Portfolio Review: February 13, 2017

2/13/2017


A new stock

Synchrony Financial ($36; SYF) is the biggest U.S. provider of private-label and co-branded credit cards for retailers. It also helps consumers finance large purchases, including elective medical procedures. Spun off from General Electric ($29; GE) in November 2015, Synchrony has a limited history. But sales grew 11% last year and are projected to climb 8% in 2017. At 13 times trailing earnings, the stock ranks among the cheapest 20% of stocks in our research universe. Synchrony is being added to the Long-Term Buy List. GE is rated C (below average).

Top 15 Utilities change

Avista has delivered four straight quarters of lower sales growth and sports an ugly chart; the shares have managed a negative return of 6% over the last six months. Earnings have missed estimates in each of the last two quarters. Our confidence in the stock's ability to outperform has eroded, and subscribers mimicking the Top 15 Utilities should sell Avista.


Some of you may be surprised that we haven't dropped WGL Holdings ($83; WGL), which plans to sell itself to AltaGas ($23; ATGFF) for $6.42 billion in cash, which equates to $88.25 per share, closing by the middle of 2018. The stock has drifted higher since the deal news but still offers a fairly attractive return if the sale takes place at the agreed price.

WGL enjoys greater operating momentum than many natural-gas utilities and is not especially expensive we'd rather hold the stock for now than move into something else. However, we could sell WGL if it rallies further — or if we find a better alternative.

Earnings review

Consumer discretionary

For the December quarter, Disney's ($109; DIS) per-share profits fell 5% to $1.55 excluding special items but topped the consensus by $0.05. Sales slipped 3% to $14.78 billion, missing the consensus. The year-ago quarter benefited from the massive success of Disney's Star Wars: The Force Awakens. Struggles continued for ESPN, but these concerns largely appear to be priced into shares, which rose on the report. Disney is a Long-Term Buy.

Energy

EQT Midstream Partners ($80; EQM) earned $1.31 per limited partnership unit, up 4% but $0.02 below the consensus estimate. Operating revenue, supported by capacity growth, increased 14% to $195 million, topping the consensus. The company will pay a quarterly cash distribution of $0.85 per unit on Feb. 14, up 4% from last quarter. EQT Midstream is a Buy and a Long-Term Buy.

Health care

Amgen ($168; AMGN) reported December-quarter earnings per share of $2.89, up 11% and $0.10 above the consensus. Revenue advanced 8% to $5.97 billion, also ahead of analysts' expectations. The midpoint of Amgen's 2017 sales and profit outlook missed consensus estimates. But Amgen shares rallied after the company said cholesterol drug Repatha reduced patients' risk of heart attacks and strokes in a major study. Amgen is a Buy and a Long-Term Buy.


Centene ($69; CNC) grew per-share profits 23% to $1.19 excluding special items in the December quarter, topping the consensus by $0.08. Sales surged 89% to $11.91 billion. Results benefited from Centene's $6.3 billion acquisition of Health Net, completed in March. While Centene's 2017 profit and sales guidance were somewhat light, shares jumped on the report. Centene is a Buy and a Long-Term Buy.

Industrials

Alaska Air Group's ($97; ALK) earnings per share advanced 7% to $1.56 excluding special items, topping the consensus estimate of $1.40. Revenue climbed 11%. Traffic rose 13%, ahead of 10% capacity growth. Alaska Air raised its quarterly dividend 9% to $0.30 per share, payable March 9. Alaska is a Buy and a Long-Term Buy.


Owens Corning ($55; OC) grew per-share profits 9% to $0.72 excluding special items in the December quarter, topping the consensus by $0.12. Sales, up 7% to $1.38 billion, also surpassed analyst forecasts. Looking ahead to 2017, the company expects operating profits to rise 9% for its composites unit and at least 27% for insulation. However, its roofing business could contract. Owens is a Focus List Buy and a Long-Term Buy.

Technology

CDW ($57; CDW) said December-quarter earnings per share rose 18% to $0.86 excluding special items, topping the consensus by a nickel. Revenue rose 2% to $3.49 billion, driven by growth from small-business and education customers. With sales sluggish, for 2017, management expects per-share profits at constant currency to climb by low-double-digits. Shares rallied on the report. CDW is a Focus List Buy and a Long-Term Buy.

Takeover talk tests patience

Laboratory Corp. of America ($131; LH) shares slumped on a report that the company, best known for conducting clinical lab tests, is reportedly in talks to acquire a privately owned contract-research organization (CRO) for more than $8 billion including debt. Recall, LabCorp paid about $6.15 billion for rival CRO Covance in 2015. Another big deal would stretch a balance sheet that already carries $6.17 billion in net debt.

The stock's poor reaction to the deal rumors is disappointing, partly because shares had begun to build some momentum. LabCorp's Overall score has fallen to 66, lower than we prefer in a Focus List stock. As we mentioned in the Jan. 16 issue, the stock's December-quarter report, due on Feb. 16, is crucial. LabCorp is a Focus List Buy and a Long-Term Buy.

Corporate roundup

CBS ($64; CBS) plans to spin off its radio business, then merge it with Entercom Communication ($15; ETM) in a tax-free deal expected to close in the second half of 2017. CBS investors will have the option to exchange all, some, or none of their stock for shares in the new company, also called Entercom. CBS is a Focus List Buy and a Long-Term Buy.


Lear ($140; LEA) agreed to acquire Grupo Antolin's automotive-seating business for about $306 million in cash. Lear is a Focus List Buy and a Long-Term Buy.


Southwest Airlines ($53; LUV) said traffic rose 4.6% on 6.2% higher capacity in January. Southwest is a Focus List Buy and a Long-Term Buy.

Fund portfolios improved

We are tweaking our Growth and Conservative portfolios, modestly adjusting weights for a handful of funds. To better align each portfolio with a benchmark, we're boosting foreign stocks and trimming bond exposure. Our Growth Portfolio is aimed at long-term investors, while the Conservative Portfolio is for investors at or near retirement.


Rank Changes

Synchrony Financial ($36; SYF) is being added to the Long-Term Buy List, which now has 96.2% in the market, with the remainder in the Vanguard Short-Term Corporate Bond ($80; VCSH) exchange-traded fund. We're also making a change to the Top 15 Utilities portfolio, with Avista ($39; AVA) coming off the list in favor of Great Plains Energy ($27; GXP).


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