Portfolio Review: July 17, 2017

7/17/2017


Lowe's off Focus List

Lowe's ($76; LOW) is being dropped from the Focus List but remains a Buy and Long-Term Buy. Its Overall score has fallen to 89 from 97 at the end of March, hurt by slowing operating momentum, a modest dip in profit estimates, and soft share-price action. Although Lowe's grew earnings per share 18% and revenue 11% in the April quarter, cash from operations rose just 2% and profit margins contracted.

Lowe's presence in home-improvement retail provides a barrier from online competition that could eventually erode if Amazon.com ($1,007; AMZN) keeps spreading to new pockets of the retail market. Still, shares seem attractively valued at 18 times trailing earnings, below their five-year median of 23. At 16.5 times estimated current-year profits, the stock trades roughly in line with the median S&P 1500 consumer-discretionary stock. Even the most pessimistic analyst estimate calls for per-share profits of $4.51, up 13%, for fiscal 2018 ending January. If Lowe's meets that target and its trailing P/E climbs to 21, its shares will reach $95 by March. Lowe's is a Buy and a Long-Term Buy. Amazon.com is rated B (average).

Facebook plays long-term growth game

Admittedly, it's difficult for analysts to project sharp changes in growth rates with much precision. And they aren't getting much guidance from Facebook ($159; FB), which has warned that ad-revenue growth will slow "meaningfully" in 2017 but has not offered guideposts for the magnitude of the slowdown. The consensus anticipates 40% higher sales this year, down from 54% growth in 2016. For the June quarter, analysts target 43% higher revenue and 15% higher per-share profits. Encouragingly, June-quarter profit estimates have ticked higher in the past week. Facebook will post results on July 26.

The company has recently taken steps to expand its online-video business, and other new revenue streams are opening up as well. Facebook has begun to slowly roll out ads displayed in Messenger, its chat application that boasts 1.2 million monthly users. The company may also incorporate advertisements in WhatsApp, its other messaging app, which is popular in developing countries. Ads from both messaging apps could boost Facebook's sales by $11 billion, says one analyst. Additionally, Nike ($58; NKE) said it plans to begin sell its apparel and shoes directly to consumers on Facebook's  Instagram. Facebook, showing bullish share-price action, is a Buy and a Long-Term Buy. Nike is rated B (average).

Airlines gain altitude

Alaska Air Group ($95; ALK) said traffic rose 8.3% in June on 6.9% capacity growth. The airline said revenue per available seat mile (unit revenue) rose about 3.5% in the June quarter, ahead of analysts' expectations. Alaska Air also trimmed its quarterly cost projections. Southwest Airlines ($62; LUV) reported 3.7% higher traffic last month, roughly in line with 3.8% higher capacity. Southwest reaffirmed its June-quarter guidance of unit revenue rising 1% to 2%.

Most other U.S. airlines are also projecting higher quarterly unit revenue, the first sign of broad growth in three years. That growth underscores how U.S. airlines have boosted revenue by introducing premium services at a time of historically low ticket prices. Southwest Airlines is a Focus List Buy and a Long-Term Buy. Alaska Air is a Buy and a Long-Term Buy.

Biotech pipelines & price hikes

Celgene ($134; CELG) agreed to pay $263 million in upfront licensing fees to BeiGene ($73; BGNE) and spend an additional $150 million for a 6% stake in the China-based drugmaker. Celgene could also pay up to $980 million in milestone payments to BeiGene, currently developing an immunotherapy drug to treat solid tumor cancers.

The market for these types of oncology drugs, also known as PD-1 inhibitors, could surpass $8 billion in sales this year. Amgen ($173; AMGN) has little exposure to this emerging field, currently dominated by Bristol-Myers Squibb ($55; BMY) and Merck ($63; MRK). That absence has caused some analysts to speculate that Amgen will explore acquisitions to boost its presence. In other news, Amgen raised the price of leukemia treatment Blincyto by 4% in July, the drug's second price hike this year. Blincyto accounts for less than 1% of Amgen's revenue. Celgene is a Focus List Buy and a Long-Term Buy. Amgen is a Buy and a Long-Term Buy. Bristol-Myers is rated B (average). Merck is rated C (below average).

Technology roundup

Citrix Systems' ($80; CTXS) shares dipped after the company named David Henshall as its next CEO, replacing Kirill Tatarinov. In his brief tenure as CEO, Tatarinov spun off the company's GoTo unit, a move sought by activist investors. But those same investors likely grew frustrated that discussions to sell the rest of Citrix have reportedly stalled. Henshall was most recently the CFO and COO of Citrix. The stock remains a Buy and a Long-Term Buy.


In July, a French court is expected to announce its decision on a tax dispute involving Alphabet ($968; GOOGL). The company could be on the hook for $1.3 billion in back taxes for routing online sales that occurred in France to Alphabet's European headquarters in Ireland. France has a corporate tax rate of 33.33% versus Ireland's 12.5%. Separately, Alphabet has hired five law firms, all based in Brussels, to help it battle antitrust scrutiny in the European Union. The EU fined Alphabet $2.7 billion last month in response to complaints that the company skewed online search results to favor its own shopping website. Alphabet is a Focus List Buy and a Long-Term Buy.


Qualcomm ($56; QCOM) intensified its dispute with Apple ($146; AAPL) by asking U.S. trade officials to block imports of some iPhones and iPads. Apple has sued Qualcomm and also withheld licensing royalties in the hope of extracting lower prices from the semiconductor company. Apple argues that Qualcomm's royalty fee should no longer be based on a percentage of a device's retail price because Apple's ability to charge higher prices is unrelated to Qualcomm patents. In response, Qualcomm countersued Apple for allegedly infringing on six of its patents. Qualcomm relies on Apple for an estimated 30% of its profits.In other news, Apple engineers are beginning to "panic" over software problems plaguing the next iPhone that could delay the device's launch, according to an online report. Some of the headaches reportedly involve incorporating a new fingerprint sensor beneath the iPhone's display. Apple is a Buy and a Long-Term Buy. Qualcomm is rated B (average).


CommScope ($36; COMM) agreed to acquire Cable Exchange, a privately-held company that makes fiber optic and copper cables for data centers. Terms of the deal were withheld.  CommScope is a Buy and a Long-Term Buy.


Rank Change

Lowe's ($76; LOW) is being dropped from the Focus List.


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