Portfolio Review: October 12, 2015
Robert Half not half bad
Earlier this month Robert Half International ($52; RHI) shares fell on a disappointing U.S. jobs report that signaled a slowdown in hiring and anemic wage growth. Although U.S. unemployment held at a seven-year low, more people are moving to the sidelines — the percentage of Americans working or looking for work fell to its lowest level in nearly 40 years.
But we still view the cup as half full for Robert Half, a staffing agency that draws about three-fourths of its revenue from the U.S. Much of the weakness in the latest jobs report was concentrated in factories and the energy sector. Robert Half has limited exposure to these areas; it primarily places workers in financial, administrative, legal, consulting, advertising, and web-design roles. The U.S. economy, though frustratingly sluggish, still appears to be heading in the right direction.
In the year ended June, Robert Half generated growth of 26% for earnings per share, 12% for revenue, and 17% for cash from operations. Analyst estimates are creeping higher, with the consensus expecting Robert Half to report earnings per share of $0.73 in the September quarter, up 16% on 8% revenue growth. Robert Half is a Long-Term Buy.
A tale of two technology stocks
Few of our recommended stocks have performed worse in the past month than Lam Research ($67; LRCX), a semiconductor-equipment maker that slumped 8%. On the far other end of the spectrum, none enjoyed a one-month surge as strong as Nvidia ($26; NVDA), a designer of graphics semiconductors that delivered a 15% total return.
Nvidia's shares rallied on the back of a strong July quarter and October-quarter guidance that topped modest expectations at the time of the announcement. They got an additional boost after Microsoft ($47; MSFT) adopted Nvidia's graphics technology for its Azure cloud platform. For Lam, analyst estimates have held up for the September quarter but slipped for fiscal 2016 ending June. The company still seems capable of posting double-digit growth for sales and per-share profits in both periods. Lam is scheduled to report September-quarter results on Oct. 21.
Plenty of pessimism has already soaked into the semiconductor industry, headlined by Taiwan Semiconductor Manufacturing's ($22; TSM) warning last month. December-quarter orders are also reportedly down sharply for semiconductors used in industrial equipment and automobiles, the latter a key growth initiative for Nvidia. A prolonged downturn could force semiconductor companies to slash capital spending. However, Lam's business is highly leveraged to 3D NAND technology, an important source of growth for semiconductor makers and a less likely target for cutbacks. Encouragingly, Taiwan Semiconductor said in October that semiconductor companies should deplete excess inventory by the end of the year.
There may also be some worries about channel stuffing. Days sales outstanding (a metric that measures how long customers take to pay) has jumped in each of the past two quarters for Lam and crept higher for Nvidia in four consecutive quarters. This trend increases the risk that they may have offered favorable sales terms in order to meet quarterly targets — at the cost of future growth.
Yet Lam earns a Value rank of 81 and trades at just 11 times estimated year-ahead earnings. Earning a Value rank of 42, Nvidia no longer looks cheap, but we remain encouraged by its strong trends for operating momentum and earnings estimates. Lam remains a Buy and a Long-Term Buy. Nvidia is a Long-Term Buy.
Google renames self Alphabet
Google reorganized itself into a holding company called Alphabet ($670; GOOGL) on Oct. 2. The company said the move is designed to improve financial transparency for investors and cut through the red tape that can slow down innovation for experimental projects. The online-advertising unit, called Google, will house the company's core search, Android, and YouTube businesses. The company's more speculative "moonshot" ventures, such as driverless cars and internet-beaming balloons, will be corralled into a separate operating unit. Despite the name change, Class A and C shares will continue to trade under their existing ticker symbols. Google, now called Alphabet, remains a Focus List Buy and a Long-Term Buy.
Apple, Skyworks follow iPhone
Apple's ($111; AAPL) iPhone unit is a behemoth, generating sales of $146.51 billion in the 12 months ended June, more than all but six other companies in the S&P 500 Index. Investors and analysts continue to gauge the success of the new iPhone 6S, which is likely to determine the near-term fate of Apple and companies that supply it with components. In China (23% of Apple's total sales for the 12 months ended June), Apple sold out all models of its iPhone 6S within six days, though initial sales fell 10% to 15% in Japan (7%), according to separate published reports. Apple hiked prices of the new iPhone model in Japan to offset the yen's depreciation, so lower volumes could still drive revenue growth.
Somewhat more troubling, iPhone-components suppliers are nervous that Apple may lower semiconductor orders in the December quarter. Those concerns have weighed on Skyworks Solutions' ($84; SWKS) stock, down 9% since mid-September. Skyworks accounted for an estimated $4 of components in the iPhone 6 and has reportedly gained more share in the iPhone 6S.
In a move that should lessen its exposure to Apple, Skyworks agreed to pay $2 billion in cash to acquire PMC-Sierra ($10; PMCS), which designs semiconductors for networking equipment. Skyworks will pay $10.50 per share, a 37% premium to PMC's price before the deal was announced. Management expects the deal to boost annual earnings by $0.75 per share. The company also projected September-quarter earnings per share of $1.52 on revenue of $880 million, narrowly ahead of consensus estimates at the time of the announcement. Apple is a Focus List Buy and a Long-Term Buy. Skyworks is a Buy and a Long-Term Buy.
Goodyear Tire & Rubber ($31; GT) raised its dividend 17% to $0.07 per share, payable Dec. 1. Goodyear is a Long-Term Buy.
Alaska Air Group ($76; ALK) reported 10.0% higher traffic on 10.3% capacity growth in September. Despite the shares' recent weakness, Alaska remains a Focus List Buy and a Long-Term Buy.
J.P. Morgan Chase ($62; JPM) is reportedly planning to bid on an $18.2 billion portfolio of mortgages held by the U.K. government. Separately, J.P. Morgan agreed to pay $595 million as part of a settlement to end a probe into charges that 12 banks conspired to hurt competition in the credit-default swap market. On a more positive note, U.S. judge dismissed an $8.6 billion lawsuit filed by failed investment bank Lehman Brothers Holdings, which claimed J.P. Morgan illegally extracted billions of dollars in collateral during Lehman's final days. J.P. Morgan is a Buy and a Long-Term Buy.
Wells Fargo ($52; WFC) agreed to acquire most of General Electric's ($28; GE) railcar-leasing business. Terms were not announced for the deal that makes Wells Fargo the second-largest lessor of railcars and locomotives in North America. Wells Fargo is a Long-Term Buy. GE is rated C (below average).
No changes were made this week in Dow Theory Forecasts.