Portfolio Review: October 31, 2016

10/31/2016


Earnings roll call

Technology

Apple ($116; AAPL) said earnings per share declined 15% to $1.67 in the September quarter, topping the consensus by a penny. Sales slipped 9% to $46.85 billion, as declines of 13% for iPhones and 17% for Macs offset 24% growth in services, such as Apple Pay and Apple TV. CEO Tim Cook said demand for some iPhone 7 models continues to outstrip supply, partly due to Android users seeking an alternative to Samsung's discontinued Galaxy Note 7 smartphone.

Apple looks to return to growth in the December quarter, projecting sales of $76 billion to $78 billion, versus $75.9 billion generated in the same quarter last year. The consensus anticipated sales of about $75 billion at the time of the announcement. Shares fell on an otherwise solid report, as investors may have been expecting Apple to better capitalize on Samsung's troubles. Apple's guidance for gross profit margin may have also disappointed some analysts. Apple is a Buy and a Long-Term Buy.


F5 Networks ($120; FFIV) grew September-quarter earnings per share 15% to $2.11, comfortably ahead of the consensus of $1.94. Revenue advanced 5% to $525 million, also exceeding analyst estimates. For the December quarter, management expects per-share profits to rise 11% to 13% on revenue growth of 4% to 6%. The consensus forecasted 8% higher profits and 5% higher revenue at the time of the announcement. F5 is a Buy and a Long-Term Buy.

Health care

Laboratory Corp. of America ($126; LH) reported September-quarter earnings per share of $2.25 excluding special items, up 9% but $0.04 below the consensus. Sales rose 5% to $2.37 billion on 4% growth for the diagnostics unit and 5% growth from drug development. LabCorp narrowed its 2016 profit guidance and raised its full-year view for sales, though the new midpoints for both target ranges narrowly missed consensus estimates. Prior to the report, LabCorp shares hovered near their 52-week high after rising 11% over the past six months. A combination of profit-taking and the soft results likely caused shares to fall on the report. For now, LabCorp remains a Focus List Buy and a Long-Term Buy.


For the September quarter, Centene ($64; CNC) earned $1.16 per share excluding special items, up 33% and a penny above the consensus. Helped by its $6.3 billion acquisition of Health Net in March, sales surged 86% to $10.85 billion but fell short of analyst expectations. The insurer's health-benefits ratio, the percentage of premiums paid out for medical costs, improved to 87% from 89%.

In 2017, Centene plans to exit its individual PPO business in Arizona, the source for a large portion of the $300 million premium-deficiency reserve it took last quarter. Management narrowed its 2016 guidance range for per-share profits, with the new midpoint of $4.35 coming in a penny below the consensus at the time of the announcement. Yet the shares rose on the report, as Centene appears to be moving beyond some of the operational problems that plagued its June quarter. Centene is a Focus List Buy and a Long-Term Buy.

Consumer discretionary

Comcast ($63; CMCSa) grew earnings per share 15% to $0.92 in the September quarter, easing past the consensus by a penny. Sales increased 14% to $21.32 billion on 7% growth for the cable business and 28% growth from NBCUniversal. Comcast reported 32,000 net additions for video, its strongest September quarter in a decade. Excluding the Summer Olympics and Super Bowl, NBCUniversal posted 6% higher revenue, as strength from theme parks and cable networks overcame some softness from broadcast TV and the movie business. Comcast is a Focus List Buy and a Long-Term Buy.


Lear's ($121; LEA) September-quarter earnings per share jumped 25% to $3.19 excluding special items, well ahead of the consensus of $2.96. Sales advanced 5% to $4.53 billion, with the seating unit up 5% and electrical systems up 4%. Profit margins rose for both business units. The auto-parts supplier reaffirmed its full-year sales outlook, which remains below the consensus. However, Lear raised its 2016 guidance for core operating earnings and free cash flow. Shares rallied on the results. Lear is a Focus List Buy and a Long-Term Buy.

Industrials

Southwest Airlines' ($38; LUV) September-quarter earnings per share slipped 1% to $0.93 excluding special items but surpassed analyst estimates by $0.05. Revenue held flat at $5.14 billion, narrowly missing the consensus. Revenue per available seat mile, a key efficiency metric, fell 4% last quarter and is projected to slip 4% to 5% in the current quarter. Management says 2017 capacity growth will not exceed 4%, slower than its 6% growth in the first nine months of this year. In recent days, other major carriers, such as Delta Air Lines ($41; DAL) and American Airlines ($39; AAL), have pledged to be more aggressive on curtailing capacity growth in order to boost efficiency. Southwest slumped on the results. While the sell-off is disappointing, we're maintaining our Focus List Buy and Long-Term Buy ratings on Southwest for the moment.


For the September quarter, Owens Corning ($50; OC) said adjusted earnings climbed 14% to $1.09, topping the consensus by $0.10. Revenue increased 5% to $1.52 billion. In the month leading up to its September-quarter report, Owens shares had slumped 6%, hurt by a string of disappointing results by other companies leveraged to the housing rebound, such as Whirlpool ($150; WHR), Masco ($31; MAS), and Sherwin-Williams ($249; SHW). But Owens' solid quarter eased some of those concerns, and shares rose on the news. Owens is a Focus List Buy and a Long-Term Buy.

Merger madness

AT&T ($36; T) agreed to acquire Time Warner ($89; TWX) for $85.4 billion in cash and stock, merging AT&T's extensive network of cellular towers and satellites with Time Warner's movie studio and cache of cable networks, including HBO and CNN. The price tag values Time Warner shares at $107.50, 30% above where they traded before news of a potential merger first surfaced. AT&T plans to close the deal by the end of 2017.

By combining pipelines with programing, AT&T steals a page from Comcast's playbook, which includes the acquisition of NBCUniversal. But regulators have upended several big deals in the past year, and some lawmakers are already pushing for this merger to meet the same fate. Moreover, AT&T already carries a massive debt load (net debt of $119 billion). Reflecting investor skepticism, Time Warner's stock remains well below the takeover price. Both AT&T and Time Warner are rated A (above average).


Walgreens Boots Alliance ($82; WBA) postponed its $9.4 billion acquisition of Rite Aid ($7; RAD) until early 2017 because of delays in the sale of stores required to satisfy regulators. The company had originally planned to complete the deal by the middle of 2016 and then pushed back its deadline to the end of this year. Walgreens is rated B (average).


Alphabet ($822; GOOGL) continued its investment in virtual reality by agreeing to acquire Eyefluence, a start-up company designing technology to let movement from human eyes control digital screens. In other news, Alphabet said it would lay off about 9% of Google Fiber workers, as it scales back plans to roll out high-speed internet service. 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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