Portfolio Review


SanDisk sinks on capacity concerns

SanDisk ($93; SNDK) shares slid after rival Samsung Electronics said it would spend $14.7 billion on a new semiconductor facility in South Korea. Samsung has yet to decide if the plant, scheduled to be completed in the second half of 2017, will manufacture DRAM (microchips that store data on personal computers) or NAND (flash-memory chips found in mobile devices) semiconductors.

SanDisk makes NAND chips. Semiconductor prices are highly sensitive to imbalances between supply and demand that can be caused by excess capacity.

SanDisk shares have advanced 22% since we first recommended the stock in the March 3 issue. That rally has pushed the Value score down to 57, and shares now trade at 15 times trailing earnings, in line with their five-year average.

The Overall score has tumbled to 68 from 97 at the end of June, hurt by softer operating momentum and poor earnings-estimate trends. Analysts' profit estimates for the September quarter have steadily eroded over the past 90 days, with the current consensus of $1.39 implying a 13% decline from the year-ago quarter. But 2015 still looks bright — the consensus projects more than 14% higher per-share profits on 12% sales growth. We will be closely watching SanDisk's quarterly report, due Oct. 16. For now, SanDisk remains a Focus List Buy and a Long-Term Buy.

Dealmakers thrive in 2014

Announced mergers and acquisitions surged 59% to $2.7 trillion globally in the first nine months of 2014, the strongest activity since 2007. U.S. deals jumped 65% to $1.3 trillion, with energy, media and entertainment, and health care seeing the most action. Deal momentum has carried over into October. Consider:

Seeking to expand its presence in the U.S. shale market, Dover ($78; DOV) paid $430 million for Accelerated Cos., which makes pumps that bring oil to the surface. Accelerated is expected to deliver sales of $225 million this year and boost Dover's profits by $0.06 per share in 2015. Dover spent $143 million on three acquisitions in the first half of 2014 and announced two more in the September quarter before the Accelerated deal in October. Dover is a Long-Term Buy.

Cognizant Technology Solutions ($45; CTSH) acquired Cadient Group, a digital marketing agency for health-care companies. Terms were not disclosed. This is Cognizant's second deal announced in the past month — both intended to bolster its health-care business, which generates 26% of the company's revenue. In September, Cognizant said it would pay $2.7 billion for TriZetto, which processes claims and operates call centers for insurers, hospitals, and some state-run health exchanges. Cognizant is a Buy and a Long-Term Buy.

J.P. Morgan Chase ($60; JPM) completed the sale of its physical-commodities unit to Mercuria Energy Group in an all-cash deal worth about $800 million. The commodities unit was originally valued at $3.5 billion; J.P. Morgan decided to sell other components of the business separately. J.P. Morgan is a Long-Term Buy.

Continuing its shift away from less-profitable operations, Dow Chemical ($50; DOW) is shopping three businesses that could fetch more than $2 billion combined. Dow has divested $1.3 billion of assets, including the sale of its North American rail-car fleet, en route to a target of $4.5 billion to $6 billion in asset sales by 2015. The company now expects divestitures to reach the upper end of that range. Dow is rated A (above average).

Hewlett-Packard ($36; HPQ) announced plans to split into two separate, publicly traded companies in 2015. Hewlett-Packard Enterprise will house the server and networking businesses, while HP Inc. will sell personal computers and printers. Each company would generate more than $50 billion in annual revenue. Although H-P shares rallied on the news, many analysts seem skeptical of the deal's merits.

In other news, CFO Cathie Lesjak said "material nonpublic information" prevents H-P from repurchasing its shares, inviting speculation that merger talks with EMC ($29; EMC) could continue. Negotiations between the two companies reportedly broke down in August or September. Meanwhile, hedge fund Elliott Management continues to hound EMC to spin off its 80% stake of VMware ($93; VMW), most recently sending a letter to the company's board. So far, EMC has resisted the investor's pressure, though this downsizing tactic is gaining popularity. Companies have sold or spun off $1.6 trillion of subsidiaries and businesses this year, nearly equaling the record set in 2007, according to Dealogic. EMC is a Long-Term Buy. H-P is rated A (above average). VMware is rated B (average).

The U.S. Federal Communications Commission paused its 180-day review of Comcast's ($55; CMCSa) proposed $45 billion acquisition of Time Warner Cable ($147; TWC). Regulators cited late and incomplete paperwork filed by the companies. The FCC had originally planned to complete its review in early January, but that deadline could now be pushed back three weeks. Comcast is a Buy and a Long-Term Buy.

Alaska Air orders up more seats to fill

Alaska Air Group ($43; ALK) reported 9% higher traffic and 10% higher capacity in September. To accommodate management's plans to ramp capacity, the company's flagship airline, Alaska Airlines, ordered 10 Boeing 737-900 jetliners with a combined list price of $990 million. These fuel-efficient jets are capable of holding 25% more passengers than older models, while consuming the same amount of fuel. By 2017, Alaska Airlines' fleet is projected to increase about 13% from 2013 levels. The airline now has 74 Boeing jets on order. Alaska Air is a Focus List Buy and a Long-Term Buy.

Alaska's news comes on the heels of Boeing's ($125; BA) announcement that it will hike production of its 737 aircraft to 52 a month in 2018, up 24% from current levels. It had previously raised its 2017 production target to 47 a month. Boeing is rated A (above average).

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