Portfolio Review: May 2, 2016

5/2/2016


Earnings roll call

Consumer discretionary

In the March quarter, Comcast ($61; CMCSa) grew earnings per share 6% to $0.84 excluding special items, surpassing the consensus by $0.05. Sales, up 5% to $18.79 billion, also topped analysts' expectations. The cable unit delivered 7% higher revenue, while NBCUniversal posted 4% growth, helped by Comcast buying a 51% interest in Universal Studios Japan.  Comcast added a net 53,000 video subscribers, marking its second straight quarter of growth.

In other news, Comcast has reportedly entered talks to acquire DreamWorks Animation ($32; DWA) in a deal worth more than $3 billion that could put the company in closer competition with Disney ($105; DIS). DreamWorks, which generated sales of $916 million in 2015, has explored selling itself multiple times in the past few years. Comcast is a Focus List Buy and a Long-Term Buy. Disney is a Long-Term Buy.


Goodyear Tire & Rubber ($30; GT) earned $0.72 per share in the March quarter excluding special items, up 33% and a penny above the consensus. But revenue slumped 8% to $3.69 billion, missing the consensus. Goodyear blamed the sales decline on foreign-currency headwinds and the deconsolidation of its Venezuela subsidiary on Dec. 31. Tire volumes rose 2% and operating profit margin expanded 1.8 percentage points to 11.4%.

Management reiterated its 2016 profit guidance but curbed its outlook for raw-material costs, now projected to decline just 2%, versus its prior estimate of a 5% decline. Goodyear says it plans to offset higher-than-expected raw-material costs with price hikes and an improved product mix. But some investors may fear Goodyear's profit margins are nearing a peak, probably contributing to the stock's sell-off on the report. For now, Goodyear remains a Buy and a Long-Term Buy.


Lear's ($116; LEA) March-quarter per-share profits surged 49% to $3.40 excluding special items, well ahead of the consensus of $2.77. Revenue advanced 3% to $4.66 billion on 2% growth from the electrical unit and 3% growth from seating. Excluding currency fluctuations, sales rose 8%. Profit margins expanded for both units. Lear raised its 2016 guidance for core operating earnings and free cash flow, while reiterating its prior view for sales, which remains below consensus estimates. Lear is a Focus List Buy and a Long-Term Buy.

Health care

Centene's ($66; CNC) March-quarter earnings per share surged 35% to $0.74 excluding $0.87 in special items, mostly expenses from the Health Net acquisition. The consensus was $0.73. Revenue advanced 36% to $6.95 billion. Cash from operations jumped to $195 million from $45 million in the year-ago quarter. The company's health-benefits ratio, which measures the percentage of collected premiums paid out to cover medical costs, improved to 88.7% from 89.8%.

Centene lowered its full-year guidance, a widely anticipated move because of the delayed completion of the $6 billion Health Net deal. The midpoint of Centene's new growth targets call for per-share profits of $4.175, up 38%, on revenue of $39.4 billion, up 73%. The stock rallied on the report and remains a Focus List Buy and a Long-Term Buy.


Biotech giant Biogen ($280; BIIB) boosted March-quarter sales 7%, paced by gains from its largest drug, Tecfidera for multiple sclerosis, and two hemophilia treatments launched last year. Per-share profits jumped 25% to $4.79 per share, topping the consensus by $0.33. Analysts expect profit growth of 11% this year and 7% next year, targets that seem overly conservative given Biogen's robust drug portfolio and expected product launches. Biogen is a Long-Term Buy.

Industrials

Alaska Air Group ($74; ALK) earned $1.45 per share in the March quarter, up 29% and $0.03 above the consensus. Revenue rose 6%, roughly in line with analyst expectations. Low fuel costs (down 29% in the quarter) fattened profit margins, a trend that has helped airline results for the last two years. Capacity rose 12.9% in the quarter, outstripping an 11.0% increase in traffic. The company expects capacity growth to slow to 11% in the June quarter and 8% for the year, with unit costs excluding fuel continuing to decline. Alaska is a Focus List Buy and a Long-Term Buy.


C.H. Robinson Worldwide ($72; CHRW) grew per-share profits 14% to $0.83 in the March quarter, easing past the consensus by a penny. Total revenue declined 7% to $3.07 billion, though net revenue, the company's preferred metric, advanced 7% to $563 million. Net revenue, excluding transportation and other services purchased on its clients' behalf, reflects C.H. Robinson's operating performance better than does traditional revenue.

