Portfolio Review: May 9, 2016
For the March quarter, CBRE Group ($29; CBG) grew per-share profits 13% to $0.36 excluding special items, easing past the consensus by a penny. Revenue, up 39% to $2.85 billion, also surpassed analysts' expectations on double-digit growth across all major geographic markets. Sales grew 15% for global leasing, partly offset by an 18% decline for global investment management. CBRE backed its 2016 guidance for per-share profits, which has a midpoint of $2.32, implying 13% growth and exceeding the consensus of $2.29 at the time of the announcement. In the days since the report, the consensus has risen to $2.31 per share. CBRE is a Focus List Buy and a Long-Term Buy.
Gilead Sciences ($86; GILD) said March-quarter earnings per share increased 3% to $3.03 excluding special items, missing the consensus estimate by $0.12. Gilead reported sales of $7.79 billion, also up 3% and also short of the consensus. Harvoni and Sovaldi, Gilead's hepatitis C drugs, combined for sales of $4.29 billion, down 6% due to higher discounts and more competition. Somewhat encouragingly, management reaffirmed its 2016 sales guidance, though that outlook lingers below the consensus.
Gilead continues its disciplined approach to exploring acquisitions, though it may face more pressure to pull the trigger as operating growth slows. In other news, a federal judge reopened a lawsuit between Gilead and Merck ($55; MRK) over claims a former Merck scientist lied to a jury about the origins of a disputed patent. Gilead had been ordered to pay Merck $200 million in damages. Gilead shares have been volatile since the March-quarter report. But the company's balance sheet is flush with cash to fund a major deal, and the stock trades at just eight times the most bearish profit estimate for 2016. Gilead, earning a Value rank of 96, is a Focus List Buy and a Long-Term Buy. Merck is rated B (average).
CDW ($41; CDW) posted per-share profits of $0.67 excluding special items in the March quarter, up 19% and $0.02 above the consensus. Sales advanced 13% to $3.12 billion, with about 3% of that growth organic and the remainder coming from its Kelway acquisition. Management continues to expect 2016 organic growth to outpace U.S. spending on technology by two to three percentage points at constant currency. CDW also announced a $750 million stock-repurchase program, in addition to $141 million remaining on its current buyback plan. In all, CDW is approved to repurchase about 13% of its share count at the stock's current price. CDW is a Buy and a Long-Term Buy.
CVS Health ($104; CVS) said March-quarter earnings per share rose 4% to $1.18 excluding special items, topping the consensus by $0.02. Revenue surged 19% to $43.22 billion, also ahead of analysts' expectations. Growth was balanced, with sales rising 21% for pharmacy services and 19% for the retail unit. Same-store sales climbed 4.2%. Although CVS reiterated its full-year outlook, June-quarter guidance was mixed relative to the consensus. Per-share profits are projected to climb 5% to 7% this quarter, versus the consensus target of 11% growth at the time of the announcement. CVS anticipates 18.5% to 20% higher sales, versus the consensus of 18.5% growth. Shares rallied on the report. CVS is a Buy and a Long-Term Buy.
LKQ ($32; LKQ) earned $0.42 per share in the March quarter excluding special items, up 11% to match the consensus estimate. Revenue advanced 8% to $1.92 billion; nearly half of that growth was organic. Cash from operations fell 34% to $119 million, though LKQ hiked its 2016 guidance to a range with a midpoint of $600 million, good for 13% growth. After completing a pair of acquisitions in the first four months of 2016, LKQ raised its full-year guidance for per-share profits to $1.81, implying 27% growth and exceeding the consensus at the time of the announcement. LKQ is a Buy and a Long-Term Buy.
Skyworks Solutions ($65; SWKS) reported per-share profits of $1.25 excluding special items in the March quarter, up 9% and a penny above the consensus. Revenue crept 2% higher to $775 million, narrowly missing analysts' expectations. More troubling, Skyworks said an inventory adjustment with a big customer, presumably Apple ($94; AAPL), will hurt June-quarter results. Management expects earnings per share to decline 10% on 7% lower sales this quarter; both targets missed consensus estimates. The shares fell on the report but trade at just 12 times the most pessimistic profit estimate for fiscal 2016 ending September, a steep 36% discount to the median forward P/E ratio for S&P 1500 semiconductor stocks. Skyworks is a Buy and a Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy.
Long-Term Buy List
Shire ($178; SHPG) grew March-quarter earnings per share 12% to $3.19 excluding special items, well ahead of the consensus of $3.05. Revenue jumped 15% to $1.71 billion, driven by its $5.9 billion Dyax purchase and 22% growth for Vyvanse, a treatment for attention-deficit hyperactivity disorder. Shire, which filed to potentially sell shares, is a Long-Term Buy.
Biogen ($263; BIIB) announced plans to spin off its hemophilia unit, which generated $640 million in sales for the 12 months ended March, or 5% of total revenue. The spin-off will make Biogen even more heavily reliant on its multiple sclerosis drugs. Some analysts speculate that Biogen, with a market value of $58 billion, could become a takeover target after the transaction, expected to close by the end of 2016 or early 2017. Biogen is a Buy and a Long-Term Buy.
Comcast ($61; CMCSa) agreed to pay $3.8 billion in cash to acquire DreamWorks Animation ($40; DWA), a 51% premium to the stock's price before news of a possible acquisition surfaced. With the deal, Comcast appears to be following Disney's ($104; DIS) strategy of assembling a stable of iconic characters. A Hollywood studio known for such movies as Shrek and Kung Fu Panda, DreamWorks also owns the licensing rights to Lassie, Rudolph The Red-Nosed Reindeer, and Casper the Friendly Ghost. Comcast is a Focus List Buy and a Long-Term Buy. Disney is a Long-Term Buy.
Abbott Laboratories ($38; ABT) agreed to acquire St. Jude Medical ($75; STJ) for $25 billion in cash and stock. St. Jude is rated B (average). Abbott Labs is rated C (below average).
Halliburton ($40; HAL) bowed to regulatory pressure by bailing on its plans to acquire Baker Hughes ($44; BHI) in a deal originally valued at $34.6 billion. Under the terms of their agreement, Halliburton will pay Baker Hughes a $3.5 billion break-up fee. Halliburton is rated C (below average).
Airlines battle over fares amid rising capacity
Alaska Air Group ($69; ALK) reported 11% higher traffic on 10% capacity growth in April. Last month, management said capacity would rise about 11% for the June quarter. Alaska Air is a Focus List Buy and a Long-Term Buy.
Southwest Airlines ($42; LUV) reportedly lowered airfares $5 for some one-way tickets. Fellow industry bellwether Delta Air Lines ($41; DAL) had a surprising response: It hiked most one-way tickets $5. Southwest Airlines is a Buy and a Long-Term Buy.
Alphabet ($711; GOOGL) has partnered with Fiat Chrysler to design a self-driving minivan. The automaker will retrofit its 2017 Pacifica Hybrid minivan with Alphabet's sensors and software to build a fleet of 100 experimental vehicles. Alphabet is a Focus List Buy and a Long-Term Buy.
India rejected Apple's ($94; AAPL) bid to sell refurbished iPhones in the country. The move would have helped Apple expand its 2% share of India's smartphone market, expected to grow 25% this year. The average smartphone sells for less than $150 in India, while Apple's midtier iPhone SE carries a starting price tag of $585 in that country. In other news, Apple increased its June-quarter orders for iPhone SE semiconductors, while reducing orders for iPhone 5S components, according to DigiTimes. Apple is a Focus List Buy and a Long-Term Buy.
No changes were made this week in Dow Theory Forecasts.