Portfolio Review: May 1, 2017

5/1/2017


Rank changes

We are making three rank changes this week. Lowe's ($85; LOW) is being upgraded to the Focus List. The stock reviewed in Investment Strategy, is also a Long-Term Buy. We are also downgrading Zions Bancorp ($41; ZION) and Laboratory Corp. of America ($139; LH) after the companies delivered mixed March-quarter reports.

LabCorp ($139; LH) said March-quarter earnings per share increased 8% to $2.22 excluding special items, easing past the consensus by $0.02. Revenue rose 5% to $2.41 billion, in line with analyst expectations. However, LabCorp trimmed its 2017 outlook, reflecting a slower backlog-conversion rate for its contract-research organization business (CRO). The new midpoints of management's guidance ranges call for 6.5% higher per-share profits on 4.5% higher revenue; the consensus had anticipated 9% profit growth on 5% higher sales at the time of the announcement.

LabCorp hinted that June-quarter results may be soft as its CRO backlog shifts toward more complex trials that take longer to perform. But management stressed that the CRO industry remains healthy and its legacy lab-diagnostics business also continues to perform well. We are removing LabCorp from the Focus List Buy and Buy lists. The stock remains a Long-Term Buy.


Zions Bancorp's ($41; ZION) per-share profits rose 60% to $0.61 in the March quarter, topping the consensus estimate of $0.54. Total deposits rose 7%. Like many other banks, Zions experienced sluggish growth for total loans, up just 3%. Although Zions tends to be more sensitive to interest rates than many other regional banks, its net interest margin crept up to 3.38% from 3.35%. Encouragingly, management expects loans to grow at a mid-single-digit rate over the next four quarters.

Zions earns an outstanding Quadrix Overall rank of 96. But the stock has surged 30% since we added it to the Focus List in the Oct. 10 issue. That rally has pushed Zion's trailing P/E ratio to 20, above its five-year average of 19, giving the shares less room for error. Zions is being dropped from the Focus List but remains a Buy and a Long-Term Buy.

Earnings roll call

Consumer discretionary

For the March quarter, D.R. Horton ($33; DHI) grew per-share profits 15% to $0.60, easing past the consensus estimate by a penny. Revenue jumped 17% to $3.16 billion, also ahead of the consensus. Net sales orders, a barometer for future revenue, advanced 14% by volume and 17% by value. Management raised its sales guidance for fiscal 2017 ending September to a midpoint of $13.8 billion, implying 14% growth and roughly in line with the consensus at the time of the announcement. Shares dipped on the report but remain up 21% in 2017. D.R. Horton is a Buy and a Long-Term Buy.


Lear ($141; LEA) reported March-quarter earnings per share of $4.27 excluding special items, topping the consensus by $0.34, Revenue, up 7% to $5.00 billion, also surpassed analyst expectations. The seating and electrical-systems units both grew sales 7%, as Lear provided more content to vehicles in all major geographic markets. Lear is a Focus List Buy and a Long-Term Buy.

Financials

Citizens Financial Group ($37; CFG) grew March-quarter earnings per share 39% to $0.57 excluding special items, topping the consensus estimate of $0.51. Revenue grew 12% to $1.38 billion. Both average loans and average deposits rose 8%. Net interest margin rose to 2.96% from 2.86%. Management expects loan growth to continue in the June quarter, and net interest margin should also keep expanding. Citizens Financial is a Focus List Buy and a Long-Term Buy.

Health care

Amgen's ($165; AMGN) March-quarter earnings per share climbed 9% to $3.15 excluding special items to surpass the consensus by $0.15. Sales slipped 1% to $5.46 billion, missing the consensus of $5.61 billion. Amgen raised the low end of its 2017 profit guidance, with the new midpoint of $12.30 implying 6% growth but falling $0.03 short of the current consensus. Amgen is a Buy and a Long-Term Buy.

Industrials

Alaska Air Group ($88; ALK) reported March-quarter earnings per share of $1.05 excluding special items, down 28% but in line with the consensus estimate. Operating revenue rose 30% to $1.75 billion, bolstered by the Virgin America deal, completed in December. Passenger unit revenue fell 5%, while operating expenses surged 50% as fuel costs doubled. Alaska Air remains a Buy and a Long-Term Buy.


Ingersoll-Rand ($89; IR) said adjusted per-share profits for the March quarter grew 14% to $0.57, topping the consensus by $0.04. Sales advanced 4% to $3.00 billion, as 5% growth from Ingersoll's climate segment overcame a 1% contraction by its industrial unit. Management raised the low end of its 2017 per-share-profit target range by $0.05, lifting its midpoint to $4.425, versus the consensus of $4.48 at the time of the announcement. Shares rallied on the report. Ingersoll is a Long-Term Buy.


Owens Corning ($61; OC) March-quarter earnings per share surged 60% to $0.85, easily outpacing the consensus of $0.59. Sales, up 20% to $1.48 billion, also handily topped analyst expectations. Roofing sales jumped 46% as customers built up inventories ahead of Owens' March price hike. Despite the strong results, management didn't raise its 2017 guidance, disappointing some investors. But Owens hinted at some upside to its current guidance and plans additional price hikes for roofing and insulation products in June. Owens is a Focus List Buy and a Long-Term Buy.

Technology

For the March quarter, Citrix Systems ($84; CTXS) earned $0.97 per share from continuing operations, down 3% but $0.02 above the consensus. Sales crept 1% higher to $663 million. Management's June-quarter guidance fell short of analysts' expectations. Citrix expects per-share profits of $0.97 to $1.00 on revenue of $685 million to $695 million; the consensus was anticipating profits of $1.10 per share and revenue of $695 million. Citrix is a Buy and a Long-Term Buy.


F5 Networks ($137; FFIV) said March-quarter earnings per share rose 16% to $1.95, missing the consensus by $0.02. Sales, up 7% to $518 million, also fell short of expectations. The company's June-quarter outlook also proved disappointing — management sees per-share profits climbing 11% to 13%, versus the consensus of 16% growth. For now, F5 remains a Buy and a Long-Term Buy.

Corporate roundup

Foot Locker ($77; FL) warned that April-quarter profits would miss the consensus estimate of $1.47 per share. Citing tax-refund delays, the retailer expects per-share profits of $1.36 to $1.39, versus $1.39 earned in the year-ago quarter. Encouragingly, the weakness appears isolated to the month of February, as same-store sales rebounded in March and remained strong in April. Foot Locker shares rose on the news, and the stock remains a Buy and a Long-Term Buy.


Lam Research ($146; LRCX) announced the accelerated repurchase of about 2.6 million shares for $500 million as part of its $1 billion stock-buyback program. Lam is a Focus List Buy and a Long-Term Buy.


Rank Changes

Lowe's ($85; LOW) is being added to the Focus List. Laboratory Corp. of America ($139; LH) and Zions Bancorp ($41; ZION) are coming off the Focus List; Zions remains a Buy and a Long-Term Buy, while LabCorp is only a Long-Term Buy.


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