Portfolio Review: December 26, 2016


Focus List rank changes

CBS ($65; CBS) is being added to the Focus List. CBS and Viacom ($35; VIAb) ended mergers talks on Dec. 12, removing the integration risk that would have come with CBS trying to fold Viacom's sprawling business into its own operations. Analyst-estimate trends are encouraging, with the consensus projecting 22% higher profits in the December quarter, followed by 8% growth in 2017. CBS is also a Long-Term Buy. Viacom is rated B (average).

We are adding Citizens Financial Group ($36; CFG), a regional bank with 1,200 branches spread across 11 states, to the Focus List. After enduring years of unusually low interest rates, regional banks stand to benefit from the Federal Reserve's plan to accelerate its pace of rate hikes in 2017. Even in the low-rate environment, Citizens has delivered impressive growth — per-share profits jumped 40% in the September quarter on 14% higher sales. For 12 months ended September, earnings per share advanced 16% and sales rose 8%. Citizens Financial is also a Long-Term Buy.

We are dropping Centene ($59; CNC), the largest private administrator of Medicaid, from the Focus List. The shares have slumped 12% since the U.S. presidential election on concerns that the Republican-controlled government will dismantle the Affordable Care Act. Also troubling, Centene's 2017 guidance fell short of analyst estimates, with its midpoint calling for 7% higher adjusted per-share profits and 17% sales growth. Fears over the fate of ACA are unlikely to dissipate any time soon. But the stock's valuation already appears to reflect plenty of risk. Shares trade at 13 times the lowest 2017 analyst estimate, while the median S&P 1500 managed-care stock trades at 15 times consensus estimates for 2017 earnings. Centene remains a Buy and a Long-Term Buy.

Comcast ($71; CMCSa) earns an Overall rank of just 65, hurt by subpar scores for Momentum (39) and Earnings Estimates (18). Rising programming costs could continue to squeeze Comcast's operating profit margin, down in six consecutive quarters. Yet its underlying cable business appears to be resilient. Comcast has grown its subscriber base in the past year and plans to increase prices for video and internet subscribers by an average of 4% in 2017. We are removing Comcast from the Focus List, but the stock remains a Buy and a Long-Term Buy.

Homebuilder D.R. Horton ($28; DHI) is being removed from the Focus List. A mixed September-quarter report and the prospect of higher interest rates have contributed to its shares declining 12% since the end of August. Rising interest rates could create some sticker shock for aspiring homeowners in the coming year. But the robust labor market, coupled with increasing household formation among millennials, should help support housing demand in the next couple years. D.R. Horton shares trade at just 12 times trailing earnings, 40% below their 10-year average. Encouragingly, its 2017 profit estimates have crept higher over the past 90 days. D.R. Horton retains its Buy and Long-Term Buy ratings.

Earnings reviews

Carnival ($53; CCL) grew November-quarter earnings per share 34% to $0.67 excluding special items, ahead of the consensus estimate of $0.58. Revenue advanced 6% to $3.94 billion. Carnival said that booking volumes and pricing for the first nine months of fiscal 2017 ending November are running well ahead of 2016 levels. But it cautioned that higher fuel prices and unfavorable foreign-currency trends could offset that growth. Management expects February-quarter earnings per share to fall 10% to 21%; the consensus had projected 5% growth. Despite the mixed guidance, Carnival shares rose on the report and remain a Buy and a Long-Term Buy.

FedEx ($192; FDX) reported per-share profits of $2.80 excluding special items in the November quarter, up 9% but $0.10 below the consensus. Revenue climbed 20% to $14.93 billion. Excluding its $4.8 billion acquisition of TNT Express, FedEx generated 6% sales growth. Management reaffirmed its per-share profit guidance for fiscal 2017 ending May, which has a midpoint of $12.10, good for 12% growth but below the consensus of $12.16. FedEx remains a Focus List Buy and a Long-Term Buy.

Guidance updates for 2017

CVS Health ($80; CVS) shed more light on its outlook as the company tries to recover from the loss of several contracts in the past few months. Management said that weakness within its retail unit could cause March-quarter earnings per share to fall 5% to 10%, despite revenue growth of 3% to 4%. However, CVS confirmed long-term goals of growing both per-share profits and revenue by double-digits, and launched a new initiative to cut annual costs up to $750 million through 2021. CVS also hiked its quarterly dividend 18% to $0.50 per share, marking the 14th consecutive year of dividend increases. CVS is a Long-Term Buy.

EQT Midstream Partners ($74; EQM) released its 2017 guidance, calling for operating profits to rise 17% to 25%. Management expects to increase its annual per-unit distribution 20% next year, in line with its prior target and compared to its projected 21% growth for 2016. Starting in 2018, EQT Midstream says its per-unit distribution should grow 15% to 20% annually for several years. EQT is a Buy and a Long-Term Buy.

Deal updates

Alaska Air Group ($91; ALK) agreed to scale back its code-sharing partnership with American Airlines Group ($49; AAL) in order to win regulatory approval for its $2.6 billion acquisition of Virgin America ($57; VA), completed on Dec. 14. Alaska Air has also said that its code-sharing pact with Delta Air Lines ($51; DAL) will end on April 30, reducing 2017 revenue up to $10 million, or less than 0.2% of estimated sales. Alaska Air is a Buy and a Long-Term Buy.

LKQ ($32; LKQ) agreed to sell its glass-manufacturing business, geared toward original equipment manufacturers, for about $310 million. LKQ is a Buy and a Long-Term Buy.

Corporate roundup

Amgen ($146; AMGN) raised its quarterly dividend 15% to $1.15 per share, payable March 8. Amgen is a Buy and a Long-Term Buy.

Biogen ($283; BIIB) reported upbeat results for a potential treatment for Alzheimer's disease. Biogen said aducanumab significantly reduced amyloid plague in patients with mild or early signs of the illness. In other news, Biogen named Michel Vounatsos as its next CEO, effective Jan. 6. Biogen is a Buy and a Long-Term Buy.

Southwest Airlines ($51; LUV) CEO Gary Kelly said that ticket demand has risen in the weeks since the Nov. 8 presidential election. Southwest Airlines is a Focus List Buy and a Long-Term Buy.

Rank Changes

CBS ($65; CBS) and Citizens Financial Group ($36; CFG) are being added to the Buy List and Focus List. Centene ($59; CNC), Comcast ($71; CMCSa), and D.R. Horton ($28; DHI) are being removed from the Focus List but remain Buys and Long-Term Buys.

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