Portfolio Review


A new Buy, upgrade, and downgrade

Quanta Services ($32; PWR) is being added to the Buy and Long-Term Buy lists. Founded in 1997, Quanta designs, installs, and maintains infrastructure, primarily in the electric-power and natural-gas markets. The sale of its telecommunications business in December 2012 probably crimped December-quarter results, with per-share profits expected to decline 10% — though investors should be encouraged by rising analyst estimates. Quanta will report results Feb. 21.

Operating momentum should accelerate in 2014, with per-share profits projected to climb 18% and sales 11%. Quanta's backlog stood at a record $8.09 billion at the end of September, up 19% from a year earlier and exceeding Quanta's last five quarters of combined sales. Its Overall rank of 95 reflects above-average scores for all six Quadrix categories. At 20 times trailing earnings, the stock trades 20% below its five-year average.

We are adding Skyworks Solutions ($31; SWKS) to the Focus List after the company topped analyst expectations for the December quarter and issued impressive guidance for the current quarter. Skyworks, a semiconductor maker, grew earnings per share 22% to $0.67, easing past the consensus estimate by a penny. Sales, up 11% to $505 million, also exceeded the consensus. Bolstered by a bevy of new-product launches and a broadening market footprint, management expects the company to keep outgrowing the analog-semiconductor industry. For the March quarter, Skyworks projects earnings of $0.59 per share, up 23% on 11% higher revenue — both targets exceeded analyst expectations at the time of the announcement. Skyworks Solutions is also a Buy and a Long-Term Buy.

Capital One Financial ($73; COF) is being removed from the Focus List after posting mixed results for the three months ended December, a quarter characterized by softness in the consumer market and strong commercial demand. Earnings per share edged 3% higher to $1.45, missing the consensus estimate by $0.10. Sales dipped 1% to $5.54 billion, topping analyst expectations. U.S. volumes for card purchases increased 3%. Within the consumer-banking unit, auto-loan originations jumped 24% while average deposits fell 3%. For the commercial bank, average deposits climbed 5% and loans 16%.

Although Capital One no longer qualifies as one our very best ideas for 12-month returns, the company remains well-positioned to benefit from favorable long term trends in consumer spending and credit-card usage. Capital One's trailing P/E ratio is just 10, ranking among the cheapest 10% of stocks in our research universe and 19% below its five-year average. The stock also scores in the top 5% of our research universe for both price/operating cash flow and price/free cash flow ratios. Capital One retains its Buy and Long-Term Buy ratings.

Financials update

American Express ($91; AXP) said earnings per share rose 15% to $1.25 in the December quarter excluding special items, a penny short of the consensus. Total revenue net of interest expense climbed 5% to $8.55 billion. Cardmember spending rose 8% in the U.S., roughly doubling the growth in U.S. retail sales for the holiday season. Management eased investor fears by saying fraud controls minimized Amex's exposure to the data breach at Target ($59; TGT), where roughly 40 million credit cards and 70 million other customer records were stolen. Amex is a Long-Term Buy. Target is rated B (average).

In the December quarter, BlackRock ($319; BLK) earned $4.92 per share excluding special items, up 24%, and $0.59 above the consensus. Revenue advanced 9% to $2.78 billion. Assets under management rose 14% to $4.32 trillion, helped by a surging stock market and net inflows of $117 billion. Although BlackRock may be best known for its iShares family of exchange-traded funds, these funds account for less than 25% of assets under management. The company said more than 50% of its actively managed fundamental equity products topped their benchmarks in 2013, up from 30% in 2012. BlackRock remains confident about the stock market's direction, with CEO Larry Fink predicting the S&P 500 Index will rise 8% to 10% this year. BlackRock also raised its quarterly dividend 15% to $1.93 per share, payable March 24. The company has now raised its dividend at least 9% in five consecutive years. The stock is a Long-Term Buy.

U.S. Bancorp ($42; USB) earned $0.76 per share in the December quarter, up 6%, and a penny better than the consensus. Net interest margin continued to decline, though the bank's profitability got a boost from lower taxes and credit-loss provisions. Revenue slid 4% to $4.89 billion with noninterest income down 7%, hurt by a 51% contraction in mortgage banking. Average total loans rose 6%, while average total deposits advanced 5%. U.S. Bancorp is a Long-Term Buy.

U.S. Bancorp, Wells Fargo ($47; WFC), and Fifth Third Bancorp ($22; FITB) agreed to end deposit-advance services, short-term loans similar to the payday loans that face regulatory scrutiny. Wells Fargo is a Focus List Buy and a Long-Term Buy. Fifth Third is a Buy and a Long-Term Buy.

Earnings checkup

Schlumberger ($91; SLB) shares rose after the oilfield-services company said December-quarter earnings per share surged 30% to $1.25 excluding special items, $0.03 ahead of the consensus. Revenue advanced 7% to $11.91 billion, with all three oilfield-services units growing at least 5%. Schlumberger posted 7% higher sales in North America, despite pricing weakness. Management expects international activity and rising demand for deepwater projects in the Gulf of Mexico to drive exploration-and-production spending in 2014. Schlumberger also announced a 28% hike in its quarterly dividend to $0.40 per share, payable April 11. Schlumberger is a Focus List Buy and a Long-Term Buy.

In the December quarter, United Rentals ($82; URI) grew earnings per share 25% to $1.59 excluding special items, topping the consensus by $0.12. Sales increased 7% to $1.34 billion, helped by higher utilization and rate hikes. Cash from operations surged 93%. For 2014, management sees revenue rising 25% to 30%, in line with the consensus target of 27% growth at the time of the announcement. United Rentals is a Focus List Buy and a Long-Term Buy.

Corporate roundup

With its initial takeover bid rebuffed by Time Warner Cable ($135; TWC), Charter Communications ($134; CHTR) has reportedly approached Comcast ($53; CMCSa) to discuss making a joint offer for the cable company. Time Warner balked at Charter's opening offer of $132.50 per share, or roughly $37.3 billion, partly because the acquirer would have to take on $20.5 billion of debt. A joint offer with Comcast could boost the cash component of the deal. Comcast's balance sheet held $5.74 billion in cash at the end of September after the company generated $7.14 billion in free cash flow over the past year. But any deal would face close scrutiny by U.S. regulators and could require concessions onerous to Comcast. Comcast is a Buy and a Long-Term Buy.

Kroger ($37; KR) won approval from the U.S. Federal Trade Commission to complete its $2.5 billion acquisition of Harris Teeter Supermarkets ($49; HTSI). Kroger expects to complete the deal, which adds 212 supermarkets, located primarily in the Southeast, by the end of January. Kroger is a Focus List Buy and a Long-Term Buy.

Rank Changes

Quanta Services ($32; PWR) is being initiated as a Buy and a Long-Term Buy. Skyworks Solutions ($31; SWKS) is being added to the Focus List, while Capital One Financial ($73; COF) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. Vanguard Short-Term Corporate Bond ($80; VCSH) now makes up 4.1% of the Buy List and 6.7% of the Long-Term Buy List.

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