Portfolio Review: May 30, 2016

5/30/2016


Earnings reviews

Amerco ($373; UHAL) reported March-quarter earnings per share of $2.68, up 10% excluding special items but $0.02 short of the consensus. Revenue climbed 6% to $683 million on broad growth across its businesses, including self-moving equipment rentals (5%), self-storage (18%), life insurance (6%), and property and casualty (16%). Management noted higher transactions for equipment rentals and self-storage, both helped by the combination of operational improvements and the addition of new locations. Amerco is a Focus List Buy and a Long-Term Buy.


Foot Locker ($55; FL) earned $1.39 per share in the April quarter, up 8% to meet the consensus. Total revenue advanced 4% to $1.99 billion and same-store sales rose 2.9%; both missed analyst expectations. Growth slowed for basketball footwear, though Foot Locker expects the category to rebound later this year. Management also noted that several key shoe models are being released later this year than in fiscal 2016 ended January. Shares fell on the report.

Foot Locker reiterated its full-year guidance, with earnings per share expected to rise by double-digits on mid-single-digit growth for same-store sales. Analyst profit estimates have declined in the days since the report, yet Foot Locker is one of few retailers experiencing higher foot traffic. The stock trades at 12 times trailing earnings, its lowest level in more than two years. Foot Locker remains a Buy and a Long-Term Buy.


Applied Materials ($24; AMAT) topped consensus profit estimates for April-quarter earnings per share, up 17%, and revenue, which held flat. The company said orders for its semiconductor equipment surged 37% to $3.45 billion, a 15-year high, emboldening management to offer July-quarter guidance that comfortably exceeded analysts' expectations. Echoing comments made by rival Lam Research ($81; LRCX), Applied Materials says the overall semiconductor-equipment market will likely hold flat this year. But the underlying composition of the market changes rapidly, and both companies have caught waves that drive growth as customers race to keep up with new technology. The report lifted shares of both Applied Materials and Lam. Lam is a Buy and a Long-Term Buy. Applied Materials is rated A (above average).


Wal-Mart Stores ($70; WMT) delivered one of the few genuine positive surprises in the retail industry for the April quarter. Per-share profits slipped 5% to $0.98 per share in the April quarter but topped the consensus by $0.10. U.S. same-store sales excluding fuel rose 1.0%, marking the seventh straight quarter of growth. The retail giant said results benefited from efforts to keep its shelves better stocked and wage gains for lower-income U.S. shoppers. For the July quarter, Wal-Mart expects same-store sales to rise 1.0%, while the midpoint of its per-share-profit guidance exceeded analyst expectations. Wal-Mart Stores is rated A (above average).

A worm doesn't spoil the whole Apple

Apple ($100; AAPL) shares have bounced 10% since hitting a 23-month low on May 12 but remain down 5% for 2016 and 23% over the past 12 months. The recent disclosure of Berkshire Hathaway's ($144; BRKb) investment in Apple has restored some confidence in the stock. Yet the shares seem to oscillate on every report concerning iPhone orders — and several of those reports have been contradictory. For now, expectations appear muted for the forthcoming iPhone 7, while speculation swirls that the next iPhone, due out in 2017, will feature a radical redesign to mark the device's 10-year anniversary. Of course, heightened anticipation of the 2017 iPhone could cause users to postpone upgrading to the iPhone 6S or 7 models.

This month CEO Tim Cook visited government officials in India and China, underscoring Apple's need to stoke growth in emerging markets as smartphone demand matures elsewhere. Cook is exploring ways to make the iPhone more affordable in India, ideally by selling refurbished phones, though the country's officials have resisted the plan so far.

The stock's Quadrix Overall score is just 71, and recent price performance has been frustrating. But we think patient investors will find the wait worthwhile. While Apple's fate hinges on the iPhone, the company is developing additional growth drivers in the form of services (which generated 20% revenue growth in the March quarter), the Apple Watch, and Apple Pay. Apple, yielding 2.3%, is a Buy and a Long-Term Buy. Berkshire is rated A (above average).

Financials

A U.S. appeals court reinstated multiple lawsuits accusing 16 big banks — including J.P. Morgan Chase ($66; JPM), Bank of America ($15; BAC), and Citigroup ($47; C) — of harming their customers by colluding to the rig the London interbank offered rate, a widely used benchmark better known as Libor. Separately, J.P. Morgan won the dismissal of a lawsuit brought by Bernard Madoff's former clients, who claimed the bank should have reported suspicious activity to regulators. J.P. Morgan is a Long-Term Buy. Bank of America and Citigroup are rated B (average).


Transaction volume for U.S. commercial real estate plunged 34% to $22 billion in April, according to Real Capital Analytics. However, CBRE Group ($30; CBG) appears to be taking share. In the March quarter, CBRE reported at least 5% higher revenue for investment sales in the U.S., Canada, and Latin America, while industrywide U.S. volumes contracted 9%. In other news, CBRE agreed to buy a 49% stake in Malaysia's leading provider of real estate services. CBRE also sold its corporate headquarters building in Los Angeles for a reported $330 million; it had purchased the office tower for $236 million in 2012. CBRE is a Buy and a Long-Term Buy.

Media

Comcast ($63; CMCSa) faces an antitrust lawsuit filed by Viamedia, a competitor for local cable advertising, seeking at least $225 million. The U.S. Justice Department is also investigating Comcast's behavior in the spot cable advertising market. Comcast is a Focus List Buy and a Long-Term Buy.


Disney ($100; DIS) CEO Bob Iger said the company may rethink its strategy of licensing television shows to Amazon.com ($708; AMZN), Netflix ($100; NFLX), and other third-party distributors. Selling shows gives media companies a short-term revenue boost, but it may increase the marketing power of other distributors, further cutting into the traditional TV business model. Disney is a Long-Term Buy. Amazon.com is rated B (average).

Corporate roundup

LKQ ($33; LKQ) joined the S&P 500 Index after the close of trading on May 20 — the third of our Buy-rated stocks to join in the past two months. LKQ is a Focus List Buy and a Long-Term Buy.


French investigators intensified their tax probe of Alphabet ($738; GOOGL) by raiding the company's offices in Paris. In other news, Alphabet filed an appeal challenging the scope of France's "right to be forgotten" law. Alphabet is a Focus List Buy and a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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