Portfolio Review: November 23, 2015


Cisco's long-term view still intact

Cisco Systems' ($27; CSCO) stock fell after the company posted solid October-quarter results but gave a disappointing outlook for the current quarter. Cisco grew earnings per share 9% to $0.59 excluding special items, exceeding the consensus by $0.03. Revenue grew 4% to $12.68 billion, also ahead of analysts' expectations. The midpoint of Cisco's January-quarter guidance calls for per-share profits of $0.54, implying 2% growth on 1% higher revenue. The consensus had anticipated 6% higher earnings and 5% higher sales at the time of the announcement. Cisco blamed the weak forecast on the strong U.S. dollar and lower orders, though it expects these headwinds to ease in the April and July quarters Cisco, yielding 3.1%, remains a Long-Term Buy.

A mixed bag for retailers

The retail industry enters the crucial holiday season with uneven operating momentum. Although the U.S. consumer appears healthy, increased spending has gone toward cars, electronic devices, and home-improvement projects. As a result, department stores and apparel retailers have struggled, while discounters and retailers leveraged to the housing rebound have fared better.

Both Macy's ($39; M) and Nordstrom ($56; JWN) cut their full-year projections earlier this month after delivering weaker-than-expected sales for the October quarter, as unseasonably warm weather hurt demand for sweaters and coats. Apparel manufacturer VF ($63; VFC) and footwear maker Skechers U.S.A. ($28; SKX) posted disappointing September-quarter results.

Shares of TJX ($68; TJX) rallied after the off-price retailer said same-store sales rose 5% for the October quarter, exceeding its target of 2% to 3% growth. Investors also cheered results posted by Wal-Mart Stores ($61; WMT), which benefited from higher traffic, its grocery business, and basic apparel. Meanwhile, Home Depot ($127; HD) and Lowe's ($73; LOW) both reported about 5% higher same-store sales for the October quarter and stood by their full-year guidance.

The National Retail Federation expects holiday sales to climb 3.7% this year, down from last year's 4.1% gain. Elevated inventory levels in the wake of poor October quarters may force some retailers to discount fall merchandise, and these products could compete with full-price items brought in for the holiday season.

Among retailers, we pay the closest attention to Foot Locker ($61; FL), which was scheduled to report October-quarter results on Nov. 20, after our deadline. Foot Locker is a Focus List Buy and a Long-Term Buy. Home Depot and Lowe's are rated A (above average). Macy's, TJX, and Wal-Mart Stores are rated B (average).

Takeover chatter

Microsemi ($37; MSCC) raised the cash portion of its $2.3 billion cash-and-stock bid for PMC Sierra ($12; PMCS). This latest move follows PMC's reaffirmation of its commitment to be acquired by Skyworks Solutions ($80; SWKS) in an all-cash deal worth roughly $2.24 billion. PMC's announcement refuted claims made by Microsemi that PMC had preferred its prior cash-and-stock offer to the Skyworks bid. Skyworks is a Buy and a Long-Term Buy. Microsemi is rated Buy at Upside, our sister publication.

Jones Lang LaSalle ($163; JLL) continued its spree of small mergers by agreeing to acquire Martin Potts, a company that offers management services for retail, hospitality, health-care, and office properties. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.

Paul Jackson, head of the pilots union at Southwest Airlines ($46; LUV), submitted his resignation just days after the airline's pilots rejected a tentative contract. Jackson's departure apparently coincides with rumors that Southwest may seek a merger, possibly with Frontier Airlines or JetBlue Airways ($25; JBLU). Southwest Airlines is a Buy and a Long-Term Buy. JetBlue is rated Best Buy in Upside.

Mylan ($52; MYL) abandoned its $26 billion hostile acquisition of Perrigo ($156; PRGO) after failing to win over the targeted company's shareholder base. Weakness in Mylan's share price caused the stock-and-cash deal to decline from its original value of about $35 billion in April. Mylan is rated B (average).

Corporate roundup

Apple ($117; AAPL) launched Apple Pay in Canada and planned to launch in Australia on Nov. 19, after this issue went to press. In both countries, the mobile-payment service will initially be limited to users with American Express cards. Furthermore, Apple may use Apple Pay as a steppingstone to push further into the payment-processing industry — and further cement the iPhone as a part of consumers' daily lives. The company has entered preliminary discussions with banks about offering a peer-to-peer payment system, reported The Wall Street Journal. The service may resemble PayPal Holdings' ($36; PYPL) Venmo platform that lets users send money to friends for such purposes as splitting restaurant checks or chipping in on shared rent.

In other news, Apple plans to add 1,000 new jobs in Ireland by the middle of 2017, boosting the work force at its European headquarters by 20%. The European Union has yet to rule on some Irish tax-minimization strategies used by Apple and other multinational companies. Separately, German antitrust officials have opened an investigation into Apple's partnership with Amazon.com ($664; AMZN) to sell audiobooks on the iTunes platform. Apple is a Focus List Buy and a Long-Term Buy. Amazon.com is rated B (average).

J.P. Morgan Chase ($67; JPM) says higher volumes have caused trading revenue to improve since the end of October. The bank expects trading revenue for the December quarter to be roughly flat with the year-ago quarter. J.P. Morgan is a Buy and a Long-Term Buy.

Oil patch optimism premature

The price of international benchmark Brent crude oil is currently flirting with August lows, which in turn were the lowest in more than six years. Yet S&P 1500 energy stocks have risen an average of 12% since the end of September, well ahead of the 5% average gain for the broader index.

The rally has been led by drillers and exploration-and-production companies as investors gain optimism that recent moves to slash operating costs will boost efficiency. In the past month, BP ($35; BP) vowed to cut annual costs more than $6 billion by 2017, Chevron ($92; CVX) announced plans to eliminate 10% of its work force, and Exxon Mobil ($81; XOM) said capital spending should decline in 2016 and 2017.

However, these three giants don't look attractive in Quadrix. They score below 10 for Momentum, below 50 for Value, and below 35 for Overall. Investors should also be wary of the outsized dividend yields — BP yields 6.8% (versus its five-year average of 4.2%), Chevron yields 4.6% (versus 3.4%), and Exxon yields 3.6% (versus 2.7%). So far, these three oil titans have pledged to preserve their quarterly dividends, yet each of those dividends consumes more than 60% of company earnings.

Lastly, the three companies collectively generated $75.35 billion in cash from operations for 12 months ended September, while spending $107.19 billion on dividends and capital expenditures. BP, Chevron, and Exxon are rated C (below average).

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