Portfolio Review


Rank changes

As we sift through the flurry of quarterly reports and the fluctuations those reports have caused in Quadrix, we are making several rank changes.

Apple ($525; AAPL), Google ($1,022; GOOG), and Whiting Petroleum ($67; WLL) are being added to the Focus List. All three companies topped consensus estimates for per-share profits and sales in the September quarter. Both Apple and Google look to build on momentum in mobile devices. Apple's iPad Air appeared to receive a solid reception at its Nov. 1 launch, while Google tries to expand its footprint in smartphones with the new Nexus 5. Meanwhile, Whiting continues to generate strong production growth in North Dakota's Bakken formation. All three stocks score at least 89 in Quadrix for Overall and earn strong sector-specific ranks. They are also Long-Term Buys.

We are adding Long-Term Buy Comcast ($48; CMCSa) to the Buy List. The NBCUniversal business partially shields Comcast from rising retransmission rates, while its voice and internet services provide insulation from weak video trends.

Celgene ($151; CELG) is being removed from the Buy List. Although Celgene posted a solid quarter, it failed to offer much upside surprise. Up 91% since we initiated the stock as a Buy and Long-Term Buy in December, Celgene may find it increasingly difficult to impress Wall Street. The Overall score has fallen to 69 from 85 at the end of September, while both sector-specific ranks have slipped below 50. However, Celgene's long-term prospects sill look solid, given its pipeline of new drugs and indications. The stock retains its rating as a Long-Term Buy.

We are dropping Express Scripts ($63; ESRX) from the Focus List, though the stock remains a Buy and a Long-Term Buy. Express Scripts, a pharmacy-benefit manager (PBM), posted a slightly disappointing September quarter and faces near-term uncertainty as the U.S. rolls out public exchanges in connection with health-reform legislation. The Overall score has fallen to 80, hurt by slowing operating momentum and poor share-price action. Still, the company generated $1.57 billion of free cash flow in the first nine months of 2013 and trades at less than 13 times estimated 2014 earnings, a 20% discount to the median for S&P 1500 health-care services stocks.

Varian Medical Systems ($73; VAR) is being removed from the Long-Term Buy list. Shares slumped after Varian missed consensus estimates for both sales and per-share profits in the September quarter. The company's guidance also fell well short of analyst targets. The stock earns an Overall rank of 72 and a 12-Factor Sector score of just 21. Varian is being dropped from coverage and should be sold.

Earnings review

Cigna ($80; CI) grew per-share profits 12% to $1.89 excluding investment gains in the September quarter, exceeding the consensus by $0.26. Sales rose 10% to $8.07 billion. Cigna projects earnings per share of $6.70 to $6.90 for the year, versus the $6.65 consensus at the time of the announcement. Shares rallied on the results. Cigna is a Long-Term Buy.

CVS Caremark ($63; CVS) said earnings per share from continuing operations surged 24% in the September quarter to $1.05 excluding a gain from a legal settlement, topping the consensus by $0.03. Revenue advanced 6% to $31.97 billion, also ahead of the consensus, as the pharmacy-benefit-management business grew 8% and retail 5%. Same-store sales rose 3.6%. Although management's profit guidance fell slightly below expectations, shares rallied as CVS told investors the rise of private exchanges shouldn't hurt its pharmacy-benefit management- business. CVS Caremark is a Buy and a Long-Term Buy.

DirecTV's ($64; DTV) per-share profits jumped 42% to $1.28 in the September quarter, exceeding the consensus of $1.01. Sales climbed 6% to $7.88 billion. In the U.S., sales grew 7% on 6% higher average revenue per user (ARPU) and a gain of 139,000 net subscribers, up 107% from the year-earlier gain. In Latin America, DirecTV added 260,000 net subscribers, while ARPU slumped 12% due to unfavorable exchange rates, resulting in 5% revenue growth. At constant currency, ARPU rose 4% in Latin America. DirecTV is a Focus List Buy and a Long-Term Buy.

