Portfolio Review: September 28, 2015


Rank changes

This week we are swapping out Shire ($213; SHPG) for C.H. Robinson Worldwide ($67; CHRW) on our Focus List. Shire is also being dropped from the Buy List.

C.H. Robinson ($67; CHRW) looks particularly timely in Quadrix, scoring above 90 for Momentum and Earnings Estimates. Operating profit margins have expanded in the past year, while growth of operating cash flow has exceeded 25% in four straight quarters. Yielding 2.3%, the company paid out 47% of net income in dividends during the 12 months ended June, in line with its stated payout target of 40% to 50%. Over the long haul, management expects per-share profits to rise 7% to 12% annually on sales growth of 5% to 10%. Analyst estimates for the September quarter are rising, with the consensus projecting 9% higher per-share profits on 3% revenue growth. C.H. Robinson is also a Long-Term Buy.

Shire's ($213; SHPG) Overall rank has fallen to 69, hurt by below-average scores for three of the six Quadrix categories. Near-term risks include a potentially expensive takeover of Baxalta ($35; BXLT). Specialty drugs have also attracted the attention of U.S. politicians, and the stock could be vulnerable to presidential campaign promises to rein in prices. Shire enjoys a strong pipeline for new drugs, and we still like the stock's long-term story. However, we see better opportunities for 12-month returns. Shire remains a Long-Term Buy.

Technology update

After spending more than a year considering the feasibility of designing an electric car, Apple ($114; AAPL) now plans to triple the size of its team working on the project, internally called Titan, reported The Wall Street Journal. The company has also met with officials from California's Department of Motor Vehicles about testing self-driving cars on public streets. Apple seeks to begin shipping the car by 2019, which could either mean the date engineers approve the vehicle or the launch date to consumers.

In other news, Apple Music has reportedly gained about 15 million subscribers, up from 11 million in early August. Some of those subscribers will drop the service when its initial free trial ends Sept. 30. But the numbers position Apple Music to challenge Spotify, which has 20 million paid subscribers. Separately, Apple registered its mobile-payment service in the Shanghai free-trade zone, a key step in bringing Apple Pay to China. Apple is a Focus List Buy and a Long-Term Buy.

France's privacy regulator rejected Google's ($653; GOOGL) appeal to limit the reach of so-called “right to be forgotten" rules. Last year the European Union gave residents the right to request that search engines remove links that include their name. Although Google removed results from European versions of its search engines, it has resisted scrubbing the names from all global search engines. France's ruling could enlarge the scope of the EU's rules, which Google claims could cause “serious chilling effects on the web." In other news, Google scheduled a media event for Sept. 29, when it is expected to introduce two new Nexus smartphones and an updated version of its Android mobile-operating system. Google is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Both Bank of America ($16; BAC) and Citigroup ($50; C) said trading revenue for the September quarter will likely fall about 5% year-over-year. J.P. Morgan Chase ($61; JPM) CEO Jamie Dimon also said the bank should deliver September-quarter trading results “about the same as everybody else." J.P. Morgan is a Buy and a Long-Term Buy. Bank of America is rated A (above average). Citigroup is rated B (average).

Disney ($102; DIS) has reportedly entered talks to license all five of the Star Wars movies it controls to Netflix ($98; NFLX) for digital streaming in Latin America. The first film, released in 1977, is controlled by 21st Century Fox ($26; FOXa). Disney is a Long-Term Buy. Fox is rated B (average).

Southwest Airlines ($39; LUV) reached a tentative agreement with its pilots union, a deal including wage increases. Pilots can vote from Oct. 5 through Nov. 4. The Southwest Airlines Pilots' Association has more than 8,000 members, third-most among the airline's worker unions. Southwest Airlines is a Buy and a Long-Term Buy.

FedEx ($144; FDX), a key indicator for the U.S. economy as a whole and the transports group in particular, grew per-share profits 14% to $2.42 in the August quarter but missed the consensus of $2.46. Revenue rose 5% to $12.28 billion. FedEx anticipates a record peak holiday season this year, but trimmed its profit guidance for fiscal 2016 ending May, citing weaker freight demand and rising ground-shipping and insurance costs. FedEx is rated B (average).

Volkswagen ($27; VLKAY) shares shed 15% of their value after the automaker admitted to rigging software in some cars in order to pass U.S. air-pollution tests. Volkswagen's CEO resigned Sept. 23, and the company said it will set aside $7.27 billion for potential costs related to the scandal, while also cutting its 2015 profit forecast. The U.S. Environmental Protection Agency said Volkswagen could face up to $18 billion in fines. Up to 11 million cars worldwide could be affected, likely leading to separate probes in other countries. Volkswagen is rated B (average).

In March, Dow Chemical ($43; DOW) agreed to sell most of its chlorine business to Olin ($17; OLN) in a $5 billion deal that includes $2.2 billion of Olin stock, $2 billion in cash, and the assumption of $800 million in liabilities. The deal, expected to close in early October, gives Dow shareholders the option to convert their shares into stakes in the larger Olin. Dow is rated A (above average), while unrated Olin earns a Quadrix Overall score of just 33. Although Dow is no longer on our buy lists and we don't advise subscribers to hold the shares, Dow looks like a better option than Olin. Subscribers shouldn't make the swap.

Gilead shares sick, not dead

Gilead Sciences ($105; GILD) said late-stage studies found an experimental combination treatment effectively treated all forms of hepatitis C. The combo drug includes Gilead's Sovaldi with a new drug candidate called velpatasvir. Existing hepatitis C drugs on the market treat some, but not all six distinct genotypes of the disease. Gilead plans to file for U.S. approval of the combo drug in the December quarter.

Despite the encouraging development, Gilead shares got swept up in a broad sell-off among drug and biotech companies after presidential hopeful Hillary Clinton recommended new regulations for the industry. Clinton proposed to help bring biosimilar drugs near copies of biotechnology treatments to market quicker and ban the practice of branded drugmakers paying rivals to postpone development of generic drugs. 

Gilead's stock remains up 12% for the year, despite a 10% slump since the end of July. U.S. prescription volumes for Gilead's hepatitis C drugs Sovaldi and Harvoni have slipped in the past few weeks, while analyst estimates have also declined marginally in the past 30 days. But the stock still scores above 60 for all six Quadrix categories, contributing to a maximum Overall score of 100. At 10 times trailing earnings and nine times operating cash flow, the stock trades near its lowest valuations since 2010. Gilead is a Focus List Buy and a Long-Term Buy.

Rank Changes

C.H. Robinson Worldwide ($67; CHRW) is being added to the Focus List. Shire ($213; SHPG) is being dropped from the Focus and Buy lists but remains a Long-Term Buy.

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