Portfolio Review


Apple off Focus List

Apple ($507; AAPL) topped analyst estimates for the December quarter, but its shares fell on management's tepid outlook. The company earned $14.50 per share, up 5% and $0.43 above the consensus estimate. Sales climbed 6% to $57.59 billion, compared to the consensus of $57.46 billion. Apple sold 19% more Macs and 14% more iPads than it did in the year-earlier quarter. But iPhone sales, up 7% to 51 million units, fell well short of analyst expectations. Apple acknowledged that it struggled to keep pace with demand for the iPhone 5S, while the iPhone 5C appears to be struggling to gain traction against rivals' cheaper models. For the March quarter, management expects revenue of $42 billion to $44 billion, compared to $43.60 billion generated one year ago and the consensus of $46.05 billion. Apple is no longer one of our very favorite stocks and is being dropped from the Focus List. But the stock still has strong potential for capital gains over the next year and beyond, so it remains a Buy and a Long-Term Buy.

Technology roundup

Google ($1,123; GOOG) is reportedly near the sale of its Motorola Mobility handset business to Lenovo for close to $3 billion. Investors reacted positively to the potential divestiture of the troubled, unprofitable handset maker. In other news, Google and Samsung Electronics formed a global alliance to cross-license patents over the next decade. The companies say the pact paves the way for better collaboration for developing new products as they battle Apple for a larger slice of the mobile-device market. The partnership could also ease some of the tension festering between the two companies since Google acquired Motorola Mobility in 2012 for $12.4 billion. Separately, Google paid a reported $400 million to acquire DeepMind Technologies, a company developing artificial intelligence. Google has spent more than $17 billion on acquisitions in the past two years, according to Bloomberg. Google is a Focus List Buy and a Long-Term Buy.

Qualcomm ($72; QCOM) said per-share profits held flat at $1.26 excluding special items in the December quarter, exceeding the consensus estimate by $0.08. Sales climbed 10% to $6.62 billion. The midpoint of management's March-quarter guidance calls for earnings per share of $1.20, up 3%, on revenue of $6.4 billion, implying 5% growth. At the time of the announcement, the consensus projected earnings of $1.26 per share and revenue of $6.72 billion. Qualcomm also raised its outlook for per-share profits in fiscal 2014 ending September to $5.00 to $5.20, implying 11% to 15% growth, compared to the consensus of $5.09. In other news, Hewlett-Packard ($29; HPQ) sold Qualcomm a patent portfolio that includes technology H-P inherited from its ill-fated Palm acquisition in 2010. Qualcomm remains a Focus List Buy and a Long-Term Buy. H-P is rated B (average).

EMC ($25; EMC) grew per-share profits 11% to $0.60 excluding special items, easing past the consensus by a penny. Revenue rose 11% to $6.68 billion. For the March quarter, EMC expects earnings per share of $0.35, compared to $0.39 earned in the year-ago quarter and the consensus of $0.43. Sales are projected to be flat at $5.39 billion, below the consensus of $5.81 billion. EMC is a Long-Term Buy.

Pay-TV update

Comcast ($53; CMCSa) earned $0.66 per share in the December quarter excluding special items, up 27% but $0.02 below the consensus. Revenue advanced 6% to $16.93 billion, ahead of analyst expectations. The cable unit grew sales 5% to $10.66 billion. Comcast reported 43,000 net new video subscribers, its first gain in 26 quarters. Comcast also added a net 379,000 internet subscribers, up from the 341,000 added in the year-earlier quarter. NBCUniversal reported 7% higher revenue, driven by a 12% gain from the broadcast division. Advertising sales for the upcoming Winter Olympics set a record, and Comcast will let subscribers watch live coverage online. Management raised the quarterly dividend 15% to $0.225 per share, payable April 23. It also increased its stock-buyback authorization to $7.5 billion, with plans to repurchase $3 billion this year alone.

On the acquisitions front, Comcast is reportedly negotiating with Charter Communications ($137; CHTR) to carve out a portion of Time Warner Cable ($134; TWC), which has welcomed takeover bids. Comcast is reportedly interested in Time Warner's markets in New York City, North Carolina, and parts of New England. Charter offered to pay Time Warner more than $37 billion in cash and stock, or $132.50 per share; Time Warner rejected the offer, reportedly seeking at least $160 per share. A partnership between Comcast and Charter would leave one less potential suitor in the field, potentially driving down the acquisition price. Comcast is a Buy and a Long-Term Buy.

Argentina, the second-largest economy in South America, devalued its currency in late January, lowering the value of assets held there by international companies and creating a headwind for future sales. The government claimed the devaluation stemmed from market forces rather than its own action, but on Jan. 25 the peso fell 13% versus the dollar. A move by Venezuela to devalue its currency by 32% in 2013 forced DirecTV ($69; DTV) to take a $166 million charge. Unfavorable exchange rates in Argentina and Brazil also pressured 2013 results. To battle rising inflation, DirecTV pushed through rate hikes last year, though governments in Argentina and Venezuela have made efforts to limit price increases. DirecTV has 2.3 million subscribers in Argentina (6% of the company's total subscribers), compared to 1.7 million in Venezuela (4%).

In the U.S., DirecTV seems unlikely to end its feud with the Weather Channel any time soon. Citing online weather forecasts available for free, CEO Mike White claims the Weather Channel is worth just 25% of what the network hopes to extract from DirecTV. The Weather Channel's prior contract, worth an estimated $0.13 per subscriber, ended Jan. 13. DirecTV is a Focus List Buy and a Long-Term Buy.

Earnings roundup

Fifth Third Bancorp's ($21; FITB) December-quarter earnings per share held flat at $0.43, topping the consensus by a penny. Total average loans and leases (excluding those held for sale) climbed 5% to $87.90 billion, lifted by 13% growth in commercial and industrial loans. Total average deposits advanced 11% to $96.73 billion. The bank said net interest margin contracted, hurt by deposit growth and the effects of debt issuance during the quarter. Net interest margin reflects the difference between what a bank collects on loans and what it pays out on deposits. Management sees net interest margin slipping further in 2014 but anticipates both loans and deposits will grow at mid-single-digit rates. Fifth Third is a Buy and a Long-Term Buy.

Union Pacific ($173; UNP) grew earnings per share 16% to $2.55 in the December quarter, exceeding the consensus of $2.49. Revenue increased 7% to $5.63 billion. Freight volumes rose 2%, driven by strength in agricultural (up 13%), automotive (up 10%), and industrial products (up 9%). Coal volumes slumped 10%. Shares rallied to a record high on the results. Union Pacific is a Long-Term Buy.

Rank Change

Apple ($507; AAPL) is being dropped from the Focus List but remains a Buy and a Long-Term Buy.

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