In the September quarter, Cognizant Technology Solutions ($90; CTSH) earned $1.13 per share excluding special items, exceeding the consensus of $1.01. Including stock-based compensation costs, Cognizant earned $1.05 per share, up 15%. Revenue advanced 22% to $2.31 billion on growth of at least 16% in all business segments and geographic regions. Cognizant updated its 2013 guidance, implying higher-than-expected profit and sales growth. Cognizant is a Focus List Buy and a Long-Term Buy.

In the September quarter, Magna International ($85; MGA) earned $1.53 per share, up 35% excluding gains related to the acquisition of a controlling interest in E-Car last year, to top the consensus of $1.34. Sales also exceeded analyst targets, climbing 13% to $8.34 billion on 16% growth in Europe. Magna also plans to repurchase up to 12 million shares, roughly 5% of outstanding shares, over the next 12 months. For the December quarter, Magna projected revenue of $8.24 billion to $9.14 billion, versus the consensus of $8.75 billion at the time of the announcement. Magna is a Focus List Buy and a Long-Term Buy.

Mylan Laboratories ($40; MYL) reported earnings per share of $0.82 excluding special items in the September quarter, down 1% but $0.02 above the consensus estimate. Revenue, hampered by currency headwinds, slipped 2% to $1.77 billion. Specialty sales rose 19% to $367 million, while generic sales fell 6% to $1.41 billion. Mylan narrowed its 2013 guidance, implying per-share profits of $0.69 to $0.79 for the December quarter, versus the consensus of $0.78; Mylan earned $0.65 per share in the year-ago quarter. The company said its $1.6 billion acquisition of Agila Specialties remains on track to close by the end of the year. Mylan is a Focus List Buy and a Long-Term Buy.

Qualcomm ($69; QCOM) grew September-quarter earnings per share 18% to $1.05 excluding special items, missing the consensus by $0.03. Sales rose 33% to $6.48 billion, topping the consensus. For the December quarter, management sees per-share profits of $1.10 to $1.20, versus the consensus of $1.29. The company projects sales growth of 5% to 15%, missing the consensus target of 16% growth. Qualcomm's guidance for fiscal 2014 ending September looks brighter, with per-share profits projected to rise 10% to 14%, ahead of the consensus estimate of 9% growth. Qualcomm remains a Focus List Buy and a Long-Term Buy.

After warning earlier this fall of lower-than-expected sales and profits, Hertz Global ($21; HTZ) said it earned $0.73 per share in the September quarter excluding special items, up 16%, to top the lowered consensus by $0.02. Sales increased 22% to $3.07 billion. Operating results benefited from Hertz' acquisition of Dollar Thrifty, though that deal is now creating headaches. To gain regulatory approval for the takeover, Hertz sold its Advantage brand, leading Simply Wheelz, a subsidiary of one of the buyers, to acquire 24,000 vehicles. Since then, Simply Wheelz has sold 5,295 of the vehicles for a combined loss of $8.6 million, raising questions about how Hertz valued that rental fleet. Those losses have also pushed Simply Wheelz to the brink of bankruptcy. Hertz says it has not received all of its payments from the Advantage sale, so it is taking a $40 million impairment charge to cover any losses, on top of a $4 million legal reserve added in the September quarter. Hertz estimates its total exposure at $50 million to $70 million. A lawsuit seems likely. Hertz Global is a Buy and a Long-Term Buy.

Rank Changes

Apple ($525; AAPL), Google ($1,022; GOOG), and Whiting Petroleum ($67; WLL) are being added to the Focus List, while Express Scripts ($63; ESRX) comes off the Focus List but remains a Buy and a Long-Term Buy. Celgene ($151; CELG) is being dropped from the Buy List but remains a Long-Term Buy. Comcast ($48; CMCSa) is being added to the Buy List. Varian Medical Systems ($73; VAR) is being dropped from the Long-Term Buy List and from coverage. Vanguard Short-Term Investment-Grade ($10.74; VFSTX) now makes up 1.1% of the Buy List and 6.7% of the Long-Term Buy List.

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