Portfolio Review: October 24, 2016

10/24/2016


Earnings report

Citrix Systems ($86; CTXS) said September-quarter earnings per share surged 27% to $1.32 excluding special items, exceeding the consensus by $0.13. Sales, up 3% to $841 million, also topped the consensus. Citrix raised its full-year guidance, implying December-quarter earnings per share of $1.48 to $1.50 on revenue of $890 million to $900 million, roughly in line with analyst expectations at the time of the announcement. Management said 2017 sales should climb 3% to 4%, excluding its GoTo business, which is being hived off; the consensus currently calls for 3.5% growth. Citrix is a Focus List Buy and a Long-Term Buy.


For the September quarter, Lam Research's ($100; LRCX) per-share profits profits slipped 1% to $1.81 excluding special item but eased past the consensus by $0.03. Revenue increased 2% to $1.63 billion. The midpoint of management's December guidance range calls for earnings per share to jump 39% on 29% higher revenue. The consensus had projected 15% higher earnings and 16% higher sales at the time of the announcement. Lam is a Focus List Buy and a Long-Term Buy.


J.P. Morgan Chase ($68; JPM) earned $1.58 per share in the September quarter, down 6% but comfortably ahead of the consensus of $1.39 per share. Revenue climbed 8% to $25.51 billion, also surpassing analyst expectations. Sales growth was driven by the bank's trading business, up 32%, and investment-banking fees, up 15%. Total loans grew 10% to $888 billion, though provisions to cover potentially sour loans jumped 86% to $1.27 billion. J.P. Morgan is a Long-Term Buy.


Intel ($36; INTC) grew September-quarter earnings per share 21% to $0.80 excluding special items, exceeding the consensus estimate by $0.08. Sales, up 9% to $15.78 billion, also topped the consensus on growth across all three major business segments. However, investors were disappointed by Intel's December-quarter sales guidance, which included a growth range with a midpoint of 5%, versus the consensus of 6% at the time of the announcement. The stock is rated A (above average).


Wells Fargo's ($45; WFC) per-share profits slipped 2% to $1.03 in the September quarter, easing past the consensus by $0.02. Revenue increased 2% as average loans rose 7% and average deposits climbed 5%. But fallout from the bank's fake-accounts scandal continues. CEO John Stumpf has resigned, replaced by COO Tim Sloan. Illinois and Ohio have suspended their business relationships with Wells Fargo, and several other states are considering similar action. The bank said customer visits with branch bankers fell 10% in September from the same time last year, while consumers opened 25% fewer checking accounts and credit-card applications slumped 20%. Wells Fargo is rated B (average).


For the September quarter, IBM ($151; IBM) earned $3.29 per share excluding special items, down 1% but $0.05 above the consensus. Revenue was virtually flat at $19.23 billion, as 44% growth for cloud services offset a 21% decline from its traditional mainframe business. IBM is rated B (average).


Johnson & Johnson ($115; JNJ) said September-quarter earnings per share climbed 13% to $1.68 excluding special items, ahead of the consensus of $1.65. Sales advanced 4%. However, J&J faces questions concerning its top-selling drug Remicade, used to treat rheumatoid arthritis and accounting for 10% of total sales. Rival Pfizer ($33; PFE) plans to launch a biosmilar version of Remicade in late November, at 15% below J&J's wholesale price. Both J&J and Pfizer are rated B (average).

Technology review

The European Union gave Alphabet ($827; GOOGL) an additional three weeks to reply to charges accusing the technology giant of improperly putting its own shopping services above those of its rivals in online searches. The next few weeks will be a busy time for Alphabet's lawyers. They must respond by Oct. 26 to claims that Alphabet blocked rivals in online search advertising and by Oct. 31 to antitrust charges regarding the Android mobile operating system. Alphabet's reply to the shopping-services probe is now due Nov. 7.

