Portfolio Review: July 3, 2017

7/3/2017


Snap-on bolts on to Long-Term Buy List

Snap-on ($156; SNA), the largest maker of premium hand and power tools, joins the Long-Term Buy List. As the vehicle-repair market tries to keep pace with increased vehicle complexity, Snap-on continues to see steady demand for its tools and diagnostics equipment. The company has begun to move into new end markets, such as aerospace, industrial, and oil and gas. With the U.S. generating 70% of sales, Snap-on is also eyeing growth opportunities in China.

The company offers consistent, if unspectacular, growth. For seven straight years Snap-on has increased annual per-share profits (annualized growth of 15%) and sales (4%). Both cash from operations and free cash flow rose at double-digit rates for the 12 months ended March. Yielding 1.8%, Snap-on's dividend has grown at an annualized rate of 15% over the past five years. A conservative payout ratio of 30% suggests room for additional dividend hikes.

The stock does not seem especially timely, given its low Quadrix ranks for Earnings Estimates (20) and Performance (16). However, analyst profit estimates are eroding for 2017 but rising for 2018. At less than 14 times estimated 2018 projected profits, the stock trades well below the S&P 1500 industrials sector's median of 18.

Deal chatter

Sprint ($8; S) is reportedly exploring a wireless partnership with Comcast ($40; CMCSa) and Charter Communications ($340; CHTR). One possible deal could involve Comcast and Charter investing in Sprint's network in exchange for favorable terms to offer wireless service on that network. Comcast already has a reseller agreement with Verizon Communications ($45; VZ). Comcast and Charter, which formed a wireless pact in May, may also offer to jointly acquire Sprint. Sprint has a market value of $33 billion, versus $93 billion for Charter and $193 billion for Comcast. Comcast is a Focus List Buy and a Long-Term Buy. Sprint and Verizon are rated B (average).


D.R. Horton ($34; DHI) increased its cash bid to acquire a 75% stake in Forestar Group ($17; FOR) to $17.75 per share, or roughly $568 million. It originally offered $16.25 per share, or $520 million. D.R. Horton is a Buy and a Long-Term Buy.


Lowe's ($77; LOW) completed its $512 million acquisition of Maintenance Supply Headquarters, a deal first announced in May that should boost the retailer's sales to construction contractors. Lowe's is a Focus List Buy and a Long-Term Buy.


Owens Corning ($67; OC) completed its $560 million acquisition of Pittsburgh Corning, a company that generates $240 million in annual sales from making cellular-glass insulation. News of the deal first surfaced in May. Owens is a Focus List Buy and a Long-Term Buy.

Fed clears banks to open up pocketbooks

The biggest U.S. banks passed the Federal Reserve's 2017 stress tests that measure their ability to withstand hypothetical shocks to the economy. The Fed also approved capital-return plans for all 34 of the largest U.S banks.

Citizens Financial Group ($35; CFG) expects to increase its quarterly dividend 29% to $0.18 per share in the September quarter, with an additional 22% hike to $0.22 per share slated for early 2018. It also expects to repurchase stock worth up to $850 million over the next 12 months, up 23% from its 2016 plan. Citizens Financial is a Focus List Buy and a Long-Term Buy.


J.P. Morgan Chase ($90; JPM) says it will boost its quarterly dividend 12% to $0.56 per share in the September quarter and repurchase upwards of $19.4 billion of stock over the next 12 months. J.P. Morgan is a Buy and a Long-Term Buy.


Zions Bancorp ($43; ZION) received approval to raise its quarterly dividend $0.04 per share in each of the next four quarters, resulting in the distribution tripling to $0.24 by the June 2018 quarter. It also plans to repurchase up to $465 million of stock in the coming year. Zions is a Buy and a Long-Term Buy.

Technology update

The European Union hit Alphabet ($961; GOOGL) with a record $2.7 billion fine following a seven-year probe into accusations that the company improperly manipulated online search results in favor of its own shopping website. The penalty represents just 3% of Alphabet's net cash ($88.50 billion) and 12-month revenue ($94.77 billion). Of more potential consequence, the ruling could invite additional EU scrutiny into Alphabet's other businesses, such as online advertising, maps, and smartphone software. The company relies on Europe for an estimated 30% of revenue. Alphabet has 90 days to change its search algorithms to comply with the EU's antitrust ruling or face additional penalties.

Continuing their push into self-driving cars, Alphabet and Apple ($146; AAPL) formed separate partnerships with rental-car companies. Alphabet's Waymo unit hired Avis Budget Group ($26; CAR) to store and service its fleet of vehicles. Apple will lease cars from Hertz Global Holdings ($11; HTZ) to test its own software. Alphabet is a Focus List Buy and a Long-Term Buy.


Separately, Apple lowered the monthly price of its streaming-music service to $8.25 from $9.99, putting pressure on rivals to do the same. Apple Music has about 27 million paying subscribers, trailing Spotify's 50 million. In other news, Apple will begin selling wireless plans from discount carrier Virgin Mobile USA, a subsidiary of Sprint ($8; S), marking its first new carrier since 2013. Apple is a Buy and a Long-Term Buy. Sprint is rated B (average).


With 2 billion regular users, Facebook ($153; FB) is pushing further into online video in the hope of opening up a new stream of advertising revenue. Facebook has entered talks with Hollywood studios to produce TV-quality shows and could begin to stream the shows online by late summer. Additionally, Facebook and Fox Sports will stream UEFA Champions League soccer games this fall. Facebook is a Buy and a Long-Term Buy.

Corporate roundup

Novartis ($85; NVS) won approval from the European Commission to sell Erelzi, a biosimilar version of Amgen's ($174; AMGN) anti-inflammatory drug Enbrel. The U.S. cleared Novartis to sell Erelzi last year, though ongoing patent lawsuits could postpone the drug's launch until next year. Enbrel generated 22% of Amgen's March-quarter revenue; 95% of the drug's sales were in the U.S. Amgen is a Buy and a Long-Term Buy. Novartis is rated C (below average).


Although the upcoming TV season is expected to suffer from soft advertising sales, CBS ($65; CBS) is seeing higher ad rates and volumes, reported Bloomberg. CBS relies on advertising for nearly half of its revenue. The stock is a Focus List Buy and a Long-Term Buy.


General Motors ($35; GM) said it now expects 2017 sales for the U.S. automobile industry to slip up to 3%; it had previously projected flat sales. General Motors is rated A (above average).


FedEx ($217; FDX) warned that its TNT Express unit (27% of sales for fiscal 2017 ended May) got hit by a cyberattack that spread to multiple companies in late June. "We cannot measure the financial impact of this service disruption at this time, but it could be material," FedEx said. FedEx is a Long-Term Buy.


Rank Change

Snap-on ($156; SNA) was initiated as a Long-Term Buy.


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