Portfolio Review: May 8, 2017

5/8/2017


One upgrade, three sells

Comcast ($39; CMCSa) joins the Focus List on account of its outstanding March-quarter results, rising analyst estimates, and strong Quadrix® scores. Comcast reported per-share profits of $0.53, up 26%, to exceed the consensus estimate of $0.45. Revenue climbed 9% to $20.46 billion on 4% growth from the cable business and 15% growth at NBCUniversal. Comcast added 42,000 net video subscribers, its fifth quarter of growth in the past six. All four divisions within NBCUniversal grew sales more than 5%, led by filmed entertainment, up 121%.

Comcast shares rallied on the report. Although management refrains from offering guidance, analyst profit estimates are also trending higher. Per-share profits are now projected to grow 14% in the June quarter and 13% for the year. The stock scores above 60 for all six Quadrix categories, contributing to an Overall rank of 92. Comcast is also a Long-Term Buy.


We are pulling CVS Health ($80; CVS) from the Long-Term Buy List after the company posted a mixed quarterly report, intensifying our concerns that contract losses may impede operating momentum. CVS said March-quarter earnings per share slipped 1% to $1.17, topping the consensus by $0.07. Revenue climbed 9% for the pharmacy-services business, offsetting a 4% decline for the retail unit, hurt by 4.7% lower same-store sales.

Although CVS reaffirmed its full-year guidance, its June-quarter outlook disappointed investors. Management's June-quarter earnings-per-share target range has a midpoint of $1.31, down 1% and $0.02 below the consensus at the time of the announcement. Analyst expectations already appeared moderate following management's warning last November that its retail business could lose 40 million prescriptions to rival Walgreens Boots Alliance ($86; WBA). Last month, CVS said it failed to renew a contract worth about $2.8 billion annually. Since adding CVS to the Long-Term Buy List in August 2012, its shares have climbed 80%, ahead of the 69% gain for the S&P 500 Index. CVS is now rated B (average) and should be sold. Walgreens is rated A (above average).


F5 Networks ($127; FFIV) is being dropped from the Buy and Long-Term Buy lists. For the March quarter, F5 missed analyst estimates for both per-share profits and sales; it also issued weak June-quarter guidance. Despite recent price weakness, the shares remain up 26% over the past 12 months. F5 still looks cheap versus its own history and other S&P 1500 communications-equipment stocks.

However, the stock's Quadrix Overall score has dropped to 70, hurt by subpar ranks for Momentum, Earnings Estimates, and Performance. Further complicating matters, management said orders in Europe (about one quarter of F5's revenue) are being disrupted by the U.K.'s exit from the European Union, France's election, and new data-protection regulations. We are dropping F5 from Monitored List. The shares should be sold.


We are removing Synchrony Financial ($29; SYF) from the Buy and Long-Term Buy lists after the credit-card issuer posted a disappointing March-quarter report. Net interest income grew 12% to $3.59 billion, as loan receivables increased 11% and purchase volume rose 7%. But the credit quality of Synchrony's loan portfolio deteriorated sharply, forcing management to ramp reserves against potential losses. As a result, per-share profits tumbled 13% to $0.61, missing the consensus estimate by $0.12.

Making matters worse, Synchrony expects to set aside similarly large loan-loss provisions in the June and September quarters, cutting further into profits. Shares have staged a modest rebound in the days since plunging on the quarterly report. We recommend that investors cut their losses, as the problems that emerged in the latest quarter probably won't be resolved any time soon. The stock is being dropped from coverage and should be sold.

Earnings reviews

Technology

For the March quarter, Alphabet ($948; GOOGL) reported per-share profits of $7.73, up 3% to surpass the consensus by $0.34. Sales, up 22% to $24.75 billion, also exceeded analysts' expectations. The loss of YouTube advertisers appeared to barely dent Alphabet's business, as paid clicks surged 44%. Average price per click fell 19%, reflecting Alphabet's struggles to increase advertising prices. Shares rallied on the results. Alphabet is a Focus List Buy and a Long-Term Buy.


Apple ($147; AAPL) grew per-share profits 11% to $2.10 in the March quarter, exceeding the consensus of $2.02. Sales advanced 5% to $52.90 billion, narrowly missing the consensus. Revenue growth was driven by services, up 18%, and Macs, up 14%; iPhone sales edged 1% higher. For the June quarter, Apple targets revenue of $43.5 billion to $45.5 billion, implying 3% to 7% growth; the consensus projected sales of $45.57 billion. The company raised its quarterly dividend 11% to $0.63 per share, payable May 18. Apple also increased its stock-repurchase authorization to $210 billion from $175 billion. Apple is a Buy and a Long-Term Buy.


CDW's ($59; CDW) March-quarter earnings per share climbed 12% to $0.75 excluding special items, matching the consensus. Revenue rose 7% to $3.32 billion, ahead of analysts' targets, on strong growth from small businesses, government agencies, and public schools. Operating cash flow declined 14%. CDW is a Focus List Buy and a Long-Term Buy.


Facebook ($152; FB) said March-quarter earnings per share climbed 73% to $1.04, topping the consensus of $0.87. Facebook is no longer reporting adjusted per-share profits, preferring to exclusively use generally accepted accounting principles (GAAP). Sales, up 49% to $8.03 billion, also surpassed the consensus. Mobile advertising accounted for 85% of Facebook's ad revenue, which rose 51%. Daily active users grew 18%. Facebook is a Buy and a Long-Term Buy.

Additional reviews

Celgene ($123; CELG) said March-quarter earnings per share surged 27% to $1.68, topping the consensus by a nickel. Revenue advanced 18% to $2.96 billion, with 15 percentage points of that growth coming from higher volumes and three percentage points coming from higher prices. Revlimid, Celgene's blockbuster multiple myeloma drug, grew sales 20%. Celgene is a Focus List Buy and a Long-Term Buy.


For the March quarter, EQT Midstream Partners ($76; EQM) earned $1.36 per limited partnership unit, down 2% and a penny below the consensus. Operating revenue climbed 9% to $203 million. EQT Midstream will pay a quarterly cash distribution of $0.89 per unit on May 15, up 5% from last quarter and 19% higher than the year-ago quarter. EQT is a Long-Term Buy.


Southwest Airlines' ($58; LUV) March-quarter earnings per share slumped 31% to $0.61, missing the consensus by $0.02. Operating revenue crept 1% higher to $4.88 billion, outpaced by higher fuel expenses, up 8%, and wage costs, up 13%. Unit costs excluding fuel are projected to climb 6% in the June quarter from the year-ago period. Management expects cost inflation to ease in the second half of the year. Shares fell after the report but remain a Focus List Buy and a Long-Term Buy.


Rank Changes

Comcast ($39; CMCSa) is being added to the Focus List. CVS Health ($80; CVS) is leaving the Long-Term Buy List. F5 Networks ($127; FFIV) and Synchrony Financial ($29; SYF) are being dropped from the Buy and Long-Term Buy lists, and from coverage. After these changes, the Vanguard Short-Term Corporate Bond ($80; VCSH) exchange-traded fund makes up 11.9% of the Buy List and 13.4% of the Long-Term Buy List.


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