Portfolio Review


Earnings report

Express Scripts ($67; ESRX) reported flat earnings per share of $0.99 for the March quarter, in line with the consensus. Revenue fell 9% to $23.69 billion, missing the consensus, with the generic fill rate up to 82.4% from 80.5% a year earlier. Management blamed the weak results on softer prescription volumes, hurt by harsh weather and unexpectedly late — and lower — enrollment for health reform. The company also disclosed it faces state and federal probes into its relationships with several drug makers. Express Scripts said several clients have postponed implementing services until January due to complications from the health-reform rollout. As a result, management lowered its 2014 per-share-profit guidance range by $0.06. The midpoint of $4.88 implies 13% growth. Shares fell on the disappointing report, but the stock looks cheap at less than 14 times the midpoint of its 2014 profit guidance range. For now, Express Scripts remains a Buy and a Long-Term Buy.

Helmerich & Payne ($108; HP) said March-quarter earnings per share rose 7% to $1.45 excluding special items, falling $0.03 short of the consensus. H&P reported sales of $893 million, up 7% and slightly ahead of the consensus. U.S. land drilling revenue rose 8% to $742 million and offshore drilling jumped 14%, offsetting a 9% slump in international land drilling. The earnings report caused shares to pull back from their all-time high. But H&P said it secured multiyear contracts to build and operate nine rigs, signaling that drilling activity should remain healthy this year. Moreover, analysts' profit estimates for the June and September quarters have risen since the report, with double-digit growth projected for both quarters. Helmerich & Payne is a Focus List Buy and a Long-Term Buy.

Lear ($82; LEA) earned $1.84 per share in the March quarter excluding special items, up 42% and $0.14 above the consensus. Sales climbed 10% to $4.36 billion, as 17% growth in Europe and Africa outpaced gains of 6% in North America and 12% in Asia, plus a 7% decline in South America. The seating business posted 11% higher revenue, electrical 10%. Citing stronger projected vehicle production in China, Lear raised its full-year sales target to a range with a midpoint of $17.45 billion, implying nearly 8% growth and exceeding the consensus of $17.36 billion. Lear is a Focus List Buy and a Long-Term Buy.

Whiting Petroleum ($74; WLL) grew per-share earnings 12% to $1.05 excluding special items in the March quarter, topping the consensus by $0.07. Revenue jumped 21% to $740 million, also ahead of the consensus. Whiting benefited from higher energy prices and 12% production growth, powered by a 16% surge from oil. The company expects production to rise 21% to 23% in the June quarter. Whiting is a Focus List Buy and a Long-Term Buy.

Aflac's ($63; AFL) March-quarter operating earnings held roughly flat at $1.69 per share, topping the consensus by $0.11. Revenue slumped 9% to $5.64 billion, hurt by weakness in the Japanese yen. Sales fell 8% in Japan but rose 2% at constant currency. Sales rose 1% in the U.S. For the June quarter, Aflac expects per-share profits of $1.54 to $1.68, compared to $1.62 earned in the year-ago quarter and the consensus estimate of $1.58 at the time of the announcement. Aflac is a Long-Term Buy.

Dividend roundup

Bank of America ($15; BAC) suspended its dividend increase and stock buybacks after discovering an error in the calculation of its capital levels. The bank had gained approval in March to raise its quarterly dividend 400% to $0.05 per share and repurchase $4 billion of its shares. Bank of America, which must submit a new capital-allocation plan to the Federal Reserve within a month, conceded the new plan will probably be more conservative. Bank of America is rated A (above average).

Wells Fargo ($49; WFC) boosted its quarterly dividend 17% to $0.35 per share, payable June 1. Wells Fargo is a Focus List Buy and a Long-Term Buy.

UGI ($47; UGI) raised its quarterly dividend 4% to $0.295 per share, payable July 1. UGI has now grown its dividend for 27 consecutive years. UGI is a Buy and a Long-Term Buy.

Deal activity heats up

The value of year-to-date global mergers and acquisitions stood at $1.2 billion in late April, up 42% from the same period in 2013 and the highest level since 2008, reported the Financial Times. All-cash deals account for just 47% of the merger volume, the lowest percentage since 2001. Investors have cheered on the activity, with shares of acquirers rising 4.4% within a day of the deal being announced — the most since at least 1995.

Comcast ($52; CMCSa) said it plans to sell 1.4 million subscribers to Charter Communications ($137; CHTR) for $7.3 billion, contingent on the completion of Comcast's $45 billion acquisition of Time Warner Cable ($141; TWC). Comcast would divest an additional 2.5 million subscribers into a new public company; Comcast shareholders will own two-thirds, Charter the remaining third. Charter and Comcast would also swap ownership of 1.6 million subscribers in different parts of the country. Comcast is a Buy and a Long-Term Buy.

A lot of the merger activity is concentrated in the health-care sector, though the suitors' affections are not always reciprocated. With a market value of more than $30 billion, Shire ($169; SHPG) reportedly spurned Allergan's ($166; AGN) initial takeover offer several months ago. But Allergan could be preparing a fresh bid for Shire, based in business-friendly Ireland. Allergan is itself the target of an unsolicited $46 billion bid from Valeant Pharmaceuticals ($134; VRX). Shire is a Long-Term Buy.

Meanwhile, AstraZeneca ($77; AZN) rebuffed Pfizer's ($32; PFE) advances in what would be a $98 billion deal involving 70% stock and 30% cash. AstraZeneca claims the offer "very significantly" undervalues the company. In other news, Merck ($59; MRK) is reportedly shopping its portfolio of mature drugs, potentially worth more than $15 billion. Separately, Zimmer ($98; ZMH) agreed to pay $13.35 billion for Biomet. Pfizer and Zimmer are rated B (average). AstraZeneca and Merck are rated C (below average).

Rank Changes

Alaska Air ($94; ALK), SanDisk ($85; SNDK), Foot Locker ($47; FL), and Dow Chemical ($49; DOW) are being added to the Focus List. SanDisk is also joining the Long-Term Buy List. Qualcomm ($79; QCOM) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. J.P. Morgan Chase ($56; JPM) is being dropped from the Focus and Buy lists but remains a Long-Term Buy. Vanguard Short-Term Corporate Bond ($80; VCSH) now accounts for 4.8% of the Buy List and 3.7% of the Long-Term Buy List.

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