Portfolio Review: November 16, 2015

11/16/2015


Focus List switch

On the Focus List, CBRE Group ($36; CBG) replaces F5 Networks ($108; FFIV).

CBRE's Quadrix Overall rank of 96 reflects outstanding operating momentum, rising earnings estimates, and a reasonable valuation. Per-share profits, revenue, and operating cash flow all grew in excess of 15% in the 12 months ending September. For the December quarter, the consensus calls for 16% higher earnings per share on 21% sales growth — and estimates may have room to rise further, considering management's recent bullish guidance earlier this month. The stock trades more than 10% below five-year norms relative to trailing earnings, cash flow, and book value. CBRE is also a Long-Term Buy.


F5 disappointed investors last month with soft December-quarter guidance. Unfavorable trends for earnings estimates and slowing operating momentum have caused the stock's Overall score to slip to 77. But F5 is one of few companies delivering consistent revenue growth — sales are up in 25 straight quarters, a trend that should continue through at least the March quarter. At 14 times estimated year-ahead earnings, F5 shares trade at an 18% discount to the average communications-equipment stock in the S&P 1500 Index. The stock's trailing P/E of 16 lingers near its lowest level in more than a decade. Excluding net cash of $11 per share, F5's trailing P/E ratio is just 14.6. F5 remains a Buy and a Long-Term Buy.

Top 15 Utilities change

NiSource ($19; NI), the country's third-largest gas utility with 3.4 million customers in seven states, is being added to the Top 15 Utilities portfolio. The company also serves 461,000 electricity customers in Indiana and operates 58,000 miles of gas pipeline and 28,000 acres of underground storage tanks. The stock earns Quadrix sector-specific scores of at least 74. NiSource targets profit and dividend growth of 4% to 6% annually, solid for a utility, yet trades at just 12 times trailing earnings, 36% below the gas-utility average. NiSource is rated A (above average) in our Utility Update.


Alliant Energy ($59; LNT) is being dropped from the Top 15 Utilities to make room for NiSource. Alliant's sales have fallen in each of the last four quarters, with per-share profits down in four of the last five. Despite the weak operating momentum, the shares are pricey relative to their peers on many metrics. Alliant, which ranks below 35 in both sector-specific scores, is being downgraded to a B (average) in our Utility Update.

Earnings reviews

Disney ($117; DIS) grew September-quarter earnings per share 35% to $1.20 excluding special items, topping the consensus by $0.06. Revenue climbed 9% to $13.51 billion, driven by the media-networks (up 12%), consumer-products (11%), and parks-and-resorts (10%) units. Although cord-cutting remains a concern for Disney, the company is pursuing multiple partnerships to distribute its portfolio of cable content on nontraditional platforms. Shares rallied on the results. Disney is a Long-Term Buy.


Nvidia's ($31; NVDA) stock surged to its highest level since January 2008 after the company impressed investors with strong October-quarter results and encouraging guidance. Nvidia said per-share profits jumped 18% to $0.46 excluding special items, versus the consensus of $0.25. Sales advanced 7% to $1.31 billion, also comfortably ahead of the consensus. For the December quarter, Nvidia expects sales to increase roughly 4%, exceeding analysts' expectations at the time of the announcement. The company hiked its quarterly dividend 18% to $0.115 per share, payable Dec. 14. Nvidia is a Long-Term Buy.

Technology wrap-up

Alphabet's ($765; GOOGL) antitrust troubles continue to mount overseas. Streetmap EU, a U.K. company that makes online maps, filed a lawsuit claiming Alphabet unfairly used its dominant search position to squash the smaller rival's business starting in 2007. Meanwhile, the European Union may be expanding its Alphabet probe to include mapping applications. The EU is already investigating Alphabet's search services, though it has not yet decided whether to issue a fine or allow the company to propose measures to change its business practices. Alphabet is a Focus List Buy and a Long-Term Buy.


