Portfolio Review: August 8, 2016


Earnings roll call

Focus List

Amerco ($396; UHAL) said June-quarter earnings per share fell 14% to $7.51, missing the one-analyst consensus of $8.72. Management attributed the profit decline to rising costs for truck chassis. Revenue increased 4% to $923 million, also below the consensus estimate. Sales advanced 18% for the self-storage unit and 3% for self-moving equipment rentals. For now, Amerco remains a Focus List Buy and a Long-Term Buy.

Lear ($111; LEA) grew June-quarter earnings per share 30% to $3.66 excluding special items to surpass the consensus estimate of $3.32. Sales increased 2% to $4.72 billion, missing the consensus target of 5% growth. Cash from operations climbed 11% to $529 million. Lear raised its 2016 guidance for core operating earnings and free cash flow but lowered the top end of its revenue range.

Shares fell on the report, which coincided with Ford Motor ($12; F) releasing disappointing quarterly results. Lear's biggest customer at 23% of revenue, Ford warned of possibly cutting its 2016 guidance later this year. U.S. auto sales for July were also soft, with Ford posting a 3% decline and General Motors ($30; GM) a 2% decline. Yet analyst profit estimates for Lear have risen since its quarterly report for both the second half of 2016 and full-year 2017. Lear remains a Focus List Buy and a Long-Term Buy. Both Ford and GM are rated A (above average).

LKQ ($35; LKQ) reported per-share profits of $0.55 for the June quarter excluding special items, up 34%, and $0.07 above the consensus. Revenue surged 33% to $2.45 billion. Acquisitions drove most of LKQ's growth, complemented by 5% higher organic sales for its parts-and-services unit. The company's updated 2016 guidance was mixed. LKQ raised its outlook for earnings per share and operating cash flow but curbed expectations for organic growth for its parts-and-services business. After slipping on the report, LKQ shares rebounded to set a record high. LKQ is a Focus List Buy and a Long-Term Buy.

Buy List

Alphabet's ($799; GOOGL) per-share profits surged 20% in the June quarter to $8.42 excluding special items. Sales climbed 21% to $21.50 billion on 19% growth from the advertising unit and 33% growth from nonadvertising businesses, such as cloud computing. The consensus had projected earnings per share of $8.04 on 17% revenue growth. Alphabet said mobile advertising drove growth, as more companies become comfortable paying for ads displayed on smartphones. More than half of Google searches are conducted on mobile devices. Paid clicks increased 29%, while cost-per-click fell 7%. Shares rose on the results. Alphabet is a Buy and a Long-Term Buy.

CDW ($44; CDW) said June-quarter earnings per share climbed 16% to $0.93 excluding special items, topping the consensus by $0.08. Sales increased 11% to $3.66 billion, as 17% growth for government and education clients overcame a 1% decline for corporate clients. CDW still expects organic growth to outpace U.S. spending on technology by two to three percentage points at constant currency this year. But it now sees the overall market's growth near the bottom of its original range of 2% to 3%. CDW is a Buy and a Long-Term Buy.

For the June quarter, CVS Health ($97; CVS) grew earnings per share 8% to $1.32 excluding special items to ease past the consensus by $0.02. Revenue increased 18% to $43.73 billion, below the consensus of $44.28 billion. The retail unit posted 16% higher sales, while the pharmacy-services business grew 21%. Despite lower customer traffic, same-store sales rose 2.1% on solid pharmacy growth. CVS expects September-quarter earnings per share of $1.55 to $1.58, implying 21% to 23% growth, versus the consensus of $1.55. Shares rallied on the report. CVS is a Buy and a Long-Term Buy.

EQT Midstream Partners ($78; EQM) said net income per limited partner unit rose 13% to $1.27 in the June quarter, exceeding the consensus of $1.15. Operating revenue advanced 19% to $172 million. Management boosted its 2016 guidance for operating earnings and distributable cash flow, leading analysts to hike their profit estimates in the days following the report. EQT also said it will pay a quarterly dividend of $0.78 per unit on Aug. 12, up 5% from last quarter. EQT is a Buy and a Long-Term Buy.

Long-Term Buy List

Shire ($199; SHPG) reported June-quarter earnings per share of $3.38 excluding special items, up 29% and $0.35 ahead of the consensus. Sales soared 56% to $2.43 billion, exceeding the consensus estimate of $2.22 billion. Organic revenue rose about 20%. Shire's $32 billion acquisition of Baxalta, completed on June 3, also helped drive growth. The company now expects full-year earnings per share to rise 9% to 12%; the consensus anticipated 7% growth at the time of the announcement. Shire remains a Long-Term Buy.

Airlines update

Alaska Air Group ($65; ALK) said capacity rose 10% in July, outpacing its 8% traffic growth. The load factor, which measures utilized capacity, slipped to 87% from 88%. Management targets 8% higher capacity for the September quarter. Alaska Air is a Buy and a Long-Term Buy.

Southwest Airlines ($36; LUV) matched a $3 fare hike for many one-way domestic flights that was initiated by JetBlue Airways ($17; JBLU). Southwest caught flak from analysts last month for sitting out price hikes made by other airlines. Separately, unions representing Southwest's pilots, mechanics, and flight attendants called for CEO Gary Kelly to resign after computer problems caused hundreds of flights to be delayed or canceled in July. Southwest Airlines is a Focus List Buy and a Long-Term Buy.

Drugmaker roundup

Biogen ($321; BIIB) has attracted takeover interest from Merck ($58; MRK) and Allergan ($253; AGN), according to The Wall Street Journal. Subsequent reports indicated Allergan is unlikely to pursue a deal. Biogen is currently searching for a new CEO and facing slowing growth for Tecfidera, its biggest drug. Its pipeline also experienced a setback in June when a key multiple sclerosis drug failed a mid-stage trial. But given the number of big deals to collapse in the past year, Biogen's size alone — its market value exceeds $65 billion — could pose an insurmountable hurdle. The stock trades at 17 times estimated 2016 earnings, 20% below the median S&P 1500 biotechnology stock.

Separately, Biogen and Ionis Pharmaceuticals ($38; IONS) said an experimental treatment for spinal muscular atrophy in infants performed well in a late-stage trial. Buoyed by the encouraging results, Biogen paid Ionis $75 million to commercially develop the drug. Biogen is a Buy and a Long-Term Buy. Merck is rated B (average).

Express Scripts ($76; ESRX) dropped Gilead Sciences' ($80; GILD) hepatitis C drug Harvoni from its list of excluded treatments and will consider offering coverage of the drug next year. Express Scripts, a pharmacy benefit manager, currently covers AbbVie's ($67; ABBV) Viekira Pak but not hepatitis C drugs made by Gilead or Merck. Gilead is a Long-Term Buy. AbbVie and Express Scripts are rated A (above average).

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