Portfolio Review


Comcast's bold bet

In the end, Comcast ($54; CMCSa) decided it wanted Time Warner Cable ($145; TWC) all to itself, ending months of speculation that it might propose a joint bid with Charter Communications ($132; CHTR). Comcast has offered $45.2 billion in stock, plus the assumption of at least $17 billion in debt. Comcast offered 2.875 of its shares for each Time Warner share, which equates to $154 at current prices, 17% higher than the current value of Charter's bid. The deal would place Comcast in 19 of the 20 largest television markets in the U.S. Comcast would also gain significant leverage for negotiating programming fees, a potentially big advantage over smaller pay-TV operators.

Comcast says regulators should have fewer concerns about this deal than its $39 billion acquisition of NBCUniversal. In the past, regulators have evaluated cable mergers by how they would affect competition at the local level, and there is limited overlap between the companies' geographic markets. Moreover, a U.S. court struck down the Federal Communications Commission's ban on cable companies taking more than 30% of U.S. subscribers. Even so, Comcast is willing to give up 3 million of Time Warner Cable's 11 million subscribers to stay below that 30% threshold. Comcast currently has close to 22 million video subscribers.

The size of the bid ensures close antitrust scrutiny, along with opposition from consumer groups and TV programmers. The deal has no breakup fee, which leave Time Warner free to seek better offers; it's too early to tell whether Charter will make a higher bid. Comcast assured investors that the deal won't disrupt its plans to repurchase $3 billion in shares this year. Comcast is a Buy and a Long-Term Buy.

Apple looks beyond its core

It's not clear how Comcast's takeover bid could affect Apple's ($546; AAPL) discussions with Time Warner Cable about a content deal for a new TV set-top box, expected to debut later this year. Apple failed to make headway in prior attempts to air live programming and entire seasons of current shows, which would have put it in closer competition with cable and satellite-TV companies. Media companies that own television shows have been reluctant to negotiate with Apple for fear of damaging their relationships with pay-TV providers. As a result, Apple is negotiating with pay-TV firms for rights for the five latest episodes of current TV shows. It proposes to piggyback on programming rights already secured by TV providers. However, Comcast already has its own set-top box, so it might try to wall off television from Apple in the way music companies failed to do a decade ago.

Apple's ambitions for its set-top device seem muted compared to the prospect of a transformative Apple TV that analysts and investors have coveted for the past couple years. But Apple is exploring other growth avenues, such as medical devices and automobiles. Apple's chief dealmaker reportedly met with Tesla Motors ($204; TSLA) CEO Elon Musk last spring. Although an acquisition of the electric-car maker seems far-fetched, we could easily see a partnership in which Apple supplies entertainment options for new Tesla models. Apple has also met with the head of the U.S. Food and Drug Administration to discuss "mobile medical applications." Moreover, Basis Science, which makes a watch that tracks users' health, is shopping itself to Apple and Google ($1,211; GOOG) in a deal that could be valued at less than $100 million. Apple is a Buy and a Long-Term Buy. Google is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Alaska Air Group ($79; ALK) raised its quarterly dividend 25% to $0.25 per share, payable March 11. Alaska Air is a Buy.

Wells Fargo ($46; WFC) is migrating back into subprime home loans, a phrase sure to conjure up memories of the dubious practices that helped trigger the financial crisis. Admittedly, the move could signal Wells Fargo's desperation to stem the decline of its mortgage business. But it could also give the housing market some momentum as riskier borrowers begin to participate in the recovery. In hopes of deterring irresponsible lending, new laws require banks to follow stricter criteria before approving borrowers. Wells Fargo says it will only issue mortgages backed by the government, so the company can package them into bonds and sell them to investors. Wells Fargo, which sidestepped many of the potholes that upended other lenders in 2008, is a Focus List Buy and a Long-Term Buy.

Winter chills retail sales

Weather is rarely reliable except as an excuse for retailers to cite when delivering disappointing sales. But the excuses may carry more weight when January-quarter results arrive in the next few weeks. In many parts of the U.S., snowstorms and frigid temperatures kept consumers at home and caused heating costs to rise. Some Americans also lost wages when their employers shut down because of the weather. Retail sales fell 0.4% on a seasonally adjusted basis in January from December, the second straight monthly decline.

Stocks in the S&P 1500 consumer discretionary sector average an index-worst 5% loss so far in 2014, pressured by downward analyst revisions and investors looking elsewhere after the sector's run-up. The consumer discretionary sector's total return ranked first or second among S&P 1500 sectors in three of the past four years. Eleven of the 14 retail groups in our research universe earn below-average Quadrix scores for Earnings Estimates.

Foot Locker ($39; FL) and Macy's ($53; M) seem capable of withstanding poor sector trends.

Macy's (Overall 97, Earnings Estimates 83) continues to deliver strong operating results by equipping its stores to fulfill orders placed online or at nearby locations, which has improved inventory turnover. The retailer impressed analysts with its sales for the last two months of the 2013 calendar year and guidance for fiscal 2015 ending January, which calls for 13% to 16% growth. Macy's will report January-quarter earnings on Feb. 25, with the consensus projecting $2.17 per share, up 6%.

Foot Locker (Overall 96, Earnings Estimates 60) has expanded its presence in the improving European economy, where significant investments in online retailing are just beginning to pay off. Foot Locker started the fiscal year with 590 stores in Europe, or 18% of the total store count. In July, the company acquired about 200 more European stores via the $87 million purchase of Runners Point. Earlier this month, the retailer raised its quarterly dividend 10% to $0.22 per share, payable May 2. Foot Locker's profit estimates for the January quarter have remained steady over the last two months, with the consensus projecting 4% growth on 3% higher sales. Foot Locker's results are due in March.

Looking further out, investors should be prepared for executives to pepper their remarks with more weather-related excuses in coming quarters. Early forecasts project an unusually snowy March and the coolest summer in five years. Pent-up consumer demand could boost retail sales in the next few months, though uncommon weather patterns could also disrupt retailers' seasonal merchandise cycle. Both Foot Locker and Macy's are rated Buy and Long-Term Buy.

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No changes were made this week in Dow Theory Forecasts.

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