Truckload volumes rose 3%, while lower costs for transportation and fuel bolstered profits. Cash from operations increased 4% to $104 million, marking the company's seventh straight quarter of growth. C.H. Robinson is a Focus List Buy and a Long-Term Buy.


Owens Corning ($49; OC) reported March-quarter earnings per share of $0.53 excluding special items, up from $0.19 in the year-ago quarter and 56% above the consensus estimate of $0.34. Sales crept 2% higher to $1.23 billion. Owens lowered its 2016 outlook for insulation (34% of 2015 sales), partly due to a contract dispute with a big residential customer. But management raised its profit guidance for composites (34%) and sees upside to its prior expectation of modest growth in roofing (32%). Owens is a Focus List Buy and a Long-Term Buy. 


For the March quarter, Robert Half International ($39; RHI) said per-share profits increased 10% to $0.64, matching the consensus. Robert Half has now grown per-share profits by double-digits in 24 straight quarters. Sales totaled $1.30 billion, up 8% and also in line with analysts' expectations. The growth was balanced, with all six of the company's business units posting at least 4% higher sales.The midpoint of management's June-quarter guidance calls for 9% higher per-share profits and 6% higher sales, which fell short of the consensus. Robert Half shares fell on the report and a subsequent analyst downgrade. For now, the stock remains a Focus List Buy and a Long-Term Buy. 


In the March quarter, Southwest Airlines ($46; LUV) earned $0.88 excluding special items, up 33% and topping the consensus by $0.04, while revenue increased 9% and operating cash flow 11%. Citing solid bookings in April, the company expects unit revenue to rise in the June quarter. Southwest is a Buy and a Long-Term Buy.

Technology

Alphabet ($721; GOOGL) said March-quarter earnings per share rose 16% to $7.50 excluding special items on revenue growth of 17% to $20.26 billion. Both sales and profits missed consensus estimates, and the stock's sell-off reflected the disappointing results. However, Alphabet has never shown much concern about hitting quarterly numbers, and its prospects remain attractive.

The Google unit grew sales 17%, as 29% higher paid clicks more than offset a 9% decline in cost-per-click. Revenue from Alphabet's "other bets" business more than doubled to $166 million, but its operating loss also widened to $802 million from $633 million. Cash from operations rose 14%. Alphabet's operating profit margin expanded, even as traffic acquisition costs jumped 13%, a trend likely to continue as web usage shifts more toward mobile devices. Up 30% over the past 12 months, Alphabet remains a Focus List Buy and a Long-Term Buy.


Apple ($98; AAPL) earned $1.90 per share in the March quarter, down 18% and $0.10 below the consensus. The company last missed the consensus profit estimate in the March 2013 quarter. Sales slid 13% to $50.56 billion, also below the consensus, driven by a 26% decline in China and a 10% decline in the Americas. Apple sold 32% fewer iPhone units, 36% fewer iPad tablets, and 24% fewer Macs. The guidance also disappointed, with Apple projecting June-quarter sales of $41 billion to $43 billion, well short of the consensus of $47.32 billion at the time of the announcement. In more upbeat news, Apple raised its quarterly dividend 10% to $0.57 per share, payable May 12. Apple remains a Focus List Buy and a Long-Term Buy.

Top 15 Utilities change

Entergy ($75; ETR) isn't particularly exciting, with analysts expecting a profit decline of 14% this year and a gain of less than 2% next year. But when it comes to utilities, excitement can be overrated. The traditional regulated utility provides electricity to 2.9 million customers in Arkansas, Louisiana, Mississippi, and Texas. Entergy earns ranks of more than 80 in both of our sector-specific Quadrix scores and trades at a discount of at least 18% to the industry median for trailing price/earnings, price/sales, and price/book ratios. The company's March-quarter earnings of $1.35 per share topped the consensus by 14%, and expectations for the year ahead are low enough to leave room for additional profit surprises. Entergy is joining the Top 15 Utilities portfolio.


Over the last three months, NiSource ($22; NI) has returned 12% — this despite a lack of operating momentum (sales and profits down in the December quarter) and a Quadrix Overall score that has sunk to 39. At 21 times expected 2016 earnings, NiSource trades at a 12% premium to its industry and no longer looks like a good bet for outperformance over the next 12 months. NiSource is being sold from the Top 15 Utilities portfolio.


Rank Change

We're making no changes to our recommended lists. In the Top 15 Utilities portfolio, we're dropping NiSource ($22; NI) and replacing it with Entergy ($75; ETR).


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