnered with drugmaker Sanofi ($49; SNY) to improve the way diabetes is monitored and treated. Google is a Focus List Buy and a Long-Term Buy. eBay is rated A (above average). Amazon.com is rated C (below average).

Dealbook

Schlumberger ($75; SLB) agreed to acquire Cameron International ($65; CAM) for about $14.8 billion in cash and stock. The two companies together generated revenue of more than $54 billion in the 12 months ended June, which would put Schlumberger back ahead of Halliburton ($38; HAL), which in November announced plans to acquire Baker Hughes ($55; BHI) for $34.6 billion. Halliburton and Baker, the second- and third-largest oilfield-services companies, produced combined sales of $52 billion but plan to sell off assets in an attempt to gain regulatory approval. Cameron ranks fifth among oilfield-services companies and has little overlap with Schlumberger. Schlumberger said it does not plan to make any divestitures. Both Halliburton and Schlumberger are rated B (average).


Wells Fargo ($52; WFC) has surfaced as the leading candidate to acquire General Electric's ($25; GE) railcar-financing business. With more than $4 billion in assets, GE Capital Rail Services leases train cars, while also offering loans and maintenance services. GE is in the midst of divesting $200 billion of lending assets as it scales back financial operations.

Separately, Wells Fargo plans to add more branches that offer car loans and financing for auto dealers. The bank's push to expand its auto-lending business coincides with U.S. car sales on pace to post one of their strongest years since 2000. Car sales exceeded expectations for August, delivering the strongest month since July 2005, and seem positioned for more growth this month, due to all of Labor Day weekend falling in September this year. Wells Fargo is a Long-Term Buy. GE is rated B (average).


Illustrating the costs that can come with failed takeover attempts, Comcast ($56; CMCSa) said expenses linked to its aborted $45.2 billion acquisition of Time Warner Cable ($185; TWC) exceeded $400 million, or 2% of operating cash flow for the 12 months ended June. In April, Comcast dropped plans to buy Time Warner due to regulatory pressure. Comcast is a Focus List Buy and a Long-Term Buy.


Pfizer ($32; PFE) won approval from U.S. regulators to acquire Hospira ($90; HSP) on the condition it sells some injectable-drug assets. Pfizer expects to complete the deal, valued at $17 billion including debt and first announced in February, early this month. Pfizer is rated C (below average).


CVS Health ($101; CVS) partnered with three companies that offer medical consultations by phone or internet. The consultants will serve CVS customers and refer their own patients to the drugstore chain's MinuteClinics. CVS is a Buy and a Long-Term Buy.

EQT Midstream added to Top 15

EQT Midstream Partners ($77; EQM) has delivered sales growth of at least 23% in 12 straight quarters and per-share-profit growth of 37% or higher in the last five. The consensus projects sales growth of 56% and per-share-profit growth of 31% this year, followed by growth of 24% and 11%, respectively, in 2016. EQT Midstream Partners transmits, stores, and gathers natural gas in southwestern Pennsylvania and northern West Virginia, the heart of the Marcellus shale region.

The company generates most of its revenue through long-term contracts — transmission and storage pacts average 17 years, gathering contracts 10 years.

The dividend has risen at an annualized rate of 26% over the last two years, with a target of 20% annual growth through 2017. EQT Midstream Partners earns a Quadrix Overall score of 91 and above 80 in Momentum, Quality, Financial Strength, and Earnings Estimates. More of an energy company than a utility pipeline play, EQT Midstream Partners becomes the third master limited partnership (MLP) in the Top 15 Utilities portfolio. Three MLPs is high for us, but we see opportunity in the group's price weakness.

Airline fares falling

U.S. airlines slashed fares nearly 6% in July compared to June, according to the U.S. Labor Department's airfare index. That marks the biggest monthly decline since December 1995. Until recently, airlines have enjoyed strong pricing, even as their largest operating expense, fuel, plunged over the past year. More encouraging, U.S. airlines are expected to see record high summer travel, according to trade group Airlines for America.

Most airline stocks have avoided the worst of the market's recent sell-off, with both Alaska Air Group ($79; ALK) and Southwest Airlines ($38; LUV) up slightly over the last month. Alaska Air is a Focus List Buy and a Long-Term Buy. Southwest Airlines is a Buy and a Long-Term Buy.


Rank Changes

We're making no changes to our buy lists. In the Top 15 Utilities portfolio, we're adding EQT Midstream Partners ($77; EQM) to replace AGL Resources ($60; GAS), which was sold last week.


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