Portfolio Review: May 29, 2017

5/29/2017


One upgrade, one new stock

We are upgrading ON Semiconductor ($16; ON), profiled as this week's Analysts' Choice, to the Focus List. We are also adding one new stock, Royal Caribbean Cruises ($108; RCL), as a Buy and a Long-Term Buy.

Royal Caribbean, the second-largest cruise company behind Carnival ($62; CCL), operates 25 ships with 123,270 berths, or roughly a 25% share of the global market. The stock's Quadrix Overall score of 98 signals strong operating momentum, rising analyst estimates, encouraging share-price action, and a decent valuation. In the March quarter, per-share profits jumped 74% on 5% higher sales. Favorable pricing trends and robust demand pushed the company's operating profit margin to its highest level for a March quarter since 2005.

In April, management raised its 2017 profit guidance, with the midpoint of the new range targeting 17% growth. Both Royal Caribbean shares and analyst estimates have risen since that announcement. But at less than 15 times estimated 2017 earnings, the stock trades comfortably below medians of 17 for the S&P 1500 consumer-discretionary sector and 20 for hotel, resorts, and cruise-line stocks.

Retail review

Foot Locker ($60; FL) shares plunged after the company reported its first profit miss since 2013, sparking concerns that slowing mall traffic may be finally taking a toll on the footwear retailer. Per-share profits slipped 2% to $1.36 excluding special items in the April quarter, missing the consensus by $0.02. Revenue crept up 1% to $2.00 billion, while same-store sales edged 0.5% higher. Management blamed the disappointing results on delayed tax refunds, noting that sales recovered in March and April. Foot Locker sees that rebound continuing in the second half of the year.

To its credit, Foot Locker posted a soft April quarter in 2016 and went on to deliver a string of outstanding quarterly results for the remainder of the year. But it still makes us nervous when a company promises back-loaded growth to make up for a slow start. Still, the selloff seems overdone, and we wouldn't be surprised to see the shares rebound in coming weeks. We may sell the stock if it bounces to $64 to $66, but for now Foot Locker remains a Buy and a Long-Term Buy.


For the April quarter, Lowe's ($80; LOW) grew adjusted earnings per share 18% to $1.03 per share but fell $0.03 short of the consensus. The profits excluded a $464 million pretax loss on the extinguishment of debt, translating to $0.33 per share. Revenue, up 11% to $16.86 billion, also narrowly missed analysts' estimates. Same-stores sales advanced 1.9%. Citing the debt extinguishment, Lowe's lowered its unadjusted full-year profit guidance to $4.30 per share from its prior forecast of $4.64; the consensus was also $4.64 at the time of the report. Management reaffirmed its other targets for fiscal 2018 ending January.

Larger rival Home Depot ($155; HD) topped consensus estimates for both per-share profits and sales last quarter, while also raising its full-year profit outlook. Most of Lowe's customers are do-it-yourself enthusiasts, while Home Depot has a large client base of professional contractors, who are driving growth. Seeking to push further into the contractor market, Lowe's agreed to acquire Maintenance Supply Headquarters for $512 million. Maintenance Supply primarily sells appliances, flooring, and lighting products to apartment complexes. Lowe's acquired a similar distributor, Central Wholesalers, in November. Lowe's is a Buy and a Long-Term Buy. Home Depot is rated A (above average).

Technology update

At its annual developers conference, Alphabet ($978; GOOGL) unveiled its updated virtual assistant, promising the technology will soon be capable of completing voice-based transactions. The company also said it's developing a stand-alone virtual-reality headset with Qualcomm ($59; QCOM) that could launch later this year. Alphabet is a Focus List Buy and a Long-Term Buy. Qualcomm is rated B (average).


With the hope of taking a larger slice of India's budding smartphone market, Apple ($153; AAPL) has begun to produce its low-end iPhone SE model in the country. Apple has not yet set a price for the device in India. The average smartphone sells for $150 in India, says researcher IDC, versus the iPhone SE's U.S. price tag of $399. Smartphone shipments rose 3% globally in 2016 but surged 18% in India, according to industry researcher Counterpoint Research. Apple has less than 3% of India's market. Apple is a Buy and a Long-Term Buy.


Cisco Systems ($31; CSCO) shares slumped after the company gave a mixed April-quarter report and disappointing guidance. Earnings per share rose 5% to $0.60 excluding special items, easing past the consensus by two cents. Revenue slipped 1% to $11.94 billion. Cisco warned that revenue would fall 4% to 6% in the July quarter; the consensus had projected 1% growth. Cisco is rated B (average).


The European Union fined Facebook ($150; FB) $122 million for allegedly giving regulators misleading information concerning its $19 billion acquisition of WhatsApp, a messaging service, in 2014. Facebook is a Buy and a Long-Term Buy.

Biotech pipeline

Amgen ($155; AMGN) said a potential osteoporosis drug met its goals in a late-stage study. But the drug's cardiovascular risks were higher than expected, potentially delaying a launch. Amgen shares dipped on the news but remain a Buy and a Long-Term Buy.


Celgene ($118; CELG) said an experimental treatment for leukemia performed well in an early trial. Separately, Celgene's potential blockbuster drug for multiple sclerosis met its primary study goal of reducing relapse rates but failed to outperform Biogen's ($253; BIIB) Avonex. Celgene is a Focus List Buy and a Long-Term Buy. Biogen is rated B (average).

Media roundup

CBS ($62; CBS) signed CEO Leslie Moonves, age 67, to a two-year extension, taking his contract through June 2021. Separately, CBS declined to say during a shareholder meeting if it would consider acquiring Viacom ($35; VIAb), though Moonves called the company's shares undervalued. Viacom has seen its shares fall 16% over the past 12 months, dragging its stock-market value below $14 billion. At 10 times trailing earnings, Viacom shares trade 44% below the median movie and entertainment stock in the S&P 1500 Index. With a market value of $25 billion, CBS is a Focus List Buy and a Long-Term Buy. Viacom is rated B (average).


Disney ($108; DIS) opened its $500 million World of Avatar, located in Orlando, in late May. Released in 2009, Avatar generated a record $2.8 billion in ticket sales. Disney is developing several other movie-themed lands, tying successful film franchises to its parks. Disney is a Long-Term Buy.


Rank Changes

ON Semiconductor ($16; ON) is being added to the Focus List. Royal Caribbean Cruises ($108; RCL) is being initiated as a Buy and a Long-Term Buy. After these changes, the Vanguard Short-Term Corporate Bond ($80; VCSH) exchange-traded fund accounts for 5.2% of the Buy List and 7.8% of the Long-Term Buy List.


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