Separately, Alphabet's Google Pixel smartphone has been a hit with early testers, with some initial reviews putting the device in the same league with the iPhone. With Samsung discontinuing its troubled Galaxy Note 7 smartphone, the Pixel appears well-positioned to attract consumers who want to stick with an Android-based device. In other news, Alphabet reportedly struck a deal with CBS ($56; CBS) to carry the broadcaster on an online-TV service. Alphabet is in advanced talks with Disney ($92; DIS) and Twenty-First Century Fox ($25; FOXa) about similar pacts. Alphabet is a Focus List Buy and a Long-Term Buy. Disney is a Long-Term Buy. Twenty-First Century Fox is rated B (average).


Apple ($117; AAPL) has backed off plans to build its own self-driving car, reported Bloomberg. For now, Apple has shifted its focus to designing the software behind the vehicle, though it may later revisit manufacturing the entire car. In other news, Apple is expected to unveil its new Mac personal computers on Oct. 27. Sales of the Mac, accounting for 11% of Apple's revenue, held flat for the 12 months ended June. Apple is a Buy and a Long-Term Buy.

Airlines press forward on takeover and labor talks

Alaska Air Group ($73; ALK) continues to negotiate with U.S. antitrust officials about completing its $2.6 billion acquisition of Virgin America ($54; VA), even as its self-imposed Oct. 17 deadline has passed. To get clearance to close the deal, Alaska Air may need to revise or abandon its code-sharing agreements with American Airlines Group ($41; AAL) and Delta Air Lines ($41; DAL).

Airlines use code-sharing pacts to sell tickets on behalf of rivals for routes they do not fly themselves. Code-sharing agreements account for an estimated $350 million, or 6%, of Alaska Air's annual revenue, says an analyst at J.P. Morgan Chase ($68; JPM). Alaska Air says it remains optimistic about closing the deal early in to the December quarter. Alaska Air is a Buy and a Long-Term Buy.


Southwest Airlines ($42; LUV) and its pilots' union will not renegotiate parts of their tentative labor contract, even though pilots at Delta Air Lines struck a more lucrative deal. Southwest's pilots had originally sought to restart salary talks. Voting on the contract runs through Nov. 7. Southwest is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Lear ($116; LEA) shares fell after Ford Motor ($12; F) announced plans to temporarily suspend production at four plants in coming weeks due to slowing U.S. automobile sales. Among the idled plants is one of two facilities that manufactures Ford's F-150 pickup. Lear supplies electrical systems for the F-150. Ford accounted for a leading 23% share of Lear's sales last year. Lear is a Focus List Buy and a Long-Term Buy. Ford is rated A (above average).


EQT Midstream Partners ($78; EQM) acquired pipeline and storage assets from EQT Corp. ($66; EQT) for $275 million in cash. EQT Midstream is a Buy and a Long-Term Buy.


FedEx ($170; FDX) plans to invest $1.5 billion to expand the capacity of its logistics business at Charles de Gaulle International Airport, located in a suburb of Paris. FedEx is a Buy and a Long-Term Buy.


Walgreens Boots Alliance's ($77; WBA) bid to surpass CVS Health ($86; CVS) as the largest U.S. retail pharmacy chain appears to have hit a snag. In October 2015, Walgreens agreed to acquire smaller rival Rite Aid ($7; RAD). But last month, Walgreens said regulators may force it to divest more than its previously anticipated 500 stores. Further complicating matters, Kroger ($31; KR) may no longer be interested in acquiring some of these stores. The Federal Trade Commission has reportedly opposed Kroger's plan to close those locations and move operations into its own grocery stores. Walgreens has an estimated 7,900 U.S. stores, while CVS operates about 9,600 locations, including pharmacies in Target ($68; TGT), and Rite Aid owns about 4,500 U.S. stores. Kroger is a Buy and a Long-Term Buy. CVS is a Buy and a Long-Term Buy. Walgreens and Target are rated B (average).


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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