Portfolio Review: August 1, 2016

8/1/2016


Rank changes

Robert Half International ($37; RHI) is being removed from the Focus, Buy, and Long-Term Buy lists after the staffing agency posted disappointing June-quarter results and guidance for the current quarter. Robert Half earned $0.71 per share, up 6% but $0.02 per share below the consensus estimate. Sales rose 6% to $1.34 billion, also missing the consensus. Management noted that growth decelerated for its temporary- and consulting-staffing businesses toward the end of the quarter and continued to slow in the first two weeks of July. September-quarter guidance for both earnings per share and revenue fell well short of consensus estimates. Shares slumped on the report. Robert Half is being dropped from the Monitored List and should be sold.


We are cutting Gilead Sciences ($82; GILD) from the Buy List amid the sales slowdown for hepatitis C drugs. For the June quarter, Gilead said per-share profits slipped 2% to $3.08 per share, ahead of the consensus estimate of $3.02. Total revenue slid 6% to $7.78 billion, hurt by a 20% decline from its hepatitis C drugs, Harvoni and Sovaldi. Gilead trimmed its 2016 outlook for product sales, noting that U.S. commercial health plans continue to limit coverage of its hepatitis C drugs, while price controls in many European countries have also cut into sales for those medicines.

The results leave a lot to be desired. They could compel Gilead to make an acquisition in the second half of the year to jump-start operating momentum. Gilead has proven itself a savvy acquirer in past deals. Gilead trades at six times trailing earnings — just eight stocks in the S&P 500 Index have a lower P/E ratio. Gilead remains a Long-Term Buy.


We are upgrading McKesson ($197; MCK) to the Buy List after the drug supplier continued to deliver strong operating momentum into the June quarter. McKesson grew earnings per share 11% to $3.50, ahead of the consensus of $3.33. Sales increased 5% to $49.73 billion, slightly below the consensus, but marked the 13th straight quarter of growth. Operating cash flow more than quadrupled to $1.86 billion. The stock earns an Overall rank of 94 in Quadrix and both sector-specific scores exceed 90. McKesson is already a Long-Term Buy.

Earnings reviews

Consumer discretionary

Comcast's ($68; CMCSa) per-share profits dipped 1% to $0.83 in the June quarter but topped the consensus estimate of $0.81. Sales rose 3% to $19.27 billion, as 6% growth for the cable business more than offset a 2% decline at NBCUniversal. Cash from operations advanced 19% to $4.27 billion. Comcast shed 4,000 net video subscribers, better than the 69,000 customers it lost in the same quarter last year. Shares rose on the results. Comcast is a Focus List Buy and a Long-Term Buy.


D.R. Horton ($34; DHI) grew earnings per share 10% to $0.66 in the June quarter to match the consensus. Revenue advanced 9% to $3.15 billion. The company's backlog of homes under contract swelled 17% to $4.4 billion, whileoperating profit margin expanded for the fifth straight quarter. Looking ahead to the fiscal year ending September 2017, D.R. Horton expects 10% to 15% higher revenue, versus the consensus of 11% growth at the time of the announcement. D.R. Horton is a Focus List Buy and a Long-Term Buy.

Health care

Biogen ($288; BIIB) reported June-quarter earnings per share of $5.21, up 23% and $0.54 above the consensus. The drugmaker's total revenue, up 12% to $2.89 billion, also surpassed expectations. Biogen updated its 2016 outlook, with per-share profits now projected at $19.70 to $20.00, implying 16% to 18% growth and exceeding the consensus of $18.96 at the time of the announcement. Biogen also increased its stock-repurchase plan by $5 billion, or roughly 8% of outstanding shares. Separately, Biogen said CEO George Scangos will resign in the coming months, after his replacement has been found. Biogen is a Buy and a Long-Term Buy.


Centene ($67; CNC) earned $1.29 per share in the June quarter, up 70% and $0.20 above the consensus estimate. Revenue surged 98% to $10.90 billion, also topping analysts' expectations. HealthNet, purchased by Centene for $6.0 billion in March, helped drive growth but is also creating some headaches for management. Centene took a $300 million premium deficiency reserve related to HealthNet and cautioned that the newly acquired commercial business in California faces fraudulent claims, currently being contested in court. Shares fell on the results. Centene remains a Focus List Buy and a Long-Term Buy.


