Portfolio Review


Earnings reviews

For the December quarter, F5 Networks ($126; FFIV) grew earnings per share 27% to $1.55 excluding special items, $0.06 ahead of the consensus estimate. Revenue climbed 14% to $463 million, slightly below the consensus due to a sharp decline in larger deals. Management tried to assure investors that the pipeline is solid for the March quarter, though its guidance fell short of expectations. F5 expects 17% to 19% higher per-share profits in the March quarter, compared to the consensus of 21% growth at the time of the announcement. It expects sales growth of 11% to 13%, lagging the consensus of 14% growth. F5 added $750 million to its share-repurchase program, giving the company the ability to buy back up to 10% of its stock. Although shares fell on the disappointing outlook, F5 still offers investors solid growth prospects at a reasonable valuation. F5 remains a Focus List Buy and a Long-Term Buy.

United Rentals' ($88; URI) December-quarter earnings per share soared 38% to $2.19 excluding special items, well ahead of the consensus of $2.07. Revenue also topped expectations by advancing 17% to $1.56 billion. United Rentals expects 2015 sales to rise 5% to 9%, compared to the consensus estimate of 8% growth. While exposure to the energy sector could drag on 2015 results, management expects low oil prices to spur growth in its manufacturing end markets. The company also expects free cash flow to jump 30% to 39% this year. United Rentals is a Focus List Buy and a Long-Term Buy.

U.S. Bancorp's ($42; USB) per-share profits rose 4% to $0.79 in the December quarter, exceeding the consensus by $0.02. Net revenue increased 6% to $5.17 billion, also ahead of the consensus. Average total deposits advanced 7%, while total loans grew 6% on strength from commercial lending. Shares rallied on the results. U.S. Bancorp remains a Long-Term Buy.

Technology update

Hope springs eternal for Google ($520; GOOGL), which backtracked on one project while pushing ahead in other directions. Google halted individual sales of its Google Glass, launched in limited quantities in 2013 and stigmatized in some circles. The company plans to tweak and reintroduce the device later this year. Separately, Google has initiated discussions with major automakers about accelerating the development of self-driving cars. Google says fully autonomous vehicles could start appearing on the roads within five years.

Google and Fidelity Investments agreed to pay a total of $1 billion for close to a 10% stake in Space Exploration Technologies. Backed by Elon Musk, CEO of Tesla Motors ($197; TSLA), SpaceX builds satellites that beam the internet to virtually everywhere in the world. Google has dabbled in this type of business before, acquiring satellite firm SkyBox Imaging and developing Project Loon, which delivers the internet from balloons. Additional reports surfaced that Google has entered talks to acquire Softcard, a mobile-payment company owned by AT&T ($34; T), T-Mobile USA ($30; TMUS), and Verizon Communications ($48; VZ). Google could pay at least $50 million for Softcard in the hope of breathing fresh life into its Wallet service, which has taken a back seat to Apple Pay. Google is a Buy and a Long-Term Buy. AT&T and Verizon are rated B (average).

Intel's ($36; INTC) December-quarter earnings per share jumped 45% to $0.74, topping the consensus by $0.08. Revenue climbed 6% as semiconductors destined for data centers countered sluggish growth for personal-computer components. Of particular interest to shareholders of equipment maker Lam Research ($80; LRCX), Intel continues to scale back on capital spending, projecting 2015 spending of $9.5 billion to $10.5 billion, down $500 million from an earlier estimate. Intel's capital expenditures totaled $10.11 billion in 2014, versus $10.7 billion to $11.0 billion spent in each of the three previous years. Despite its size, Intel is not among Lam's biggest customers and accounts for less than 10% of Lam's revenue. Lam will post its results Jan. 28. Intel is rated A (above average). Lam is a Focus List Buy and a Long-Term Buy.

IBM ($152; IBM) reported December-quarter earnings per share of $5.81 excluding special items, down 6% but comfortably ahead of the $5.41 consensus. However, revenue slid 12% to $24.11 billion, below the consensus, mostly because of divestitures and foreign-currency effects. Sales contracted in all five business segments, including an 8% decline for the consulting and outsourcing businesses — areas where it competes with Cognizant Technology Solutions ($55; CTSH). IBM's 2015 profit outlook also fell short of analysts' estimates. Cognizant's shares dipped in sympathy with IBM. IBM is rated B (average). Cognizant is a Buy and a Long-Term Buy.

Health-care roundup

Aetna ($95; AET) agreed to give preferred status to hepatitis C drugs Harvoni and Sovaldi after extracting price concessions from Gilead Sciences ($104; GILD). In the weeks since losing a contract with Express Scripts ($84; ESRX) to rival AbbVie ($63; ABBV) in December, Gilead has signed exclusive deals with Anthem ($140; ANTM) and CVS Health ($100; CVS). Pricing details for the pacts have not been disclosed, though some analysts estimate discounts could exceed 30%.

Gilead shares plummeted nearly 18% in the two trading days after the shut-out at Express Scripts; they have since recovered to within 5% of levels before the dip. In other news, India refused to approve Gilead's application for a key Sovaldi patent, which could pave the path for rivals to enter the hepatitis C market. Gilead vowed to appeal the decision.

Aetna's shares advanced to an all-time high after rival UnitedHealth Group ($109; UNH) posted strong December-quarter results. UnitedHealth grew earnings per share 10% to $1.55, exceeding the consensus by $0.05. Sales, up 7%, also surpassed expectations. Management said medical costs remain "well controlled," citing a per-member decline in inpatient hospital usage last year. Although UnitedHealth expects modestly higher utilization rates this year, it has yet to see an increase in January. Aetna will report results Feb. 3. Aetna is a Focus List Buy and a Long-Term Buy. CVS is a Buy and a Long-Term Buy. Gilead is a Long-Term Buy. Anthem, Express Scripts, and UnitedHealth are rated A (above average). AbbVie is rated B (average).

Johnson & Johnson's ($102; JNJ) December quarter illustrated the challenges multinational companies face from the strong U.S. dollar. J&J's earnings per share increased 2% to $1.27 excluding special items, easing past the consensus by a penny. Revenue slipped 1% to $18.25 billion as currency headwinds erased operating growth. U.S. sales (47% of quarterly revenue) advanced 7%, while international sales fell 7% but were up 1% at constant currency. The pharmaceuticals unit produced 14% higher total sales at constant currency. J&J says currency headwinds have increased "quite substantially" since October. J&J is rated B (average). 

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