Portfolio Review


Kroger bags another big quarter

Kroger ($52; KR) grew per-share profits 17% to $0.70 in the July quarter, easing past the consensus by a penny. Total revenue jumped 12% to $25.31 billion. Same-store sales excluding gasoline climbed 4.8%, the 43rd straight quarter of growth. Kroger passed some of its higher food costs through to customers, who appear somewhat less cautious and more willing to buy upscale items. Natural foods products helped drive growth, though the group experienced price pressure. Management raised its full-year growth target for same-store sales excluding fuel to a range of 3.5% to 4.25%, up from an earlier 3.0% to 4.0% range. Kroger shares rose on the report and remain a Focus List Buy and a Long-Term Buy.

Shoppers clamor for new iPhones

Apple ($102; AAPL) received 4 million preorders for the iPhone 6 and the larger 6 Plus, doubling initial orders for the iPhone 5 and setting a one-day record for a new iPhone. Although the devices have garnered glowing reviews, manufacturers are struggling to keep up with demand, causing some wait times to stretch to four weeks.

Consumers in China could be forced to wait until a 2015 launch, following reports that Apple has yet to reach an agreement with regulators there. The delay would come at a time when China Mobile ($61; CHL), the country's largest wireless carrier, plans to reduce subsidies for smartphones. Apple reportedly expects to ship 80 million of the new iPhones in 2014, up 33% from the iPhone 5 in 2013.

In other news, Apple has entered talks to bring its contactless payment service called Apple Pay to Europe. Numerous European retailers already allow shoppers to use contactless pay, thanks to efforts by Visa ($216; V) to roll out the technology in 2007. Visa's technology is reportedly compatible with Apple Pay. According to published reports, in the U.S., several of the banks partnering with Apple Pay accepted a lower rate than usual for credit-card transactions. Security features offered by Apple Pay could help reduce fraud costs for banks and credit-card networks, potentially leading to lower rates charged to retailers. Apple is a Focus List Buy and a Long-Term Buy. Visa is a rated B (average).

Gilead unveils plan for Sovaldi

Gilead Sciences ($104; GILD) shares waivered after the company announced a licensing deal that would significantly discount the price of Sovaldi, a drug responsible for more than half of its revenue. Gilead agreed to let generic-drug makers sell its hepatitis C treatment in 91 developing countries for a fraction of what the drug costs in the U.S. The licensing pact covers about 54% of the world's hepatitis C sufferers. In India, Gilead will receive 7% of sales, projected to be about $1,800 per patient. Excluded from the deal were wealthier developing nations such as China, Brazil, and Mexico, where Gilead expects to charge a higher price.

In the U.S., the next version of Gilead's hepatitis C drug could cost around $95,000 over a 12-week course of treatment, up from $84,000 for Sovaldi. The new treatment, slated for an October launch, will be the first all-oral drug for hepatitis C. Gilead says the new drug cures nearly half of patients within eight weeks compared to 12 weeks for Sovaldi, implying the actual cost of the new drug could be lower. Gilead expects the entire diagnosed U.S. population to be treated in the next three years. Separately, Gilead's efforts to expand into cancer drugs hit a speed bump when the company reported that in a study, an experimental treatment failed to offer a clinical benefit for patients with advanced pancreatic cancer. Gilead Sciences is a Long-Term Buy.

Deals pending, deals not to be

Cognizant Technology Solutions ($45; CTSH) agreed to pay $2.7 billion in cash to acquire TriZetto, a privately held company that provides software and technology support to the health-care sector. The deal is the largest in the company's history and will broaden its offerings in health care, which represents 26% of Cognizant's sales and operating profit. Management hopes the deal will help revive sales growth. In August, Cognizant lowered its 2014 sales outlook to at least 14% growth, which would be the slowest in the company's 20-year history. Cognizant is a Buy and a Long-Term Buy.

Attorneys general from multiple states opened an investigation into whether AT&T's ($35; T) proposed $48.5 billion purchase of DirecTV ($87; DTV) violates antitrust laws. The attorneys generals were already reviewing Comcast's ($57; CMCSa) pending $46.0 billion acquisition of Time Warner Cable ($155; TWC). DirecTV CEO Mike White said the deal with AT&T should be completed by April. The TV providers say they must expand to cope with rising content costs, while content providers say the bigger companies will seize too much control over programming. Comcast is a Buy and a Long-Term Buy. AT&T and DirecTV are rated A (above average).

EMC ($29; EMC) has reportedly decided to retain its 80% stake in VMware ($95; VMW), resisting shareholder pressure for a spin-off. EMC is a Long-Term Buy. VMware is rated B (average).

Corporate roundup

Lear ($100; LEA) reached a tentative agreement with workers at an Indiana plant who participated in a one-day strike. When Lear emerged from bankruptcy in 2009, the workers agreed to a two-tiered pay system that caps hourly wages at $16 for new hires, now comprising two-thirds of the plant's 760 workers. In recent negotiations, Lear had originally offered raises of 6% to 8%. Following the strike, the two sides hammered out a proposal that would end the two-tiered system and raise the ceiling on pay. Workers were slated to vote on the proposal Sept. 21, after our deadline.

Of Lear's 226 facilities, 26 are located in the U.S. The Indiana plant negotiations could precipitate wage hikes at other U.S. locations, potentially pressuring Lear's profit margins. In the first half of 2014, operating margins stood at their highest level for any six-month period since the first half of 2011. In July, management predicted it could keep profit margins at current levels. The company says plants in Europe are still running "significantly below peak volumes," offering an opportunity to increase profitability if demand picks up. Lear is a Focus List Buy and a Long-Term Buy.

J.P. Morgan Chase ($60; JPM) claims no money was stolen when hackers accessed its servers during a cyberattack launched in June. Hackers reportedly accessed a million customer accounts but failed to swipe Social Security numbers or financial information. J.P. Morgan is a Long-Term Buy.

United Rentals ($118; URI) was set to join the S&P 500 Index Sept. 19, after our deadline. The stock has advanced 51% in 2014, compared to the S&P 500's 8% gain. That rally has pushed United Rentals' Value score down to 58 from 70 at the start of the year. However, the stock still earns an Overall rank of 92 and remains a Focus List Buy and a Long-Term Buy.

FedEx ($160; FDX) shares rallied after the bellwether said July-quarter earnings per share surged 37% to $2.10, topping the consensus by $0.14. Strong volumes helped revenue climb 6%, and the company announced plans to raise rates by an average of 5% for most of its shipping services in January. FedEx, a decent proxy for the cyclical industrial sector, is rated A (above average).

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