Portfolio Review: October 3, 2016
Comcast ($67; CMCSa) agreed to acquire up to 7.8 million shares of Harmonic ($6; HLIT) under a warrant agreement. The deal gives Comcast the right, but not obligation, to buy shares in Harmonic, a provider of video-infrastructure technology, at a prearranged price. Comcast is a Focus List Buy and a Long-Term Buy.
Alaska Air Group ($66; ALK) agreed to postpone acquiring Virgin America ($54; VA) until Oct. 17, giving regulators more time to review the $2.6 billion deal. The companies had previously planned to complete the takeover by the end of September. Investors have turned more cautious on the deal in the past few days, pushing Virgin's share price to its lowest level since the deal was announced on April 4 — and below its agreed takeover price of $57.
The regulatory delay suggests an increased likelihood of divestitures. But Alaska Air insists that the regulatory review continues as planned. The deal would create the fifth-largest U.S. airline, potentially helping Alaska Air to better compete with the four largest industry players, which control 80% of the market. Additionally, Alaska's share of West Coast flights would increase modestly to 22%, still below Southwest Airlines' ($38; LUV) leading 26% share. In other news, Alaska Air postponed the launch of its daily route from Los Angeles to Cuba to Jan. 5 from Nov. 29 in order to avoid the operational challenges that often come with holiday seasons. Alaska Air is a Buy and a Long-Term Buy. Southwest is a Focus List Buy and a Long-Term Buy.
According to published reports, Disney ($92; DIS) and Salesforce.com ($72; CRM) are exploring separate takeover bids for Twitter ($23; TWTR). Alphabet ($810; GOOGL) has also expressed some interest in the social-media company. With a stock-market value of $16.0 billion, Twitter has faced high executive turnover and sluggish growth, possibly reflecting a lack of operational focus. As its cable business faces more online pressure, Disney could use Twitter as a new platform for distributing sports, news, and other media content, while also boosting its advertising presence. Alphabet is a Focus List Buy and a Long-Term Buy. Disney is a Long-Term Buy.
Drug pipeline updates
AbbVie ($64; ABBV) applied with the U.S. Food and Drug Administration to widen the usage of Imbruvica in lymphoma patients. Launched in the June 2015 quarter, Imbruvica generated $1.47 billion in sales during the 12 months ended June, representing 6% of AbbVie's revenue. AbbVie is a Long-Term Buy.
Amgen ($170; AMGN) says its Kyprolis multiple myeloma drug failed to outperform an older treatment made by Takeda Pharmaceutical in patients who had yet to be treated for the disease. Kyprolis has been approved in the U.S. for patients who have relapsed or already undergone treatment with other drugs. Kyprolis sales grew 48% to $611 million in the 12 months ended June, accounting for 3% of Amgen's total revenue. Amgen also won U.S. approval to sell Amjevita, a biosimilar version of AbbVie's Humira, used to treat Crohn's disease and multiple forms of arthritis. Amgen is a Buy and a Long-Term Buy.
In the latest instance of hulking technology companies bumping into each other's markets, Apple ($114; AAPL) is developing a smart speaker similar to Amazon.com's ($829; AMZN) Echo, reported Bloomberg. Alphabet ($810; GOOGL) is expected to introduce a similar product, called Google Home, in October. Amazon is preparing to launch a streaming-music service later this year, possibly priced at just $5 a month, which would undercut monthly plans offered by established players Apple and Spotify.
Separately, Alphabet launched a network of Wi-Fi hot spots in India, a project called Google Station. Amazon and Facebook ($129; FB) have also been investing heavily in India in the past few years. Alphabet plans to expand the service in Indonesia and the Philippines.
In other news, health insurer Aetna ($116; AET) agreed to subsidize part of the cost of the Apple Watch to certain customers. Aetna will also give away the watch to its nearly 50,000 workers. Apple has been developing applications to help users remember to take their medicine, refill prescriptions, and contact their doctors. Separately, Apple increased December-quarter orders for iPhone components 20% to 30% higher than previously expected, according to DigiTimes. Alphabet is a Focus List Buy and a Long-Term Buy. Apple is a Buy and a Long-Term Buy. Aetna and Facebook are rated A (above average). Amazon.com is rated B (average).
Southwest Airlines ($38; LUV) expects to receive 10 of Boeing's ($132; BA) new 737 Max 8 jetliners next August or September. The airplanes are 14% more fuel efficient than current models and can fly farther than the airline's existing planes, paving the way for Southwest to add more international flights. Southwest Airlines is a Focus List Buy and a Long-Term Buy.
Wells Fargo's ($45; WFC) board tool back some of the pay of two top executives over the massive fraud that involved workers creating fake customer accounts in order to reach sales goals. CEO John Stumpf was forced to forfeit $41 million while Carrie Tolstedt, former head of the community bank, will lose $19 million in unvested equity awards. The board said it may further penalize some executives. The U.S. Labor Department plans to review all complaints made by workers. Wells Fargo is rated B (average).
Viacom ($37; VIAb) slashed its quarterly dividend in half to $0.20 per share and warned that September-quarter profits would miss expectations. Viacom is rated B (average).
For the August quarter, Nike ($53; NKE) grew per-share profits 9% to $0.73 on 8% higher sales. Although both metrics comfortably exceeded analyst expectations, Nike reported disappointing growth of 5% for global futures orders (products scheduled for delivery from September through January). Softening demand for Nike products may have a silver lining for Foot Locker ($68; FL), because it appears to reflect increased competition from Under Armour ($39; UA) and Adidas. These two athletic brands are gaining market share, helping to reduce Foot Locker's reliance on Nike, which accounted for 72% of the retailer's merchandise in fiscal 2016 ended January, versus 73% in fiscal 2015 and 68% in fiscal 2014. Foot Locker is a Buy and a Long-Term Buy. Nike is rated B (average).
Vanguard Selected Value ($27; VASVX) is being dropped from our recommended Growth and Conservative Portfolios. A middling performer so far in 2016, the fund has seen its fund score slump to 48, down from 79 at the start of the year. Taking its place is Vanguard Mid-Cap Value Index ($37; VMVIX), which boasts an impressive score of 94. Up 9.3% this year, the fund ranks among the top 20% of its peer group for three-, five-, and 10-year total return. The expense ratio is only 0.20%.
We're making no changes to our buy lists, but we are making a switch in our fund portfolios. See above for details.