Portfolio Review


Foot Locker bounds higher

Foot Locker ($52; FL) shares, up nearly 25% for the year, set a record high in early July following strong earnings reports from key customer Nike ($78; NKE) and close rival Finish Line ($31; FINL). For the May quarter, Nike grew earnings per share 3% to $0.78 on 10% revenue growth; both metrics exceeded consensus estimates. Nike expects the FIFA World Cup to help boost sales by double-digits in the August quarter and has also seen strong growth in futures orders, particularly in Western Europe. Foot Locker relies on Nike products for about 65% of its revenue, while Europe accounts for about 20% of the retailer's sales. Meanwhile, Finish Line posted double-digit growth for earnings per share and sales in the May quarter, both topping the consensus. Foot Locker is a Focus List Buy and a Long-Term Buy. Nike is rated C (below average). Finish Line is rated Buy in our sister publication Upside, which focuses on small-cap stocks.

Banking update

The Federal Reserve plans to impose more stringent conditions for the stress tests many U.S. banks must face each year. In an attempt to limit the risk of another systemic financial collapse, the Fed plans to add a new set of conditions, such as when multiple banks share the same exposures. The new rules are expected to be toughest on the largest U.S. banks.

U.S. Bancorp ($43; USB) agreed to pay $200 million to settle a U.S. probe into complaints that it misstated the quality of home mortgages issued from 2006 to 2011 in order to dupe a federal agency into insuring the investments. Unlike many other U.S. banks, U.S. Bancorp has not settled probes into its mortgage originations, servicing, and foreclosures. It faces additional investigations into its lending and loan-servicing practices, as well as the sale of mortgages to government-sponsored enterprises. At the end of March, the bank estimated legal losses could exceed its reserves by $200 million. U.S. Bancorp is a Long-Term Buy.

J.P. Morgan Chase ($58; JPM) shares fell after CEO Jamie Dimon said he has throat cancer. He plans to remain active with the bank's daily operations during his treatment, expected to last eight weeks. J.P. Morgan Chase is a Long-Term Buy.

Corporate roundup

Google ($591; GOOGL) has begun to remove some search results requested by users in order to comply with a European Union ruling aimed at protecting data privacy. Google says it received 41,000 removal requests in the first four days after it posted an online form. In other news, Google plans to develop three smartphones to be sold in India for less than $100. It is also reportedly designing a tablet that displays 3-D images; the device could launch in 2015. Google is a Focus List Buy and a Long-Term Buy.

Comcast ($54; CMCSa), Disney ($86; DIS), and other broadcasters scored a victory after the Supreme Court ruled Aereo violated programming copyrights. Aereo had sought to upend the TV industry by letting customers watch local broadcasts from a variety of electronic devices. Unlike cable companies, Aereo did not pay broadcasters retransmission fees. Comcast is a Buy and a Long-Term Buy. Disney is rated A (above average).

Auto sales surprise

U.S. auto sales topped analyst expectations, climbing 1% in June from May levels. Automakers sold 8.2 million vehicles in the first half of 2014, up 4% from a year earlier. Shares of auto-parts makers Lear ($91; LEA) and Magna International ($109; MGA) rallied on the report, which assuaged concerns that sales would suffer from the procession of General Motors ($38; GM) recalls. In late June, GM issued a recall for more than 8 million compact and midsize sedans to check for faulty ignition switches.

GM has recalled 29 million vehicles in North America this year. It also increased recall-related charges by $500 million for the June quarter; write-downs amount to $2.5 billion for the year. North America accounted for 22% of Lear's revenue last year, versus 51% of sales for Magna. Lear and Magna are rated Focus List Buy and Long-Term Buy. General Motors is rated A (above average).

Deal news

AbbVie ($57; ABBV) has begun to court Shire ($235; SHPG) shareholders in hopes it can pressure the drugmaker to return to the negotiating table. Shire insists that AbbVie's $46.5 billion bid undervalues its growth prospects. Some experts see AbbVie increasing its offer or launching a hostile takeover. AbbVie also interrupted Shire's pursuit of big deals of its own, including plans to acquire NPS Pharmaceuticals ($33; NPSP), which makes drugs that treat rare diseases. The U.K. forbids targeted companies from buying assets worth more than 10% of their market value, because the act can be viewed as a way to undermine a suitor's bid. Separately, Shire expects to receive a tax refund of $410 million from Canada, which it will use to repay debt. Shire is a Buy and a Long-Term Buy. AbbVie is rated B (average).

Seeking to build its internet presence, Kroger ($50; KR) agreed to acquire Vitacost.com ($6; VITC) for $280 million. That price represents a 27% premium to Vitacost's share price prior to the announcement. Vitacost sells nutrition and health products, food, and beauty supplies online, and Kroger wants to use the company's home-delivery platform for some of its own products. Kroger also approved a new $500 million share-buyback plan, though it does not expect to make any material purchases for the remainder of the year. Stock repurchases have shrunk the share count 2.5% in the past year and 21% over the past four years. Kroger, earning a Value rank of 75 and Overall score of 92, is a Focus List Buy and a Long-Term Buy.

UGI ($51; UGI) agreed to acquire Total's ($73; TOT) liquid petroleum gas distribution business in France for $545 million to $615 million, funded from cash on hand and new debt. UGI, which already operates an LPG distributor in France, expects to complete the deal in the first half of 2015. UGI bought a similar business in Poland from BP ($53; BP) in September. UGI is a Buy and a Long-Term Buy. BP is rated B (average).

DuPont plants seeds of doubt

DuPont ($65; DD) slashed its profit guidance for both the June quarter and 2014 due to weakness in its agricultural (33% of 2013 sales) and performance chemicals (19%) segments. In response to a record corn harvest last year that caused prices to plummet, U.S. farmers are planting more soybeans. DuPont miscalculated and now finds itself with excess corn seed.

While DuPont's warning came as a surprise to investors, analysts have tapered June-quarter profit estimates for Dow Chemical ($52; DOW) over the past 90 days, partly due to unplanned outages at an ethylene plant.

Keep in mind that Dow has a smaller reliance on agriculture, which generated 13% of Dow's 2013 revenue. Pesticides, fungicides, and herbicides account for three-fourths of revenue at Dow's agricultural unit, with seeds and oils making up a far smaller portion. Dow also has moderately less exposure to the U.S. (33% of 2013 sales) than DuPont (39%). Dow Chemical is a Focus List Buy and a Long-Term Buy. DuPont is rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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