According to Credit Suisse analysts, Apple ($116; AAPL) cut orders for iPhone 6S components by up to 10%, likely due to soft demand. Separately, Apple began taking orders for its iPad Pro, a larger tablet aimed at corporate users. CEO Tim Cook predicts the iPad Pro, which offers more features than Apple's other tablets, will replace personal computers for "many, many people." Sales to businesses could reach 20% of the overall tablet market by 2018, versus 14% this year, says researcher Forrester. Apple is a Focus List Buy and a Long-Term Buy.


Microsemi ($37; MSCC) claims PMC-Sierra ($12; PMCS) now views its takeover offer of $2.38 billion in cash and stock as superior to Skyworks Solutions' ($79; SWKS) all-cash bid of $2.24 billion. Just days earlier, PMC publicly declared its support of the Skyworks offer because it offered "more value certainty" to investors. However, PMC has warned Skyworks it will approve the Microsemi deal in the absence of a higher offer, according to Microsemi. The tentative pact between Skyworks and PMC includes a termination fee of $88.5 million. In other news, Skyworks said it plans to repurchase up to $400 million of stock over the next two years, or nearly 3% of outstanding shares at the current price. Skyworks put some of those concerns to bed with its solid September-quarter report and encouraging outlook for the current quarter. The company grew per-share profits 36% to $1.52 excluding special items to match the consensus. Revenue, up 23%, topped analysts' expectations. Skyworks is a Buy and a Long-Term Buy. Microsemi is rated Buy in our sister publication Upside.


CDW ($43; CDW) shares slumped after the company said the U.S. Securities and Exchange Commission is investigating incentives offered by its vendor-partner program. CDW uses its marketing and distribution network to sell vendors' software and equipment to more than 250,000 customers. CDW remains a Focus List Buy and a Long-Term Buy.

Corporate roundup

Southwest Airlines ($47; LUV) said traffic increased 10.8% in October on 7.2% higher capacity, increasing its load factor to 85.9% from 83.1% in October 2014. In other news, Southwest pilots rejected a tentative four-year contract that would have called for increased productivity in exchange for higher pay. Southwest Airlines is a Buy and a Long-Term Buy.


Kroger ($37; KR) expanded its presence in the Midwest by agreeing to acquire smaller grocer Roundy's ($4; RNDY). Kroger will pay about $178 million in cash and assume $646 million in debt. Roundy's operates 151 stores and 101 pharmacies in Wisconsin and the Chicago area under multiple brand names. It generated $4.03 billion in sales for the 12 months ended September but earned just $0.02 per share on an operating basis. Kroger expects the deal to boost earnings slightly in the first year. Kroger is a Buy and a Long-Term Buy.


Jones Lang LaSalle ($162; JLL) acquired Guardian Property Asset Management, a residential agency in Dublin, Ireland. Jones Lang has acquired or agreed to acquire 16 companies this year, at a combined price of $420 million. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.

Health-care report

U.S. Medicaid officials asked Gilead Sciences ($107; GILD) and AbbVie ($61; ABBV) for information on pricing deals made with health insurers for hepatitis C drugs as states strain to afford the expensive treatments. Federal officials also warned state Medicaid directors that restricting access to hepatitis C drugs may be illegal. Some states have barred from treatment Medicaid patients with drug problems or less-than-severe liver disease.

In other news, the U.S. Food and Drug Administration cleared Gilead to sell Genvoya, an HIV combo drug. European regulators approved Genvoya in September. Separately, doctors in France warned that hepatitis C drug Sovaldi may cause patients to experience abnormally slow heartbeats. The doctors observed that three of 415 patients they treated in 2014 developed a slowing heart rate during the first 10 days of using Sovaldi, ultimately requiring the patients to receive pacemakers. Gilead is a Focus List Buy and a Long-Term Buy. AbbVie is rated B (average).


Community Health Systems ($28; CYH) announced plans to repurchase up to 10 million shares, or nearly 9% of its stock count, at a cost not to exceed $300 million over the next three years. Community Health is a Buy and a Long-Term Buy.


Rank Changes

CBRE Group ($36; CBG) is being added to the Focus List. F5 Networks ($108; FFIV) is coming off the Focus List but remains a Buy and a Long-Term Buy. In the Top 15 Utilities portfolio, NiSource ($19; NI) is replacing Alliant Energy ($59; LNT).


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