Laboratory Corp. of America ($138; LH) earned $2.31 per share excluding special items in the June quarter, up 11% and a penny above the consensus. Net revenue rose 7% to $2.38 billion on 5% growth from diagnostics and 12% growth from drug development. Management raised the bottom end of its 2016 target range for both earnings per share and sales. LabCorp also agreed to acquire Sequenom ($2; SQNM) for $371 million including debt. Sequenom performs prenatal testing. LabCorp is a Focus List Buy and a Long-Term Buy.

Industrials

For the June quarter, Alaska Air Group ($68; ALK) said earnings per share climbed 20% to $2.12 excluding special items, topping the consensus by $0.03. The airline's operating revenue rose 4% to $1.49 billion. Both traffic and capacity rose 11.2% for the quarter. Management targets 8% capacity growth in the September quarter. Alaska Air is a Buy and a Long-Term Buy.


Owens Corning's ($53; OC) per-share profits surged 70% in the June quarter to $1.29 excluding special items, versus the consensus of $0.86. Revenue advanced 11% to $1.55 billion. The roofing unit (44% of June-quarter sales) helped drive growth, with sales up 35%. Management says shipments for the U.S. asphalt-shingle market rose 20% in the first half of the year but are projected to be flat to slightly lower in the second half of the year. Owens is a Focus List Buy and a Long-Term Buy.


Southwest Airlines ($37; LUV) reported June-quarter earnings per share of $1.19 excluding special items, up 16% but $0.02 short of the consensus. Revenue advanced 5% to $5.38 billion, and cash from operations jumped 77% to $1.11 billion. The airline's traffic rose 6.0%, ahead of its 4.8% capacity growth. But shares fell after management raised concerns about weaker airfares, reflected by a projected 3% to 4% decline in revenue per available seat mile for the September quarter. Southwest was also forced to cancel nearly 700 flights and postpone hundreds more on July 20 after its computer network went down. Southwest Airlines remains a Focus List Buy and a Long-Term Buy.

Technology

Citrix Systems ($88; CTXS) grew earnings per share 20% to $1.20 excluding special items in the June quarter to surpass the consensus estimate of $1.14. Sales, up 6% to $843 million, also topped analyst expectations. Management forecasts per-share earnings of $1.18 to $1.20 in the September quarter, up 13% to 15%, compared to the consensus of $1.18. Citrix says revenue should climb 1% to 2%; the consensus was projecting flat sales. Citrix also said that its virtual-meeting business GoTo will merge with LogMeIn ($84; LOGM) in a tax-free, all-stock deal. Citrix shareholders will own a 50.1% stake in the stand-alone company, valued at $1.8 billion. Citrix announced plans last year to spin off GoTo. Shares of Citrix dipped despite the solid results, possibly in response to the spin-off news. The stock remains a Focus List Buy and a Long-Term Buy.


Lam Research ($92; LRCX) said June-quarter earnings per share jumped 20% to $1.80 excluding special items, topping the consensus by $0.16. Sales climbed 4% to $1.55 billion. The midpoint of management's September-quarter guidance range for both revenue and per-share profits topped analyst expectations. Lam is a Buy and a Long-Term Buy.

Corporate roundup

Antitrust regulators in South Korea are reportedly probing whether Alphabet ($762; GOOGL) prohibited smartphone makers that use Android from selling devices that run on other operating systems. Alphabet is a Buy and a Long-Term Buy.


Seeking to expand its specialty-pharmacy business, Kroger ($36; KR) agreed to acquire Modern HC Holdings. Kroger is a Buy and a Long-Term Buy.


Rank Changes

Gilead Sciences ($82; GILD) is being dropped from the Buy List but remains a Long-Term Buy. Robert Half International ($37; RHI) is being dropped from the Focus, Buy, and Long-Term Buy lists and from coverage. McKesson ($197; MCK) is being added to the Buy List. In the wake of these changes, Vanguard Short-Term Corporate Bond ($81; VCSH) exchange-traded fund now accounts for 23.2% of the Buy List and 22.8% of the Long-Term Buy List.


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