Portfolio Review


Earnings roll call: Banks

J.P. Morgan Chase ($64; JPM) grew per-share profits 13% to $1.45 in the March quarter, exceeding the consensus by $0.05. Revenue also topped the consensus, advancing 4% to $24.82 billion, driven by 8% growth from the investment bank and 7% growth from the asset-management unit. The bank issued $24.7 billion in mortgages, up 45%, spurred by refinancing. Management said legal expenses, which amounted to $487 million in the March quarter, should begin to subside in coming quarters. Shares rallied to a record high on the results. J.P. Morgan, yielding 2.5%, is a Long-Term Buy.

U.S. Bancorp ($43; USB) earned $0.76 per share in the March quarter, up 4% and in line with analysts' expectations. The bank attributed its profit growth to higher net interest income and fee-based revenue, along with a 14% decline in its provision for credit losses. Sales rose 2% to $4.91 billion, below the 3% consensus. Average deposits jumped 8%, contributing to a decline in net interest margin. Although residential mortgages held flat, the bank's average total loans advanced 5% on 15% growth in commercial loans. U.S. Bancorp, which yields 2.3%, is a Long-Term Buy.

Wells Fargo's ($55; WFC) March-quarter earnings per share slipped 1% to $1.04 but topped the consensus estimate by $0.06. Low interest rates and higher employee costs pressured the bank's profits despite decent operating growth. Revenue increased 3% to $21.28 billion, roughly in line with the consensus.

Core deposits climbed 9%, lifted by both commercial and consumer growth. Total loans increased 4% on a 13% surge in commercial and industrial loans, while consumer loans held flat. The pipeline for mortgage applications widened 63% to $44 billion as refinancing demand surged. The energy sector represents just 2% of Wells Fargo's loan portfolio, easing some concerns over the bank's potential exposure to defaults by U.S. drillers. Wells Fargo, yielding 2.7%, is a Long-Term Buy.

Financials review

The Department of Labor proposed holding brokers to a higher fiduciary standard, requiring companies such as Wells Fargo ($55; WFC) and Ameriprise Financial ($129; AMP) to act in clients' best interests regarding retirement accounts and disclose any potential conflicts of interest. The primary goal is to impede brokers from peddling retirement investments saddled with high commissions, though the proposal could prevent asset managers from selling in-house investment products.

Current rules already hold financial advisers to higher fiduciary standards. Brokers need only ensure their products are suitable for clients, not that they are cost-effective. President Obama spoke in favor of the proposal on Feb. 23, and Ameriprise shares are down 5% since then.

However, shares bounced April 14 on the formal Labor Department proposal, suggesting investors feared even more onerous restrictions. Ameriprise has tried to calm fears by saying the proposal "does not impact our business." Ameriprise, which yields 1.8%, is a Focus List Buy and a Long-Term Buy.

General Electric ($27; GE) plans to divest most of its finance unit in order to rid itself of regulatory headaches, focus on its industrial businesses, and ramp capital returns to shareholders. GE agreed to sell real estate assets worth $9 billion to Wells Fargo and $14 billion to Blackstone ($41; BX). GE had also previously announced plans to spin off its private-label credit card and retail-finance businesses. The company expects to sell off $275 billion of GE Capital assets in all.

Management said these moves could help GE return upwards of $90 billion to shareholders, including $50 billion in stock repurchases, the second-largest buyback announcement in history. GE had previously projected that GE Capital would earn $0.60 per share this year, representing about one-third of the company's total per-share profits. GE is rated B (average).

Travelers ($108; TRV) agreed to acquire a 95% stake in the property-casualty business of an existing joint venture in Brazil. Travelers is a Buy and a Long-Term Buy.

Technology update

Apple ($127; AAPL) began accepting preorders for Apple Watch on April 10. First-day preorders for the watch totaled 957,000, estimated industry researcher Slice Intelligence. About 62% of the preorders were for the less-expensive Sport model. Apple did not reveal official orders data, but some analysts estimate orders for the weekend topped 2 million. In comparison, Apple received about 4 million preorders for its latest iPhones in September. The Apple Watch has reportedly suffered from production problems, and the limited initial supplies for April 24 delivery sold out within the first 30 minutes, pushing some wait times into June. Of course, the device's elusiveness could also help stoke consumer demand, and analysts seem confident Apple can boost production fairly quickly. Initial reviews were mixed. While the device's design and health applications have drawn praise, battery life is a common complaint. Apple is a Focus List Buy and a Long-Term Buy.

Altera ($43; ALTR) rejected Intel's ($33; INTC) takeover proposal of about $54 per share, according to published reports. However, several of Altera's biggest investors are reportedly pressuring the company to resume talks with Intel. Intel is rated A (above average). Altera is rated B (average).

A five-year antitrust probe culminated in the European Union opening a formal investigation and accusing Google ($541; GOOGL) of abusing its dominant position in the online search market. Margrethe Vestager, the EU's new antitrust chief, said Google manipulated online-search results to promote its own shopping service at the disadvantage of rivals.

The EU can fine companies up to 10% of annual revenue, though its largest fine on record, a 2009 penalty of $1.45 billion to Intel, accounted for just 4% of the company's revenue at the time. Google generated $66 billion in sales last year. European regulators also launched an investigation into Android, Google's mobile operating system. Google is a Buy and a Long-Term Buy.

Corporate roundup

Southwest Airlines ($42; LUV) said traffic climbed 7% while capacity grew 4% in March. Passenger revenue per available seat mile increased 1%. Southwest Airlines is a Long-Term Buy.

Shire ($247; SHPG) shares rallied after the U.S. Food & Drug Administration granted priority review to the drugmaker's dry-eye treatment lifitegrast. Mixed study results had dampened investor enthusiasm for lifitegrast, though the priority review indicates regulators see promise in the drug. Dry eye results from a lack of tear production or tears that evaporate too quickly. Annual sales for the drug could eventually exceed $1 billion, analysts estimate. A decision by regulators is due Oct. 25. Shire is a Focus List Buy and a Long-Term Buy.

Mylan ($67; MYL) settled a lawsuit with Pfizer ($35; PFE) concerning patents linked to Viagra, which generated $1.3 billion in U.S. sales last year. Terms of the settlement will allow Mylan to launch sildenafil citrate, a generic version of the drug, in the U.S. by December 2017. Sildenafil citrate is currently marketed in 11 European countries. Mylan is a Buy and a Long-Term Buy. Pfizer is rated B (average).

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