Portfolio Review: February 15, 2016


U.S. Bancorp downgraded

U.S. Bancorp ($39; USB) is being removed from the Long-Term Buy List. Its Overall score of 66, lowest among our recommended stocks, reflects sluggish recent results and falling analyst estimates. Both per-share profits and revenue were flat last year. Although the consensus calls for 7% higher earnings per share and 5% revenue growth in 2016, analyst estimates have fallen in the past month. Turmoil in global markets, slowing U.S. growth, and recent comments made by Federal Reserve Chair Janet Yellen all point to a slower path toward higher interest rates, which will continue to weigh on the bank's profitability. U.S. Bancorp is now rated B (average).

Earnings reviews

Focus List

CDW's ($35; CDW) December-quarter earnings per share rose 23% to $0.73 excluding special items, easing past the consensus by a penny. Sales advanced 12%, benefiting from CDW's August acquisition of Kelway and 5% organic growth. CDW says per-share profits should rise by low-double-digits this year, while the consensus projected 14% growth at the time of the announcement. Management expects to keep taking market share and says sales could rise 4% to 6% in 2016 excluding the Kelway deal and a new Dell partnership. The consensus calls for 11% higher total revenue this year. CDW is a Focus List Buy and a Long-Term Buy.

Buy List

Centene ($55; CNC) reported per-share earnings of $0.95 in the December quarter, up 9%, topping the consensus by $0.09. The results excluded expenses linked to its pending $6.3 billion acquisition of Health Net ($61; HNT). Total revenue surged 33% to $6.30 billion, also above the consensus. The results were consistent with the preliminary results Centene gave last month. Centene's medical membership grew 26% to 5.1 million members. Management pushed back the expected completion date of the Health Net deal to March 1 rather than Feb 1; as a result, the company reduced its sales and profit guidance. The new outlook has a midpoint of $4.225 for earnings per share, below the consensus of $4.25, on revenue of $40.4 billion, below the consensus of $42.14 billion. Despite the lower guidance, Centene shares jumped on the report and remain a Buy and a Long-Term Buy.

CVS Health's ($93; CVS) December-quarter earnings per share climbed 26% to $1.53 excluding special items, to match the consensus. Revenue advanced 11% to $41.15 billion on 11% growth from pharmacy services and 12% growth from the retail business. Total same-store sales grew 3.5%, as pharmacy sales, up 5.0%, more than offset front-of-store sales, down 0.5%. For the March quarter, CVS expects earnings per share of $1.14 to $1.17, versus $1.14 in the year-ago quarter and the current consensus estimate of $1.18. CVS is a Buy and a Long-Term Buy.

For the December quarter, Goodyear Tire & Rubber ($29; GT) said earnings per share increased 58% to $0.93 excluding special items, topping the consensus of $0.75. Earnings per share excluded, among other things, a $2.11 per share ($577 million after taxes) accounting charge linked to currency woes in Venezuela. Goodyear deconsolidated its Venezuelan operations on Dec. 31, writing down the market value of assets in Venezuela, which are now considered investments rather than an operating unit.

Sales fell 7% to $4.01 billion, in line with analyst expectations. Results benefited from a favorable price mix for raw materials and 7% higher tire volumes. Goodyear expects both trends to continue this year. The company also boosted its stock-repurchase plan by $650 million, representing 9% of outstanding shares. Goodyear used buybacks to shrink its share count 3% last year. Shares rallied on the results. Goodyear is a Buy and a Long-Term Buy.

Long-Term Buy List

Disney ($89; DIS) grew December-quarter earnings per share 28% to $1.63 excluding special items, comfortably ahead of the consensus of $1.45. Revenue, up 14% to $15.24 billion, also topped analyst expectations, as all four business units reported at least 8% growth. Powered by the latest Star Wars movie, the studio-entertainment unit posted 46% higher sales. Operating income rose 20% companywide but declined 6% for media networks due to higher programming costs and timing issues related to the College Football Playoff. Although ESPN subscribers declined for the quarter, management noted an uptick in subscribers over the past two months. Cash from operations rose 27% to $2.36 billion. Disney shares fell on the report but remain a Long-Term Buy.

Logistics business should keep on trucking

C.H. Robinson Worldwide ($69; CHRW) shares have jumped 8% since posting December-quarter results, while the S&P 1500 Index has retreated 3%. Shipping demand softened in the second half of 2015, pressuring the company's rates. Yet C.H. Robinson generated higher volumes in the challenging environment, due to acquisitions and rising demand for its integrated, global services. Cash from operations advanced 22% for the quarter and 40% for the year. Annual free cash flow surged 67% to an all-time high of $455 million.

C.H. Robinson, a third-party logistics provider, farms out the majority of its business to smaller trucking companies. New U.S. safety laws could reduce industrywide capacity, while raising costs for smaller trucking companies. But C.H. Robinson seems confident these truckers will adapt to the regulations and could improve their efficiency. C.H. Robinson's profit estimates are rising, with the consensus projecting 11% growth in the March quarter and 8% growth for 2016.
C.H. Robinson is a Focus List Buy and a Long-Term Buy.

Software takes the wheel

U.S. highway officials declared that Alphabet's ($707; GOOGL) artificial-intelligence software will be classified as a driver. That decision puts Alphabet one step closer toward gaining regulatory approval for putting its self-driving cars on the roads. Alphabet is a Focus List Buy and a Long-Term Buy.

Merger digest

Western Digital ($40; WDC) won approval from the European Union to acquire SanDisk ($67; SNDK) in a $19 billion deal announced in October. SanDisk is rated C (below average).

EU antitrust officials also cleared Schlumberger's ($68; SLB) pending $12.7 billion acquisition of Cameron International ($62; CAM). Schlumberger is rated C (below average).

Meanwhile, the EU opened an in-depth investigation into Halliburton's ($30; HAL) proposed $35 billion merger with Baker Hughes ($42; BHI) after warning of "serious potential competition concerns." Halliburton is rated C (below average).

Rank Changes

U.S. Bancorp ($39; USB) is being dropped from the Long-Term Buy List. After this change, Vanguard Short-Term Corporate Bond ($79; VCSH) exchange-traded fund will account for 26.4% of the Long-Term Buy List and 21.4% of the Buy List.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com