Portfolio Review: July 25, 2016
Earnings roll call
J.P. Morgan Chase ($64; JPM) said per-share earnings rose 1% to $1.55 in the June quarter, exceeding the consensus by $0.12. Revenue increased 3% to $25.21 billion, also well ahead of analyst expectations. Sales rose 4% for both the consumer- and commercial-banking units, helping to offset declines of 7% for asset management and 15% for the investment bank. Average core loans jumped 16%, and average deposits 10%. Robust trading activity boosted results, as did a 6% drop in operating expenses. The bank noted stabilization in the energy sector, reflected by its provision against potential credit losses falling 23% from the March quarter. Shares rose on the report. J.P. Morgan is a Long-Term Buy.
Other large U.S. banks enjoyed strong trading revenue in the June quarter amid the heightened market volatility, but registered minimal growth elsewhere. With little relief from low interest rates in sight, cost cuts remain a primary focus.
Bank of America ($14; BAC) earned $0.42 per share excluding special items, up 5% and $0.09 ahead of the consensus. Total revenue, net of interest expense, fell 7%. The bank has slashed 25% of its work force since 2010 and pledged to cut annual costs by another $5 billion, or 9%, by 2018. Bank of America's large base of U.S. deposits and portfolio of mortgage-backed securities makes it especially sensitive to interest rates. Bank of America is rated B (average).
Citigroup's ($44; C) per-share profits fell 14% to $1.24 excluding special items, topping the consensus by $0.14. The consumer bank's net income plunged 18%, driven by a 22% decline in North America, as net interest margin contracted. Citigroup, which has a larger overseas presence than the other U.S. banks, said total revenue slumped 10%. Operating expenses fell 5%. Citigroup is rated B (average).
Wells Fargo ($49; WFC) reported per-share profits of $1.01, down 2%, to match the consensus. Although revenue increased 4%, the bank saw expenses climb 3% and its portfolio of energy loans weaken. Net write-offs jumped 42% to $924 million. Wells Fargo has a relatively small trading operation, so it did not enjoy the lift many other banks received in the quarter. Still, total average loans increased 9%, and management anticipates a strong September quarter for mortgage originations. Wells Fargo is rated B (average).
For the June quarter, Abbott Laboratories ($43; ABT) reported per-share earnings of $0.55, up 6%, to squeeze past the consensus by $0.02. Revenue increased 3% to $5.33 billion, also ahead of analyst expectations. Despite its exposure to Venezuela's troubled economy, Abbott posted higher sales across all four units, with the strongest growth coming from medical devices, up 6%. Abbott Laboratories is rated B (average).
Johnson & Johnson ($125; JNJ) said June-quarter earnings per share crept 2% higher to $1.74 excluding special items, topping the consensus of $1.68. Revenue rose 4%, driven by 9% growth from the pharmaceuticals unit. Sales increased 1% for medical devices and slipped 2% for the consumer unit. About 47% of J&J's revenue comes from overseas, but just 3% from the U.K. Management raised its 2016 guidance for earnings per share and sales; the new midpoints for both metrics surpassed consensus estimates at the time of the announcement. J&J is rated B (average).
UnitedHealth Group ($143; UNH) grew June-quarter earnings per share 13% to $1.96 excluding special items, topping the consensus by $0.07. Revenue surged 28% to $46.49 billion, helped by acquisitions and well ahead of analyst expectations. However, the insurer continues to rack up losses on health exchanges created by the Affordable Care Act; it reported a $200 million loss in the June quarter and expects losses to reach $850 million for the year, up from $475 million in 2015. Despite its troubled ACA business, UnitedHealth said medical-cost trends were in line with expectations. UnitedHealth is rated B (average).
F5 Networks ($121; FFIV) said June-quarter earnings per share advanced 8% to $1.81 excluding special items to top the consensus by $0.02. Revenue increased 3% to $497 million, also narrowly ahead of the consensus estimate. Looking ahead to the September quarter, F5 expects per-share earnings of $1.92 to $1.95, implying 4% to 6% growth, on revenue of $515 million to $525 million, up 3% to 4%. The consensus had projected earnings of $1.92 on revenue of $517 million at the time of the announcement.
In other news, F5 has reportedly attracted takeover interest from Thoma Bravo, a private-equity firm. In June, F5 hired Goldman Sachs ($162; GS) to explore putting itself up for sale. F5 is a Buy and a Long-Term Buy.
For the June quarter, IBM's ($161; IBM) earnings per share tumbled 23% to $2.95 excluding special items but exceeded the consensus by $0.06. Sales dipped 3%, marking IBM's 17th consecutive quarterly decline. Revenue from cloud services jumped 30%, though its traditional consulting and hardware businesses continues to shrink. While management reaffirmed its full-year profit guidance, some analysts question IBM's ability to reach its target. IBM is rated B (average).
Intel ($36; INTC) reported June-quarter earnings per share of $0.59 excluding special items, down 5% but $0.06 above the consensus. Revenue advanced 3%. The midpoint of Intel's September-quarter sales-guidance range calls for 3% growth and surpassed the consensus estimates at the time of the announcement. Intel maintained its 2016 target for capital spending. Intel is rated A (above average).
Microsoft ($56; MSFT) grew per-share earnings 11% to $0.69 excluding special items in the June quarter, easily topping the consensus of $0.58. Adjusted revenue increased 2%, also ahead of the consensus. The cloud business delivered 7% sales growth, while the personal-computing unit, which houses Windows, contracted 4%. Microsoft is rated C (below average).
The European Union expanded its five-year probe of Alphabet ($757; GOOGL) by filing a fresh charge that accuses the company of improperly limiting how websites that feature Google's search function display ads sold by other companies. Prior EU charges center on claims that Alphabet's Android and shopping service unfairly stifle competition. Alphabet is a Buy and a Long-Term Buy.
Separately, the European Union could conclude its probe of Apple's ($100; AAPL) tax practices by this fall, said Ireland's finance minister. The EU has accused Ireland of helping Apple skirt international tax laws in exchange for keeping jobs in the country. In other news, Apple is reportedly interested in a Formula 1 race series, according to an online report. Such a deal sounds far-fetched but would boost Apple's presence in the automotive industry. Apple is a Buy and a Long-Term Buy.
Disney's ($98; DIS) ESPN business has reportedly entered talks with Amazon.com ($746; AMZN) and Facebook ($122; FB) about featuring its sports programming. ESPN will need to walk a fine line to court internet distributors that reach so-called cord-cutters without angering cable companies that already carry its networks. Disney is a Long-Term Buy. Facebook is rated A (above average). Amazon.com is rated B (average).