Portfolio Review: August 3, 2015


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Rank changes

Southwest Airlines ($36; LUV) is being added to the Buy List after delivering strong June-quarter results and an improved outlook. Per-share profits surged 47% to $1.03 excluding special items to ease past the consensus by a penny. Operating revenue advanced 2% to $5.11 billion. Passenger revenue per available seat mile fell 5%, but management predicts it should dip just 1% in the September quarter on improving demand. Southwest also eased some lingering concerns that it may be expanding too aggressively by trimming its 2016 outlook for capacity growth to 5% to 6%. Capacity increased 7% in the June quarter, consistent with Southwest's 2015 target. Shares rallied on the results yet trade at just 10 times estimated 2015 profits. Southwest Airlines is also a Long-Term Buy.

Mylan ($57; MYL) shares plunged after Teva Pharmaceutical Industries ($71; TEVA) agreed to acquire Allergan's ($338; AGN) generic-drug business for $40.5 billion in cash and stock. With the deal, Teva ends its hostile takeover pursuit of Mylan. Negotiations between Teva and Mylan were acrimonious at best. Just days before the Allergan deal was announced, a Dutch foundation used a poison pill to discourage Teva from gaining control of Mylan. The Allergan acquisition will improve the Teva's economies of scale and may put more pressure on Mylan to acquire Perrigo ($193; PRGO). Perrigo has rejected Mylan's previous advances and may demand a higher price than Mylan's current $34 billion offer. Given the lofty valuations in the health-care sector, Mylan risks overpaying. The stock, with an Overall score of 61, is being dropped from the Buy and Long-Term Buy lists. Mylan, now rated B (average) on our Monitored List, should be sold.

Affiliated Managers Group ($210; AMG) said June-quarter earnings per share grew 16% to $3.08 excluding special item, exceeding the consensus of $3.02. Revenue advanced just 2% to $647 million, its weakest growth since 2012 and below analyst expectations. Citing market conditions, management lowered its 2015 guidance for per-share profits to a midpoint of $13.40, down from its prior midpoint of $13.725 and the consensus of $13.58 at the time of the announcement.

Affiliated Managers is being removed from the Focus List due to an increasingly challenging environment for asset managers and its deteriorating Overall score, currently 74. The stock no longer ranks among our very top favorites for year-ahead gains. However, the new guidance midpoint implies 17% growth, and the stock still looks cheap. Affiliated Managers Group, earning a Value rank of 68, remains a Buy and a Long-Term Buy.


Automotive parts & tires

In the June quarter, Lear ($104; LEA) earned $2.82 per share excluding special items, up 33% to top the consensus estimate by $0.34. Revenue crept 1% higher to $4.64 billion, falling short of the consensus. Seating sales rose 4% to help offset a 7% decline for the electrical business. Lear increased its 2015 outlook for core operating earnings and free cash flow, calming investors' fears over slowing growth in China. Shares rallied on the results. Lear is a Focus List Buy and a Long-Term Buy.

Goodyear Tire & Rubber ($30; GT) said June-quarter earnings per share climbed 5% to $0.84 excluding special items, beating the consensus by $0.09. Foreign-exchange headwinds contributed to revenue sliding 10% to $4.17 billion, slightly ahead of the consensus estimate. Tire volumes increased 1%. Goodyear's stock rose on the results and remains a Long-Term Buy.


CBRE's ($37; CBG) per-share profits grew 17% to $0.42 in the June quarter excluding special items, a penny below the consensus. Sales advanced 12% to $2.39 billion, slightly ahead of analyst expectations. Management expects 2015 per-share profits to reach the high end of its prior range of $1.90 to $1.95; the consensus expected $1.99 at the time of the announcement. CBRE is a Buy and a Long-Term Buy.

Lincoln National ($59; LNC) reported June-quarter earnings per share of $1.46 from operations, down 1% and $0.07 below the consensus estimate. Revenue increased 3% to $3.38 billion, compared to the consensus of $3.40 billion. Among Lincoln's two biggest units, the annuities business grew operating income 12%, while the life-insurance business posted a 29% decline due to several large mortality claims. Lincoln is a Long-Term Buy.

Health care

Gilead Sciences ($116; GILD) said June-quarter earnings per share surged 33% to $3.15, topping the consensus by $0.44. Sales advanced 26% to $8.24 billion, well ahead of the consensus of $7.61 billion. Hepatitis C drugs Harvoni and Sovaldi combined for sales of $4.90 billion, up 41%. Gilead has offered an average price discount of about 46% on the drugs. Gilead raised its 2015 sales guidance to a midpoint of $29.5 billion, above the previous guidance but still below the consensus of $30.36 billion at the time of the announcement. It also lowered its projected expenses and tax rate for the year. Gilead is a Focus List Buy and a Long-Term Buy.

Shire ($263; SHPG) said June-quarter earnings per share slipped 2% to $2.63 excluding special items, falling $0.18 short of the consensus due to higher spending on new drugs. Total revenue rose 4% to $1.56 billion. Shire raised its 2015 outlook for per-share profits to mid-to-high single digit growth. Shire, the Forecasts' favorite international stock, is a Focus List Buy and Long-Term Buy.


Lam Research's ($78; LRCX) June-quarter earnings per share advanced 20% to $1.50 excluding special items to exceed the consensus by $0.03. Revenue climbed 18% to $1.48 billion, also ahead of analyst expectations on growth from all geographic markets. Operating cash flow rose 19% to $292 million, pushing cash and short-term investments 33% higher to $4.08 billion. Looking ahead to the September quarter, Lam gave midpoints of $1.70 for per-share profits (implying 77% growth) and $1.60 billion for revenue (39% growth). Both targets exceeded consensus estimates at the time of the announcement. Lam, earning an Overall rank of 91, is a Focus List Buy and a Long-Term Buy.

Skyworks Solutions ($95; SWKS) grew per-share earnings 61% to $1.34 in the June quarter excluding special items, exceeding the consensus estimate of $1.29. Sales surged 38% to $810 million. For the September quarter, management expects earnings per share of $1.51, up 35% and exceeding the consensus of $1.42 at the time of announcement. Skyworks' revenue guidance implies 22% growth and also surpassed analyst targets. Skyworks is a Buy and a Long-Term Buy.

Corning ($19; GLW) said June-quarter earnings per share rose 12% to $0.38 excluding special items, easing past the consensus by a penny. Constrained by weak glass demand for televisions and personal computers, sales held flat at $2.52 billion. Management expects price declines for glass to remain moderate in the September quarter. At just 12 times trailing earnings, the stock seems oversold and could be due for a bounce. For now, Corning remains a Long-Term Buy.

Takeover updates

Anthem ($155; ANTM) agreed to acquire Cigna ($145; CI) for $48.4 billion in cash and stock, a 22% premium to Cigna's price before the deal's announcement. The combined company would be the largest U.S. health insurer, covering about 53 million people. Anthem is rated A (above average). Cigna is rated B (average).

AT&T ($35; T) completed its $48.5 billion acquisition of DirecTV (DTV) after winning approval from U.S. regulators. AT&T is rated B (average). DirecTV is being dropped from coverage.

Rank Changes

Southwest Airlines ($36; LUV), already a Long-Term Buy, joins the Buy List. Mylan ($57; MYL) is being dropped from the Buy and Long-Term Buy lists. Affiliated Managers Group ($210; AMG) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. Vanguard Short-Term Corporate Bond ($80; VCSH) now makes up 21.9% of both the Focus List and Buy List and 22.7% of the Long-Term Buy List.

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