Portfolio Review: February 1, 2016


Airline shares climb on results

Alaska Air Group ($70; ALK) said December-quarter earnings per share surged 55% to $1.46 excluding special items, topping the consensus by $0.06. Operating revenue advanced 5% to $1.38 billion, and cash from operations more than doubled to $371 million. Management plans to expand capacity 13.5% in the March quarter, up from 12.9% in the December quarter. The company reiterated its full-year projection of 8% capacity growth. Alaska Air hiked its quarterly dividend 38% to $0.275 per share, payable March 8. Stock buybacks lowered the share count 5% last year, and $880 million remains on the current buyback plan — enough to repurchase roughly 10% of the remaining shares. Alaska rallied on the results. Alaska is a Focus List Buy and a Long-Term Buy.

Southwest Airlines ($37; LUV) grew per-share profits 53% to $0.90 per share excluding special items in the December quarter, matching the consensus. Operating revenue rose 8% to $4.98 billion, marking the airline's 13th straight quarter of growth. Cash from operations jumped 59% to $324 million.Operating profit margin expanded nine percentage points to 29%, its highest level since the September 1980 quarter. Profitability benefited from lower fuel costs, down 23% to $2.03 per gallon. For the March quarter, management expects fuel costs of $1.70 per gallon, 15% below levels in the year-ago quarter. Southwest Airlines is a Buy and a Long-Term Buy.

Apple dishes our weak guidance, with side of optimism

Apple ($93; AAPL) reported per-share earnings of $3.28 in the December quarter, up 7% and $0.05 above the consensus. Sales crept 2% higher to $75.87 billion, short of the consensus estimate of $76.59 billion. iPhone sales rose just 1%, while Mac sales fell 3% and iPad sales plunged 21%. Apple's growth primarily came from services such as Apple Pay, up 26%, and other products such as Apple Watch and Apple TV, up 62%. China's sales rose 14%, stronger than any other geographic region. Although CEO Tim Cook says he remains bullish on China (24% of Apple's quarterly revenue), he noted some "signs of economic softness" began to appear in January. Apple also says it has raised prices in some countries to adjust for the stronger U.S. dollar; the higher prices have crimped demand.

For the March quarter, Apple expects sales of $50 billion to $53 billion, down 9% to 14% from the year-ago quarter and below the consensus of $55.64 billion at the time of the announcement. Apple's last sales decline occurred in the March 2003 quarter. Management also expects iPhone sales in the current quarter to fall for the first time in the device's history.

Shares fell on the report. Apple's near-term outlook is soft, but many investors had already anticipated a challenging March quarter. Moreover, although smartphone growth is slowing, the global market has not yet reached its saturation point. For instance, nearly half of iPhones sold in China in the quarter went to consumers buying their first iPhone. Apple's balance sheet, containing $216 billion in cash and securities, or $29 per share net of debt, provides flexibility to fund new growth avenues. Finally, shares remain attractively valued at just 10 times estimated earnings for fiscal 2016 ending September — or seven times estimated earnings after backing out the net cash. Apple remains a Focus List Buy and a Long-Term Buy.

Financials update

J.P. Morgan Chase ($57; JPM) settled a pair of lawsuits as it strives to put its litany of legal woes to bed. The bank agreed to pay $1.42 billion to settle most of the claims in a lawsuit alleging it improperly drained Lehman Brothers of funds in the days before its 2008 collapse. Lehman had originally pledged billions of dollars to J.P. Morgan as collateral for derivative transactions and overnight loans. The bank will also pay $995 million, settling claims it misrepresented the quality of mortgages backed by securities insured by Ambac Financial Group. J.P. Morgan is a Buy and a Long-Term Buy.

Jones Lang LaSalle ($137; JLL) acquired Bill Goold Realty, a commercial and multifamily residential property broker based in western Canada. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.

Wells Fargo ($49; WFC) increased its stock-buyback plan by 350 million shares, or nearly 7% of outstanding shares. The bank repurchased enough of its stock last year to reduce the share count 2%. Wells Fargo is a Buy and a Long-Term Buy.

Corporate roundup

Lam Research ($68; LRCX) said December-quarter earnings per share jumped 32% to $1.57, exceeding the consensus of $1.43. Revenue advanced 16% to $1.43 billion, also ahead of analysts' expectations. Cash from operations jumped 83% to $295 million. But management's March-quarter guidance fell short of expectations, with the midpoint of its target range at $1.07, versus the consensus of $1.31 at the time of the announcement and $1.40 earned in the year-ago quarter. Lam expects revenue to slip 6% to $1.30 billion in the current quarter, missing the consensus of $1.39 billion. Lam, earning a Quadrix Overall score of 98, remains a Buy and a Long-Term Buy.

Centene ($62; CNC) announced preliminary December-quarter results, with per-share earnings rising 9% to $0.95 excluding expenses from its pending Health Net ($66; HNT) acquisition. The consensus estimate stood at $0.83. Total revenue jumped 33% to $6.3 billion, also above the consensus. The company also plans to issue $2.27 billion of debt to help fund its Health Net merger, which still requires regulatory approval. Centene expects to complete the deal early this year. The company also said it is searching for six missing hard drives containing personal information — but not financial or payment details — for 950,000 members. Centene expects little fallout from the missing hard drives, reflected by it reaffirming 2016 guidance, originally issued in December. Management's 2016 targets assume Centene acquires Health Net on Feb. 1. Centene is a Buy and a Long-Term Buy.

Alphabet ($718; GOOGL) paid Apple ($93; AAPL) $1 billion in 2014 to insure that Google would be the default search engine on iPhone and other devices, according to a lawyer for Oracle ($35; ORCL). Alphabet and Oracle are in the midst of a prolonged patent battle. The lawyer also said Alphabet's Android operating system has delivered $31 billion in revenue and $22 billion in profit since its 2008 launch. Alphabet's total revenue exceeded $350 billion during that time. In other news, Alphabet agreed to pay $185 million to settle a back-taxes dispute with U.K. officials. Alphabet is a Focus List Buy and a Long-Term Buy. Oracle is rated B (average).

Shire ($170; SHPG) resubmitted its application to the U.S. Food and Drug Administration for lifitegrast, a treatment for dry-eye disease in adults. The FDA rejected lifitegrast, a potential blockbuster drug, in October due to insufficient data from clinical trials. Separately, Shire completed its $5.9 billion cash acquisition of Dyax, a drugmaker specializing in rare diseases. Shire is a Long-Term Buy.

Disney ($94; DIS) pushed back the release date of Star Wars: Episode VIII until Dec. 15, 2017. It had originally been scheduled for release on May 26, 2017. Additional Star Wars spin-off movies are expected to debut this December and in May 2018. Box office receipts for Star Wars: The Force Awakens already total $1.88 billion globally, making it the third-biggest release of all time. Disney is a Long-Term Buy.

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