Portfolio Review


New channels invade pay TV

With growth stalling in the U.S. pay-TV market, the industry's major players acknowledge a shifting landscape. Content is king, and the internet has broadened the options for delivering that programming.

In the past few weeks, DirecTV ($63; DTV) has struck an exclusive licensing deal with a startup movie studio and hinted it could launch its own digital platform to supplement a sluggish U.S. satellite-TV business. DirecTV shed 63,000 net U.S. subscribers in the first half of the year, and research firm IHS expects cable and satellite subscriptions to post their first annual decline this year.

After failing to acquire online-video service Hulu, DirecTV offers no U.S. internet services, putting it at a disadvantage to cable companies. That predicament fuels speculation of an eventual merger with Dish Network ($48; DISH), which owns the spectrum to build out a wireless network. Regulators rejected a tie-up between the two companies in 2002, though today DirecTV and Dish lack the pricing power they enjoyed a decade ago.

Still, DirecTV's growth prospects in Latin America remain strong enough for analysts to project 6% to 7% revenue growth for 2013 and 2014. The consensus projects 14% higher per-share profits in the September-quarter on 6% revenue growth. DirecTV is expected to report quarterly results Nov. 5. At 13 times trailing earnings, the stock trades 23% below its five-year average and 39% below the median for S&P 1500 pay-TV stocks.

Comcast ($48; CMCSa), a minority owner of Hulu and dominant provider of internet services, appears better insulated from the emerging trends. In the September quarter, Comcast earned $0.65 per share, up 41% excluding gains on asset sales in the year-ago quarter and $0.04 above the consensus. Sales slipped 2% to $16.15 billion. Revenue fell 14% at NBCUniversal, while the cable business grew sales 5%.

Seeking to bolster its market position, Comcast has reportedly entered talks to add Netflix's ($327; NFLX) online video service as an application on set-top boxes. A partnership would allow Netflix's on-demand programming to compete directly with Comcast's own offerings, but it could also boost Comcast's internet business by encouraging subscribers to buy faster broadband connections. In a gambit to increase viewership by harnessing social buzz, Comcast also struck a deal to provide Comcast-owned channels through Twitter feeds.

But TV-related companies can't plug all the holes fast enough, as technological advances invite new players to find ways to infiltrate the space. Broadcasters including Comcast's NBC and Disney's ($69; DIS) ABC lost their appeal to block a company called Aereo from streaming local TV signals over the internet for free.

Google ($1,036; GOOG) has launched Chromecast, a device that plugs into TVs to stream video from YouTube and Netflix. Apple ($517; AAPL) remains quiet about its TV ambitions, though it has hired two executives with streaming-video experience, suggesting the company continues to work on its own strategy. DirecTV is a Focus List Buy and a Long-Term Buy. Apple and Google are rated Buy and Long-Term Buy. Comcast is a Long-Term Buy. Disney is rated B (average).

September-quarter earnings

Apple ($517; AAPL) said September-quarter earnings per share slid 5% to $8.26 but still exceeded the consensus by $0.30. Sales advanced 4% to $37.47 billion, also ahead of the consensus. Gross profit margin remained under pressure because of a less-favorable product mix, highlighted by a 7% year-over-year decline in the average selling price of the iPhone; prices fell less than 1% from the June quarter. Unit sales of the iPhone surged 26% year-over-year, were flat for the iPad, and fell 7% for the Mac. Apple said its gross margin has begun to stabilize and provided December-quarter sales guidance with a midpoint of $56.5 billion, ahead of the consensus of $55.7 billion at the time of the announcement. In other news, China Mobile hinted on its website that it could begin selling the iPhone by Nov. 11. Apple is a Buy and a Long-Term Buy.

Lear ($80; LEA) grew per-share profits 12% to $1.45 in the September quarter, topping the consensus of $1.33. Revenue rose 11% to $3.92 billion, also ahead of the consensus, on broad growth across all geographic regions. Lear raised its full-year guidance, implying December-quarter sales will grow 8% to $4.02 billion, slightly ahead of analysts' target of $3.99 billion at the time of the announcement. Lear is a Focus List Buy and a Long-Term Buy.

Express Scripts ($62; ESRX) earned $1.07 per share from continuing operations in the September quarter excluding special items, up 4% but a penny below the consensus. Revenue slipped 3% to $25.92 billion on a 9% decline in claims volumes. Management sees per-share profits of $1.09 to $1.13 in the December quarter, compared to the consensus of $1.12 and $1.05 earned in the same quarter last year. Express Scripts is a Focus List Buy and a Long-Term Buy.

Visa ($204; V) grew per-share profits 20% to $1.85 in the September quarter excluding special items, in line with the consensus. Sales grew 9% to $2.97 billion. Visa reported 13% higher payment volumes and 14% higher processed transactions, both at constant currency. Visa approved a fresh $5 billion share-repurchase plan, roughly equivalent to 4% of outstanding shares at current prices. Looking ahead to fiscal 2014 ending September, management says per-share profits should grow at a rate in the mid to high teens, compared to the 17% consensus. Visa is a Buy and a Long-Term Buy.

Corporate roundup

J.P. Morgan Chase ($53; JPM) agreed to pay $5.1 billion to settle a lawsuit alleging that it hid the quality of mortgage securities sold to Fannie Mae and Freddie Mac. The bulk of the settlement was originally intended to be part of J.P. Morgan's tentative $13 billion pact with the U.S. Justice Department, which could be unraveling due to a clash over the bank's legal protection in an ongoing criminal probe. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.

A U.S. ruling paved the way for Google ($1,036; GOOG) to issue Class C nonvoting shares in a stock split that will keep the company firmly under the control of its co-founders. Armed with Class B shares that give them super-voting rights, Larry Page and Sergey Brin own 15% of Google's outstanding stock but control 56% of the voting power. The two-for-one split, originally proposed in April 2012, that would give investors one share of a new class of nonvoting stock for each share currently held. In other news, the European Union is soliciting feedback from 125 companies as it assesses whether Google's revised proposal will resolve anticompetitive concerns regarding its advertising and data-collection activities. Google is a Buy and a Long-Term Buy.

A U.S. jury ordered Qualcomm ($69; QCOM) to pay $173 million after finding the company unintentionally infringed on wireless patents held by ParkerVision ($3; PRKR). ParkerVision had originally sought more than $400 million. Qualcomm is a Focus List Buy and a Long-Term Buy.

McKesson ($156; MCK) agreed to pay about $8.3 billion for Celesio, a German drug distributor that will extend the company's reach into Europe and Latin America. McKesson is rated A (above average).

Fifth Third Bancorp ($19; FITB) and U.S. Bancorp ($38; USB) are among bidders for 105 Chicago-based branches being auctioned off by Citizens Financial Group. The branches could fetch $500 million. Fifth Third is a Buy and a Long-Term Buy. U.S. Bancorp is a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.


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