Portfolio Review: March 7, 2016


Owens Corning initiated as Long-Term Buy

Owens Corning ($44; OC) is being added to the Long-Term Buy List. The company makes insulation, roofing, and fiberglass composites used in residential and commercial buildings. Owens topped consensus estimates for both earnings per share and revenue in the December quarter. Although Owens grew sales just 2% last year, cash from operations jumped 68% and free cash flow reached $263 million, versus a negative $6 million in 2014. In Quadrix, Owens earns an Overall rank of 92, supported by above-average scores for all six categories.

The improving housing market and lower material costs boosted profits for all three segments in 2015, and management expects more growth in the year ahead. Rising analyst estimates call for 16% higher earnings per share on 3% sales growth in 2016. Shares trade at 17 times trailing earnings and 15 times estimated 2016 profits, roughly 25% below medians for the S&P 1500 building-products industry. Shares look even cheaper relative to peers based on trailing operating cash flow and free cash flow, as large noncash amortization expenses drag on Owens' net income.

Foot Locker shares take a breather

Foot Locker ($64; FL) said January-quarter earnings per share increased 16% to $1.16 excluding special items, topping the consensus by $0.04. Revenue advanced 5% to $2.01 billion, while same-store sales grew 7.9%. Looking ahead to fiscal 2017 ending January, management expects per-share profits to climb at a double-digit rate, while same-store sales grow by mid-single-digits.

Despite the solid results and guidance, Foot Locker shares have lagged since the report. Several factors may be coming into play. First, investors have become accustomed to Foot Locker topping consensus profit targets by a wide margin; Foot Locker had surpassed the consensus by $0.05 or more in eight of its last 10 quarters. Second, Foot Locker noted that same-store sales rose at a low-single-digit rate in the first few weeks of February. Third, sales growth in basketball footwear, a key product segment, appears to be slowing. Finally, the shares, up 13% so far this year, may be due for a breather. Foot Locker, earning an Overall score of 90, remains a Focus List Buy and a Long-Term Buy.

Technology update

Technology companies including Microsoft ($53; MSFT) and eBay ($24; EBAY) are closely monitoring Intel's ($31; INTC) legal feud with the Internal Revenue Service concerning overseas taxes. The case centers on whether companies can include share-based compensation in cost-sharing arrangements between the U.S. parent company and its foreign subsidiaries. Including these costs would lower Intel's tax bill. The U.S. Tax Court ruled in favor of Intel in July, and the IRS appealed the decision in February. If the Tax Court's ruling stands, Alphabet ($739; GOOGL) could receive at least $3.5 billion in new tax benefits, says The Wall Street Journal.

Separately, a panel of British lawmakers called Alphabet's $180 million tax settlement too small, noting that tax officials in France and Italy have pursued far larger sums. Alphabet's settlement with the U.K.'s tax authority covers back taxes it allegedly neglected to pay from 2005 to 2015. Alphabet has countered by saying most of its profits in the U.K. come from intellectual property developed elsewhere. Alphabet is a Focus List Buy and a Long-Term Buy. Intel is rated A (above average). eBay and Microsoft are rated B (average).

Apple ($101; AAPL) CEO Tim Cook pledged to increase the company's dividend annually. Apple has raised its quarterly dividend, reinstated in 2012 after a 17-year hiatus, between 8% and 15% in each of the past three years. Previous dividend hikes were announced in late April. Cook also said Apple may ramp acquisitions this year to take advantage of the market's recent sell-off. Apple completed 19 deals in 2015.

In other news, iPhone production in the June quarter may exceed market expectations, according to an analyst at J.P. Morgan Chase ($60; JPM). Apple appears to be accelerating the launch of its new four-inch iPhone, now expected to be introduced alongside its newest iPad on March 15. This developing scenario could boost growth at Skyworks Solutions ($69; SWKS), Jabil Circuit ($22; JBL), and other Apple suppliers. Separately, a U.S. appeals court reversed a previous ruling that had ordered Samsung to pay Apple $119.6 million for patent infringement. Both Apple and Jabil are Focus List Buys and Long-Term Buys. Skyworks is a Buy and a Long-Term Buy. J.P. Morgan is a Long-Term Buy.

Cable deals draw scrutiny

The Federal Communications Commission is investigating whether Comcast ($59; CMCSa) and other large cable companies use special contract clauses to prevent media companies, such as Disney ($97; DIS), from streaming shows on the internet. Concerns that these provisions may stunt the growth of online video have been raised by antitrust officials reviewing Charter Communications' ($182; CHTR) pending $56 billion acquisition of Time Warner Cable ($193; TWC). For its part, Disney said that on March 1, it started making shows available on all platforms the same day they aired on its networks.

In other news, Disney introduced a new pricing strategy for one-day tickets at its U.S. theme parks based on anticipated demand. Disney will charge customers more during peak periods, in an effort to smooth out demand trends, hopefully convincing some patrons to visit at less-busy times. Disney said attendance rose 10% at its U.S. parks in the December quarter. Some of its parks have reached capacity during holidays. Comcast is a Focus List Buy and a Long-Term Buy. Disney is a Long-Term Buy.

Corporate roundup

Alaska Air Group ($77; ALK) said traffic increased 14% in February. Capacity jumped 18% for the month, well above the airline's target of 13.5% growth for the March quarter. Alaska Air is a Focus List Buy and a Long-Term Buy.

Not to be left out of the excitement surrounding self-driving cars, Goodyear Tire & Rubber ($31; GT) introduced new concept tires designed for autonomous vehicles. Goodyear is a Buy and a Long-Term Buy.

Southwest Airlines ($42; LUV) said its flight instructors approved a tentative new contract that includes broad pay increases. Southwest Airlines is a Buy and a Long-Term Buy.

Jones Lang LaSalle's ($105; JLL) deal-making binge has continued into 2016 with a pair of recent acquisitions. Jones Lang acquired lease- and debt-restructuring company Huntley, Mullaney, Spargo & Sullivan for an undisclosed sum. The company also purchased Seattle-based leasing expert Washington Partners. Jones Lang is a Focus List Buy and a Long-Term Buy.

Honeywell ($106; HON) ended its pursuit of United Technologies ($96; UTX) after the two companies disagreed over price and whether antitrust regulators would ultimately approve an acquisition. Honeywell had offered to pay $90.7 billion in cash and stock, equating to $108 per share or an 18% premium to United Technologies' stock price before news of the talks surfaced. Both Honeywell and United Technologies are rated B (average).

Rank Changes

Owens Corning ($44; OC) is being initiated as a Long-Term Buy.

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