Portfolio Review: December 7, 2015


Two upgrades

Jabil Circuit ($25; JBL) is joining the Focus List. We're excited about its robust operating growth, encouraging share-price action, and cheap valuation. Jabil manufactures and assembles electronic products for a diverse group of customers, none bigger than Apple ($116; AAPL), which accounts for nearly one-quarter of revenue. Sales and cash from operations have risen in four straight quarters, while operating profit margin stands at its highest level in a decade.

Jabil operates in a highly cyclical industry that still appears to have a long runway for growth. For fiscal 2016 ending September, management expects per-share profits of $2.60, up 25%, on revenue of $20 billion, up 12%. Analyst estimates have risen since Jabil gave its guidance in September, though the consensus remains below company targets, allowing for upside to analyst expectations. The stock ranks among the cheapest 20% in our research universe for price/sales ratio, price/cash flow, and P/E on estimated year-ahead earnings. Jabil, earning a Quadrix Overall rank of 98, is also a Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy.

We are adding Goodyear Tire & Rubber ($35; GT) to the Buy List. The stock's Overall score has exceeded 95 in nine straight months, reflecting favorable analyst-revision trends, a rising share price, and attractive valuation. Revenue has declined at least 5% in 14 straight quarters due to a combination of asset sales, foreign-currency headwinds, and weak volumes. But operating profit margins have contracted just twice during that span, as Goodyear benefits from improved efficiency and lower costs.

Sales are expected to stabilize next year, and rising analyst estimates project 20% higher earnings per share in 2016. Shares have surged 22% in 2015, while the S&P 1500 Index has squeezed out a 1% gain. But at 12 times trailing earnings, the stock trades 36% below the median for S&P 1500 consumer-discretionary stocks and ranks among the cheapest 20% of stocks in Quadrix. Goodyear is also a Long-Term Buy.

Auto review

Lear ($124; LEA) agreed to acquire Arada Systems, a company that designs vehicle-connectivity technology. The purchase fits with Lear's strategy of pursuing smaller deals in connectivity and driver-assistance technology. In August, the company acquired Autonet Mobile, a software developer that helps cars communicate with dealers. Terms of the latest deal were not disclosed. Lear is a Focus List Buy and a Long-Term Buy.

U.S. auto sales remain on pace to set a record this year after rising 1% to 1.32 million vehicles in November. Automakers relied on rebates and discounts to stoke sales, which rose 1.5% for General Motors ($36; GM) and 0.4% for Ford Motor ($14; F). Plagued by the ongoing emissions scandal, Volkswagen ($29; VLKAY) took its diesel-powered vehicles off the market, causing sales to plunge 25%. Ford and GM are rated A (above average). Volkswagen is a B (average).

Retailers see more shopping from home for the holidays

Citing solid retail results over Thanksgiving weekend, the National Retail Federation continues to expect holiday sales to climb 3.7% this year. Improving consumer sentiment, low fuel prices, and a healthy labor market are stoking retail sales.

Online sales surged 26% during Thanksgiving weekend, said IBM, more than offsetting a 10% decline at brick-and-mortar retail stores, according to ShopperTrak. Mobile devices generated roughly one-third of online sales, estimated Adobe Systems.

Retailers are adjusting to the shifting landscape of lower store traffic by offering more deals online, in some cases before the promotions appear in stores. High volumes caused website problems for Foot Locker ($66; FL), Wal-Mart Stores ($58; WMT), and Neiman Marcus.

Black Friday has lost importance in recent years as more retailers began introducing holiday deals in early November and extending promotions into the final days before Christmas. Last year, Dec. 23 was the biggest shopping day, according to MasterCard.

Discounters appear well-positioned for the holidays, while cosmetics, TVs, and wearable devices such as the Apple Watch are expected to be popular gifts this year. Foot Locker is a Focus List Buy and a Long-Term Buy. Wal-Mart Stores is a B (average).

Corporate roundup

Cord-cutting keeps taking a toll on Disney ($114; DIS), which reported 92 million ESPN viewers at the end of September, down 3% from a year earlier. ESPN, Disney's most profitable channel, has shed 7 million viewers over the past two years. Disney CEO Bob Iger acknowledged "modest" subscriber losses in August, then last month assured investors there was no reason to panic. Many of the company's other networks, including Disney Channel, also lost subscribers in the past year. But none are as important as ESPN, representing roughly 25% of Disney's revenue. Cable companies pay fees to Disney based on subscriber counts. In other news, Disney raised its semiannual dividend 8% to $0.71 per share, payable Jan. 11. Disney moved to semiannual dividends in July; before then the payout was annual. Disney is a Long-Term Buy.

After reviewing Gilead Sciences ($104; GILD) internal documents, two U.S. senators accused the company of trying to maximize revenue for hepatitis C drugs Sovaldi (list price of $84,000) and Harvoni ($94,500), rather than making the drugs widely available to patients. Gilead rejected the lawmakers' findings, noting that rebates currently make the drugs more affordable than when they first launched. Gilead is a Focus List Buy and a Long-Term Buy.

Alaska Air Group ($82; ALK) said traffic rose 13.0% in November on 13.7% higher capacity. Shares rallied on the news. Alaska Air is a Focus List Buy and a Long-Term Buy.

Keep rolling with C.H. Robinson

Shares of C.H. Robinson Worldwide ($64; CHRW) slumped after an analyst downgraded the stock to a Sell rating. In October, C.H. Robinson noted that softer demand and rising capacity in the freight market has hurt pricing. At the same time, the company has generated higher volumes from market-share gains. Analyst estimates have ticked higher in the past 60 days, with the consensus projecting 13% higher per-share profits in the December quarter and 8% growth in 2016. The stock trades at 19 times trailing earnings, a 22% discount to its five-year average. Shares also trade more than 25% below their five-year norms for price/sales and price/cash flow. C.H. Robinson, earning an Overall rank of 90, remains a Focus List Buy and a Long-Term Buy.

Rank Changes

Jabil Circuit ($25; JBL) is being added to the Focus List; it was already a Buy and a Long-Term Buy. Goodyear Tire & Rubber ($35; GT), already a Long-Term Buy, is being added to the Buy List. After these changes, Vanguard Short-Term Corporate Bond ($79; VCSH) exchange-traded fund will account for 14.8% of the Buy List and 16.0% of the Long-Term Buy List.

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