Portfolio Review: September 14, 2015
1 upgrade, 2 new monitored stocks
C.H. Robinson Worldwide ($69; CHRW), a provider of third-party logistics and transportation services, is being added to the Buy List. The stock's Quadrix scores for Momentum and Earnings Estimates exceed 90, lifted by surging cash flow and favorable trends for analyst revisions. Despite the market's recent turbulence, the shares have held up pretty well, rising 11% in the past two months while the S&P 1500 Index has slipped 5%.
At 18 times trailing earnings, the stock trades 27% below its five-year average of more than 24. Should C.H. Robinson meet the 2015 consensus profit estimate of $3.45, which implies 13% growth, and its P/E ratio rise to 23, the stock would near $80 by January. C.H. Robinson was initiated as a Long-Term Buy in the Aug. 24 issue.
Centene's ($61; CNC) $7.6 billion market value could attract takeover interest in the consolidating health-insurance industry, though management seems determined to be a buyer, not a seller. The company's pending $6.3 billion acquisition of Health Net ($64; HNT) would make Centene the largest private administrator of Medicaid, an increasingly important segment of the insurance market. About 6 million of the companies' combined 10 million members use Medicaid.
Centene shares have slumped 24% since the Health Net deal's announcement in early July, while the S&P 1500 Health Care Sector Index has declined 7%. The sell-off has lifted the stock's Value score to 71, and though its P/E ratio of 23 isn't cheap, its price/sales ratio ranks in the top 10% of our research universe. The insurer has grown annual sales at least 8% in 15 straight years, a trend that seems capable of continuing into 2016. In Quadrix, the stock earns an Overall score of 95 and both sector-specific ranks are 98. Centene is being initiated as rated A (above average).
With a market value topping $20 billion, Paccar ($57; PCAR) ranks among the leaders in the construction-machinery and heavy-trucks industry. Paccar builds commercial trucks (77% of 2014 sales), while also offering aftermarket parts (16%) and financing services (7%) for those trucks. It generates most of its revenue in the U.S. and Canada (61%), as well as Europe (26%).
Sales grew 11% in the first half of 2015, while operating cash flow jumped 41%.Although Paccar raised its 2015 guidance in July, it operates in a highly cyclical industry, and some investors worry truck demand may be nearing a peak. Earning an Overall score of 98 and Value rank of 86, Paccar is an intriguing potential Buy. But with the Dow Theory bearish, we're holding off on recommending the stock for purchase. We initiate coverage of Paccar with an A (above average) rating.
Airlines gain altitude
Shares of Alaska Air Group ($82; ALK) and Southwest Airlines ($38; LUV) rallied after both airlines reported robust operating growth for the month of August. Alaska Air said traffic rose 7.0%, while capacity increased 7.7%. Southwest's traffic, up 7.5%, nearly kept pace with capacity, up 7.6%. Alaska Air is a Focus List Buy and a Long-Term Buy. Southwest Airlines is a Buy and a Long-Term Buy.
Shire ($226; SHPG) takeover target Baxalta ($34; BXLT) ended its own bid to acquire Ariad Pharmaceuticals ($8; ARIA) after both sides failed to agree on a price. Baxalta had discussed paying about $2 billion for Ariad. However, Baxalta's management has apparently not softened its stance on Shire's $30 billion offer, which it considers too low. Shire's stock has slumped 16% since reports first surfaced in early August of its plans to pursue Baxalta.
Shire's Overall score has dipped to 74, down from 91 at the end of May, partly due to slowing operating momentum in the June quarter. Sales grew just 4% and cash from operations fell 46% to $452 million, or 16% after excluding a one-time payment from Canadian revenue authorities in the year-ago quarter.
Yet Shire in July raised its 2015 outlook for per-share profits to mid-to-high-single-digit growth from mid-single-digit growth. Shire's pipeline for new drugs looks robust, with U.S. regulators expected to decide by Oct. 25 whether to approve lifitegrast, an experimental drug for dry eyes. The drug's peak sales could reach $1.3 billion, says J.P. Morgan Chase ($62; JPM). For comparison, Vyvanse, a treatment for attention-deficit hyperactivity disorder and Shire's top drug, generated sales of $1.45 billion in 2014. For now, Shire remains a Focus List Buy and a Long-Term Buy. J.P. Morgan Chase is a Buy and a Long-Term Buy.
Gilead Sciences ($104; GILD) said an experimental treatment for HIV performed well in a late-stage study. Gilead has already filed for approval to sell the drug, intended to be safer than its current HIV treatment Truvada (13% of 2014 revenue), in the U.S. and Europe. Gilead is a Focus List Buy and a Long-Term Buy.
Novartis ($96; NVS) launched the first U.S. biosimilar drug after an appeals court rejected Amgen's ($151; AMGN) bid to halt sales of the new treatment. Novartis priced Zarxio at a 15% discount to Neupogen, which generated sales of $1.16 billion in 2014, or 6% of Amgen's revenue. U.S. customers accounted for $839 million of that revenue. Both Neupogen and Zarxio increase white blood cell counts in an effort to reduce infection in patients receiving chemotherapy. On the market in Europe since 2006, biosmiliars are near — but not exact — copies of biological drugs, which are extracted from living cells. Amgen is rated A (above average). Novartis is rated C (below average).
Disney ($102; DIS) agreed to open its movie vault by allowing Amazon.com ($517; AMZN) and Microsoft ($43; MSFT) customers to watch videos through its cloud-based service. Last year Disney partnered with online stores managed by Apple, Google, and Wal-Mart Stores ($65; WMT). Disney is a Long-Term Buy. Microsoft and Wal-Mart are rated B (average). Amazon.com is rated C (below average).
General Electric ($25; GE) won approval from European regulators to complete its $13.9 billion acquisition of Alstrom's power business after making concessions to sell certain turbine assets. The deal is GE's largest ever. GE is rated B (average).
Anticipating little hope of settling with the European Union over charges its online search business violated antitrust rules, Google ($643; GOOGL) is preparing for a lengthy legal campaign, reported the New York Post. Google may have another battle on its hands as the EU considers whether to charge the company with allegedly using its Android mobile operating system to abuse its market position.
Meanwhile, Google continues to explore new businesses. It plans to launch a pilot program for grocery deliveries later this year and conduct human tests with Novartis ($96; NVS) for a "smart" contact lens in 2016. It has also entered talks with government officials about opening a new Android application store in China. A wave of cyberattacks and a feud with the government over censorship forced Google to halt most of its operations in China in 2010. Google is a Focus List Buy and a Long-Term Buy. Novartis is rated C (below average).
Apple ($110; AAPL) unveiled its iPhone 6S and larger 6S Plus, both featuring new display technology that distinguishes light taps from hard pushes. The devices will be available Sept. 25. Apple announced a $32 monthly upgrade plan that could entice more existing iPhone users to buy the latest modelÂ each year. Apple CEO Tim Cook also introduced a new Apple TV set-top box, priced at $149 to $199 and due out in late October. It includes a touchscreen remote control and can also be activated through Siri, Apple's speech-recognition software.
Finally, Apple showed off its refreshed iPad line, with the newest addition being the long-awaited iPad Pro. Seeking to increase its footing with business customers, Apple equipped the iPad Pro with a larger screen and two optional accessories: a physical keyboard for $170 and a $100 stylus pencil. Apple is a Focus List Buy and a Long-Term Buy.
C.H. Robinson Worldwide ($69; CHRW) is being added to the Buy List.