Portfolio Review: July 20, 2015


Earnings: Banks off to good start

S&P 1500 Index diversified banks have averaged total returns of 9% over the past three months, while the broad index has held roughly flat. These big U.S. banks were among the first companies to step to the plate for the June-quarter earnings season. The banks hit no home runs but did enough to keep the rally alive.

For many banks, lower legal expenses and cost cuts boosted profits amid sluggish revenue growth. They also saw further declines in net interest margin, a measure of lending profitability. Banks restlessly await the Federal Reserve, which still expects to raise interest rates this year, though a September hike seems less likely than it did a few weeks ago. Wells Fargo ($58; WFC) signaled it has gotten tired of waiting. The bank has adjusted its investment portfolio in anticipation of interest rates remaining low for a longer period than previously expected.

Wells Fargo said June-quarter earnings per share increased 2% to $1.03, matching the consensus. Revenue crept 1% higher to $21.32 billion, below the consensus of $21.70 billion. The bank's mortgage income contracted slightly, offset by growth elsewhere. Total loans increased 7%, driven by a 15% jump in commercial and industrial lending. Wells Fargo tried to calm concerns over its exposure to the oil-and-gas industry by saying the loans are sufficiently backstopped with reserves and performing fairly well given the environment. The oil-and-gas industry accounts for 2% of the bank's loan portfolio. Long-Term Buy Wells Fargo's shares rose on the results.

U.S. Bancorp ($46; USB) earned $0.80 per share in the March quarter, up 3%, to meet the consensus estimate. Revenue slipped 3% to $5.04 billion, also in line with analysts' expectations. Average total loans increased 4% on an 11% jump in commercial loans. The stock rallied on the results. U.S. Bancorp is a Long-Term Buy.

Bank of America's ($18; BAC) June-quarter earnings per share jumped to $0.45 per share, up from $0.19 earned in the year-ago quarter and above the consensus of $0.36. The bank's improved profitability benefited from sharply lower legal expenses and growth at the consumer-banking unit. Revenue advanced 2% to $22.35 billion, although total loans fell 3%. Bank of America is rated B (average).

Apple resilient in tough market for PCs and smartphones

Global shipments of personal computers fell 9.5% in the June quarter, according to researcher Gartner, marking the sharpest decline since the September 2013 quarter. Rival researcher IDC, which does not include tablets and other handheld computers in its numbers, reported an 11.8% decline, although it said Apple's ($127; AAPL) shipments jumped more than 16% while its market share rose to 7.8% for the quarter from 5.9% in the year-earlier period. Apple is holding up pretty well in a difficult environment for PCs.

A similar scenario is playing out in the maturing smartphone market. Apple took less than 20% of March-quarter global sales of smartphones, yet collected 92% of the profits, according to Canaccord Genuity. Many other smartphones lack distinguishing features because they share Google's ($584; GOOGL) Android software, forcing companies to compete on price. Smartphone shipments are projected to rise just 3% worldwide in 2015, says Gartner; prices are falling. Even smartphone brands fitted with their own operating system have failed to duplicate the iPhone's success. Earlier this month Microsoft ($46; MSFT) wrote down 80% of the value of its smartphone business acquired from Nokia ($7; NOK) in 2014. The unit remains unprofitable, despite Microsoft slashing operating expenses 44% since the acquisition.

Gartner now expects PC shipments to decrease 4% this year but grow in 2016. PC inventories are reportedly piling up in retail channels, even as the traditionally strong September quarter begins. Several PC manufacturers have lost hope that Microsoft's Windows 10, due out July 29, will motivate customers to upgrade their computers. Unlike past upgrades, Microsoft will be giving away the new upgrade for free to many PC users, which could hurt demand for replacement PCs. Moreover, consumers continue to shift their spending budgets toward new smartphones rather than PCs.

PC weakness has taken a toll on semiconductor companies. Intel's ($30; INTC) June-quarter sales fell 5% to 13.20 billion, as 10% growth for semiconductors destined for data centers failed to offset a 14% slide for PC components. Per-share profits held flat at $0.55, topping the consensus by $0.05. Intel lowered its 2015 sales outlook, now forecasting a 1% decline, versus the consensus projection of a 2% drop.

In other news, a state-owned investment arm of a Chinese university is reportedly preparing to offer $23 billion to acquire Micron Technology ($19; MU). That price tag translates to $21 per share, a 19% premium to where the stock traded before news of the bid surfaced. But several analysts called the bid far too low, even for a company trying to weather slumping demand for memory components. Micron shares began 2015 trading at $35. Apple is a Focus List Buy and a Long-Term Buy. Google is a Buy and a Long-Term Buy. Intel is rated A (above average). Micron and Microsoft are rated B (average).

Corporate roundup

HCA Holdings ($94; HCA) gave preliminary June-quarter results, disclosing that per-share profits held flat at $1.37 excluding special items, topping the consensus by $0.05. Year-earlier results included an adjustment to Medicaid revenue that lifted profits by $0.20 per share. Sales grew 7% to $9.90 billion, also ahead of the consensus. HCA is a Focus List Buy and a Long-Term Buy.

Comcast ($64; CMCSa) announced plans to launch Stream, an online-TV service, to existing internet subscribers for $15 a month. The video service will include local broadcast stations and HBO but exclude popular networks such as ESPN and AMC. The move could help Comcast revive a video business that lost 8,000 subscribers in the March quarter. Separately, Comcast said its super-high-speed internet will cost about $300 a month. The service, called X1 Gigabit Pro, promises to deliver the internet at speeds of two gigabits per second — twice the speed of Google Fiber, which costs $70 a month, and AT&T's ($35; T) $110-per-month GigaPower broadband service. Comcast is a Buy and a Long-Term Buy. AT&T is rated B (average).

Insurers and politicians have cried foul over the price of Gilead Sciences' ($117; GILD) hepatitis C treatments Harvoni and Sovaldi, which can cost upwards of $1,000 a day. But a report by a panel of doctors and medical experts found the hepatitis C drugs cost-effective, given how efficiently they cured the disease. Gilead is a Focus List Buy and a Long-Term Buy.

Macy's ($72; M) shares surged to an all-time high after activist investor Jeffery Smith disclosed his stake in the retailer. Smith declared Macy's could be worth more than $125 a share and should consider splitting its real estate holdings and retail business into two separate companies. In July, Macy's sold its store in downtown Pittsburgh for about $15 million. Macy's is a Long-Term Buy.

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