Portfolio Review: March 21, 2016


Jabil Circuit disappoints

Jabil Circuit ($22; JBL) said core earnings per share rose 14% to $0.57 in the February quarter but fell $0.03 short of the consensus. Revenue crept 2% higher to $4.40 billion, also missing analyst expectations. Revenue from diversified manufacturing services rose 4%, while electronics manufacturing revenue rose a better-than-expected 1%.

The iPhone supplier's May-quarter outlook was also disappointing, hurt by lower demand for mobile devices. The midpoint of management's guidance calls for per-share profits of $0.15 on revenue of $4.2 billion. The consensus had projected earnings per share of $0.51 on revenue of $4.75 billion at the time of the announcement. Jabil also cut its full-year guidance for fiscal 2016 ending August. Despite an undeniably disappointing quarter, for now, Jabil remains a Focus List Buy and a Long-Term Buy.

Pharmaceuticals update

A court in Europe nullified one of four patents covering Biogen's ($251; BIIB) multiple-sclerosis drug Tecfidera. Biogen vowed to appeal the decision. Launched in 2013, Tecfidera was Biogen's top-selling drug last year, delivering $3.64 billion in revenue, 34% of the company's total. Biogen is a Buy and a Long-Term Buy.

Regulators in the U.S. and Europe are investigating reports of patient deaths and severe side effects linked to clinical trials of Zydelig, a blood cancer drug made by Gilead Sciences ($90; GILD). The drugmaker has halted six clinical trials involving new indications for Zydelig, which generated $132 million last year, less than 1% of Gilead's total revenue, though analysts had projected annual sales in excess of $800 million by 2020. Gilead remains a Focus List Buy and a Long-Term Buy.

U.S. spending on prescription drugs increased 5% last year, or 8% excluding rebates, said Express Scripts ($70; ESRX). That's down from 13% growth in 2015 excluding rebates. Spending jumped 18% on specialty drugs, including treatments for hepatitis C, multiple sclerosis, and rheumatoid arthritis. Express Scripts expects spending to climb 7% in both 2016 and 2017. Express Scripts is rated A (above average).

Technology review

March-quarter demand for Apple's ($106; AAPL) iPhone is tracking ahead of expectations, said an analyst at Morgan Stanley ($25; MS). Analysts at Nomura ($5; NMR) and UBS ($16; UBS) are bullish on the iPhone's prospects over the next six months. Analysts appear more divided on the prospects of Apple's rumored forthcoming four-inch model, reportedly dubbed the iPhone SE. Apple is widely expected to unveil the device on March 21, after our deadline.

Some analysts see the new model sparking upgrades by current iPhone users, especially those who prefer a smaller device at a lower price. Others predict relatively small unit sales unlikely to move the needle for a company as massive as Apple. Apple shares have surged 9% since the end of January and are up nearly 1% in 2016. Apple is a Focus List Buy and a Long-Term Buy. Morgan Stanley is rated B (average).

Alphabet ($757; GOOGL) shares have surged 37% over the past 12 months and briefly overtook Apple as the world's largest company by market value following a strong December-quarter report.  But the stock has stalled and is now down 1% so far in 2016, likely weighed down by ongoing regulatory concerns.

The European Union is taking steps toward filing formal antitrust charges against Alphabet, according to published reports. The probe centers on complaints that Android, Alphabet's mobile operating system, favors its own applications over rival products. The company allegedly requires mobile-device makers to preinstall applications for messaging, search, and e-mail.

Alphabet already faces antitrust charges linked to its online search engine. In related news, Alphabet failed to overturn a ruling made by Russia's antitrust regulators that claims the company used Android to abuse its dominant market position. The company faces fines of up to 15% of 2014 revenue from preloaded applications, and may also have to rework contracts with smartphone manufacturers.

Nevertheless, few companies nurture more potential blockbusters than Alphabet. And few experimental products could have a bigger payoff than Alphabet's autonomous vehicles. Earlier this month, Alphabet executives touted the social benefits of self-driving cars during a hearing with U.S. senators. The company says on-demand services from autonomous vehicles will allow the U.S. to reduce spending on infrastructure, such as roads and parking garages. In a study released earlier this month, the U.S. Department of Transportation noted that few barriers in U.S. laws stand in the way of approving self-driving cars that still allow humans to take control of the vehicle. Alphabet is a Focus List Buy and a Long-Term Buy.

Corporate roundup

CBRE Group ($27; CBG) took a leading 22% share of global commercial real estate sales last year, according to industry researcher Real Capital Analytics. CBRE is a Focus List Buy and a Long-Term Buy.

Kroger ($39; KR) approved $500 million in stock repurchases, adding to the $176 million remaining under its prior plan. In all, Kroger can repurchase nearly 2% of outstanding stock at its current price. Buybacks reduced Kroger's share count by 1% in fiscal 2016 ended January and by 42% over the past 15 years. Kroger is a Buy and a Long-Term Buy.

J.P. Morgan Chase ($59; JPM) plans to sell its first mortgage-backed securities since the 2008 financial crisis, reported The Wall Street Journal. The bank is packaging more than 6,000 residential mortgages worth $1.9 billion into securities. J.P. Morgan hopes to sell the riskiest securities to investors, while retaining the safest, most senior tranches on its balance sheet. The stock is a Long-Term Buy.

Amerco ($350; UHAL) declared a special cash dividend of $1.00, payable April 21. Amerco is a Focus List Buy and a Long-Term Buy.

A group of 278 institutional investors filed a $3.67 billion lawsuit against Volkswagen ($29; VLKAY) for failing to disclose information about its emissions scandal in a timely matter. The automaker admitted in September that it had installed software in diesel-powered vehicles to cheat emissions tests since 2009.

In addition to the shareholder lawsuit, the U.S. Justice Department has sued Volkswagen for potentially more than $18 billion for allegedly violating environmental laws. In other news, Michael Horn, the head of Volkswagen's U.S. operations, has resigned. Volkswagen is rated B (average).

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