Portfolio Review: July 10, 2017

7/10/2017


Health-care update

Undeterred by the uncertain fate of the Affordable Care Act, Centene ($82; CNC) plans to expand in Missouri next year, pushing into counties unlikely to have any other health insurer. Centene also plans to move onto health exchanges in Kansas and Nevada, while broadening its presence in Ohio.

Centene's announcement comes at a time other insurers hasten their retreat from state health exchanges. Insurers find themselves in the unenviable position of planning for next year while lacking direction from lawmakers on whether ACA will be kept, swapped out for a new health law, or repealed without a replacement.

In reviewing its plans on 14 state exchanges, Anthem ($191; ANTM) said last month it intends to exit most of Nevada's individual marketplace next year. Anthem is also abandoning exchanges in Ohio, Wisconsin, and Indiana. Aetna ($153; AET), Humana ($242; HUM), and UnitedHealth Group ($188; UNH) have also left many of the state exchanges due to persistent losses. Centene is a Focus List Buy and a Long-Term Buy. Anthem and UnitedHealth are rated A (above average). Aetna is rated B (average).


In reaching a partnership with Walgreens Boots Alliance ($79; WBA), Laboratory Corp. of America ($153; LH) expects to open lab-testing centers in seven Walgreens stores later this summer. LabCorp is a Long-Term Buy. Walgreens is rated A (above average).

Dealbook

Forestar Group ($17; FOR) accepted D.R. Horton's ($35; DHI) offer to pay $17.75 per share for 75% of its outstanding shares. The all-cash deal is worth about $560 million. D.R. Horton previously bid $16.25 per share, or $520 million, for Forestar, a residential and mixed-use real estate developer. The deal gives D.R. Horton another source of land, primarily in Texas, Colorado, and North Carolina.  D.R. Horton is a Buy and a Long-Term Buy.


Verizon Communications ($45; VZ) views Disney ($106; DIS) as a potential takeover target, reported the New York Post. Given Disney's stock-market value of $168 billion, a takeover seems far-fetched. But Verizon is scrambling to bolster its portfolio of movies and TV shows in an effort to grow mobile advertising. Disney is a Long-Term Buy. Verizon is rated B (average).


Jana Partners took a 5% stake in EQT Corp. ($60; EQT) in the hope of squashing the natural-gas producer's pending $6.7 billion acquisition of Rice Energy ($26; RICE). Jana views that takeover price as too rich and has instead urged EQT Corp. to fully divest its pipeline business, run by EQT Midstream Partners ($77; EQM). EQT Corp. owns a 90% stake in EQT GP Holdings, which in turn holds a 26% interest in EQT Midstream. EQT Midstream shares rallied on the news and remain a Long-Term Buy.


Walgreens Boots Alliance ($79; WBA) altered its plans to acquire Rite Aid ($2; RAD) in a $9.4 billion deal that ran afoul of regulators. Walgreens has now agreed to pay $5.18 billion for almost half of Rite Aid's stores. Walgreens is rated A (above average).

Technology review

Alphabet ($932; GOOGL) said the European Commission's antitrust fine, announced in June, shaved $2.74 billion from its June-quarter profits, or roughly $3.90 per share. The consensus currently expects Alphabet to report earnings of $8.26 per share, down 2% from the year-ago quarter. European antitrust officials said the ruling sets a precedent for future cases, potentially ensnaring other Alphabet online tools and services. Alphabet could face another record fine later this year, this one linked to its Android mobile operating system, reported Reuters. The company says it will consider appealing the ruling. Separately, Alphabet has begun to experiment with mobile ads that use virtual reality and plans to work with developers to utilize the new technology. Alphabet is a Focus List Buy and a Long-Term Buy.


Apple ($144; AAPL) continues to expand its retail presence overseas, opening its first stores in Taiwan and Singapore, while taking steps to push into South Korea and India as well. Separately, Apple is designing a 3-D sensor that would scan iPhone users' faces to unlock their devices and make mobile payments, reported Bloomberg. The next iPhone, which may be postponed until the December quarter, is rumored to feature a bigger screen, new glass casing, and possibly a semiconductor devoted to performing artificial-intelligence tasks to improve battery life. Apple is a Buy and a Long-Term Buy.


Facebook ($150; FB) won a court battle to dismiss claims it monitored users' internet activity after they logged off the social network. In other news, Facebook said it successfully tested an internet-beaming drone powered by sunlight. Facebook is a Buy and a Long-Term Buy.

Banks battle headwinds

U.S. banks boast well-capitalized balance sheets, as evidenced by the generous dividend and stock-buyback plans approved by the Federal Reserve last month. Their valuations remain modest, and analyst profit estimates for both the June quarter and 2017 are holding up well. But some headwinds could slow the industry's momentum.

The bank-friendly policies promised by President Trump have yet to materialize. Additionally, June-quarter business lending slumped to its lowest pace since 2011, while trading revenue is trending lower and deal activity has turned sluggish.

In late May, J.P. Morgan Chase ($94; JPM) said trading revenue was on pace to fall 15% for the June quarter. Morgan Stanley ($46; MS) projects a decline of at least 10%, while Bank of America ($25; BAC) and Goldman Sachs ($228; GS) also expect declines. Meanwhile, global activity for mergers and acquisitions accelerated in Europe during the first half of 2017, but the total value of announced deals in the U.S. fell 16% to $584 billion, the lowest first half since 2013. Although the number of deals climbed 17%, the average premium paid slipped below 30%, lower than any first-half period in at least five years. The results show that companies are still pursuing deals but getting pickier about prices.

The sluggish environment may help explain why some banks are exploring new revenue streams. J.P. Morgan flirted with acquiring Worldpay Group, a payments processor based in the U.K., before bowing out of the bidding. J.P. Morgan's last major deals occurred during the financial meltdown, when it acquired Washington Mutual and Bear Stearns. J.P. Morgan is a Buy and a Long-Term Buy. Bank of America, Goldman, and Morgan Stanley are rated A (above average).

Corporate roundup

U.S. car sales slipped about 3% in June on lower demand from rental-car agencies and less promotional activity by automakers. Sales fell 5% at both Ford Motor ($11; F) and General Motors ($35; GM) but rose 2% at Toyota Motor ($109; TM). GM is rated A (above average). Ford and Toyota are rated B (average).


Southwest Airlines ($63; LUV) plans to reduce its number of flights to Cuba, halting service to smaller cities Varadero and Santa Clara on Sept. 4. It will continue its three daily flights to Havana. Southwest Airlines is a Focus List Buy and a Long-Term Buy.


Rank Change

No changes were made this week in Dow Theory Forecasts.


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