Portfolio Review


Quarterly earnings reviews

Magna International ($100; MGA) said per-share earnings rose 26% to $2.00 excluding $0.24 from restructuring costs and Austrian tax reform in the March quarter, topping the consensus of $1.98. Sales advanced 7% to $8.96 billion. Vehicle production increased 8% in Europe and 4% in North America. Citing the stronger production, management raised the midpoint of its 2014 sales guidance by $1.1 billion to $35.75 billion, implying 3% growth, and increased its target for operating profit margin. The auto-parts maker also raised its stock-buyback plan by two-thirds to 20 million shares, equaling 9% of outstanding shares. Magna is a Focus List Buy and a Long-Term Buy.

Macy's ($58; M) grew April-quarter earnings per share 9% to $0.60, easing past the consensus by a penny. The retailer cut expenses to overcome a soft sales environment, lifting operating profit margins. Total revenue slipped 2% to $6.28 billion, slightly below the consensus estimate. Same-store sales decreased 1.6%, just the second decline in the past 17 quarters. The retailer reiterated its full-year guidance and said sales trends improved in April when the weather improved, a good omen for the July quarter. Macy's hiked its quarterly dividend 25% to $0.3125 per share, payable July 1. It also boosted its stock-repurchase program by $1.5 billion to a total of $2.5 billion. Macy's is a Buy and a Long-Term Buy.

Cisco Systems' ($23; CSCO) per-share earnings held flat at $0.51 excluding special items in the April quarter, topping the consensus by $0.03. The share count shrank 4%, roughly offsetting a 3% dip in net income. Sales slid 5% to $11.55 billion, also exceeding the consensus. For the July quarter, Cisco expects sales to fall 1% to 3%, slightly better than the consensus projection of a 5% decline. Cisco is a Long-Term Buy.

Continental Resources ($135; CLR) grew March-quarter earnings per share 19% to $1.47 excluding special items but missed the consensus estimate of $1.54. Revenue jumped 38% to $972 million. Total average daily production increased 25%, while average sales prices rose 5%. Continental Resources is a Long-Term Buy.

Pay-TV update

Merger talks between DirecTV ($86; DTV) and AT&T ($36; T) continue to progress, according to multiple published reports, and a deal could be announced within two weeks. A takeover of DirecTV could be worth around $50 billion and would likely involve a combination of cash and AT&T stock. Analysts estimate a deal could value DirecTV shares anywhere from the low $90s to more than $105. Together, DirecTV and AT&T would have about 26 million pay-TV subscribers, not too far behind Comcast's ($50; CMCSa) ultimate target of 29 million subscribers after its pending $45 billion acquisition of Time Warner Cable ($69; TWX). Despite reservations raised by lawmakers in recent weeks, many experts expect regulators to approve the Comcast deal. DirecTV is a Focus List Buy and a Long-Term Buy. AT&T is rated A (above average).

In other news, Comcast agreed to pay $7.65 billion for the rights to broadcast the Olympics from 2022 to 2032. The deal costs an average of $1.28 billion for each of the six Olympic Games, up 16% from the last contract. The deal was awarded without a formal bidding process. Recent contract renewals for other major sporting events, such as Monday Night Football and soccer's World Cup, have faced far steeper rate hikes. Comcast is a Buy and a Long-Term Buy.

Corporate roundup

Alaska Air Group ($98; ALK) authorized the repurchase of up to $650 million of its own shares, equating to nearly 10% of its outstanding stock. Alaska Air has spent $519 million on share repurchases since September 2007. Stock buybacks lowered the company's share count by 3% in the 12 months ended March. Alaska Air is a Focus List Buy.

Seeking to expand its treatment portfolio for rare diseases, Shire ($169; SHPG) acquired Lumena Pharmaceuticals, a privately held U.S. company, for at least $260 million in cash. Shire is a Long-Term Buy.

The European Union's highest court ruled that Google ($542; GOOGL), Microsoft ($40; MSFT), and other internet companies must in some cases abide by an individual's request to remove from their search engines links to web pages containing personal information. Google is a Focus List Buy and a Long-Term Buy. Microsoft is rated A (above average).

Apple: Marching to a new beat?

In a bid to expand its streaming-music business, Apple ($596; AAPL) has reportedly entered talks to acquire Beats Electronics for about $3.2 billion. Known for its premium headphones, Beats recently launched a subscription-music service, a budding market that has weighed on digital music in the past year.

Apple shares dipped on the news, as analysts questioned the deal's merits from a strategic and valuation standpoint. It would mark a departure for Apple, which preferred small strategic acquisitions under former CEO Steve Jobs, none costing more than $400 million. The price tag represents just 9% of Apple's free cash flow for the 12 months ended March, but seems rich given Beats was valued at $1.01 billion during its last round of funding in September.

The takeover chatter comes at a time when Apple struggles to fend off Samsung Electronics in the slowing tablet market. With iPad shipments down 16% to 16.4 million units in the March quarter, Apple's share of global tablets fell to 32% from 40% in the year-ago quarter. Meanwhile, Samsung took a 22% slice of the market, up from 17%, as its tablet shipments surged 32% to 11.2 million units.

As for the smartphone market, Apple took a 16% share of March-quarter sales, according to researcher Canaccord Genuity, lagging Samsung's 32% share. However, Apple took a 65% slice of the smartphone industry's profits, compared to 57% in the year-ago quarter and Samsung's 41% share. How did Apple and Samsung split 106% of the industry's profits? All of the other major players lost money in the smartphone business.

In other news, Apple continues to bolster its staff with medical-technology executives, fanning speculation that it is preparing to launch an iWatch or other mobile device that will track consumers' health. It is also reportedly building an online store for fitness and health applications. Apple is a Buy and a Long-Term Buy.

Performance update

Dow Theory Forecasts was recently named to the Top Performers group of Mark Hulbert of the Hulbert Financial Digest. To qualify for the group, a newsletter must pass two screens. First, it must outperform the stock market over the past 15 years. Second, it must rank among the top 15 one-year performers among these long-term market beaters.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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