Portfolio Review: January 16, 2017


Technology update

Ten years ago this month, Apple ($120; AAPL) publicly unveiled its first iPhone. Apple has gone on to sell more than a billion iPhone units since then. The iPhone's spectacular success hurried the demise of Apple's once popular iPod. But it has fostered growth in other segments, such as the App Store, which generated more than $28.5 billion in sales last year, estimates The Wall Street Journal. Today, like in 2007, Apple faces pressure to find new avenues for growth. Skeptics currently question Apple's ability to incorporate recent advances in artificial intelligence into another popular product. But Apple is reportedly at work on augmented reality glasses that could debut in 2018. Apple is a Buy and a Long-Term Buy.

Waymo, Alphabet's ($830; GOOGL) self-driving car unit, showed off its latest technology in an autonomous Chrysler Pacifica minivan. Waymo says disengagement rates — instances when human testers must take command of the self-driving cars — improved to 0.2 times per thousand miles from 0.8 in 2015. It has also slashed costs in some of the vehicle's sensors by 90% to $7,500, making the technology more commercially viable. Waymo insists that it does not want to build its own cars, preferring to supply software and hardware components to automakers. Waymo plans to begin conducting tests for the Pacifica on public roads this month. Alphabet, which began testing vehicles in 2009, is a Focus List Buy and a Long-Term Buy.

After the close of trading on Jan. 31, Citrix Systems ($92; CTXS) plans to spin off its GoTo business, which will merge with LogMeIn ($103; LOGM). Citrix shareholders will receive 0.1718 shares of LogMeIn stock for every share of Citirix they hold. Following the tax-free deal, Citrix investors will hold a 50.1% stake in LogMeIn.

The GoTo unit makes video-conferencing software and generated an estimated $2.7 billion in 2016, roughly 44% of Citrix's revenue. Excluding GoTo, Citrix expects sales to climb 3% to 4% in 2017. In other news, Citrix acquired Unidesk, a maker of management technology. Terms were not announced. Citrix is a Focus List Buy and a Long-Term Buy.

Latest quarter poses big test for sick LabCorp shares

Laboratory Corp. of America's ($135; LH) Overall score has slumped to 72, dragged down by subpar ranks for Momentum (40) and Performance (22). The weakness partly reflects increasing uncertainty over the fate of the Affordable Care Act, which has boosted laboratory volumes. But LabCorp shares have lagged other S&P 1500 health-services stocks, underscoring company-specific concerns.

The stock still hasn't fully recovered from a disappointing September-quarter report, when LabCorp missed consensus profit and sales estimates and reported 10% lower cash from operations. There may also be creeping doubts about the value of its $6.15 billion acquisition of Covance, which pushed the company into the contract-research market. In the first weeks of 2017, management tried to quell investor fears by reaffirming its commitment to Covance, expressing confidence in its ability to keep delivering solid operating growth, and vowing to reinstate its stock-buyback program this year.

Nevertheless, the December-quarter report will be crucial for LabCorp investors trying to gauge whether the September quarter was an aberration or the beginning of a troubling trend.

Analyst estimates have steadily declined over the past 90 days, with the current consensus targeting quarterly per-share profits of $2.14, implying 8% growth, on revenue of $2.35 billion, up 5%. LabCorp is expected to post results and offer its 2017 outlook in February. For now, the stock remains a Focus List Buy and a Long-Term Buy.

Airlines dodge antitrust claims

The Justice Department has yet to uncover evidence of collusion among U.S. airlines, though it has not formally ended its investigation, reported The Wall Street Journal. In May 2015, antitrust officials opened a probe into concerns that the largest four U.S. airlines, a group that includes Southwest Airlines ($52; LUV), conspired to control capacity in order to protect airfares. In other news, Southwest named Thomas Nealon as its next president, splitting off a role held by CEO Gary Kelly since 2008. Kelly, age 61, attributed the changes to succession-planning efforts. Southwest is a Focus List Buy and a Long-Term Buy.

Alaska Air Group ($94; ALK) reported 5.6% higher traffic in December, while capacity expanded 5.0%. The airline's traffic rose 2.8% to 5.0% in the final three months of 2016, versus its target of 3% growth for the quarter. Shares rallied on the report, and on an analyst upgrade at Bank of America ($23; BAC). The analyst noted that Alaska Air's $2.7 billion acquisition of Virgin America, completed in December, gives the airline access to several key airports on the West Coast. Alaska Air is a Buy and a Long-Term Buy. Bank of America is rated A (above average).

Corporate roundup

Amgen ($157; AMGN) prevailed in a patent lawsuit that protects a promising new drug from competition from Sanofi ($41; SNY) and Regeneron Pharmaceuticals ($364; REGN). A U.S. court blocked Sanofi and Regeneron from selling a new cholesterol-lowering drug that would have competed with Amgen's Repatha. Sanofi and Regeneron vowed to appeal the ruling. Although Repatha generated just $40 million in the September quarter (1% of Amgen's September-quarter sales), some analysts see the drug's annual sales ultimately topping $5 billion. Amgen shares rose on the news and remain a Buy and a Long-Term Buy.

Centene ($62; CNC) won a three-year Medicaid contract in three regions of Pennsylvania. The contract will begin on June 1. Centene is a Buy and a Long-Term Buy.

Walgreens Boots Alliance ($84; WBA) grew November-quarter earnings per share 7% to $1.10 excluding special items, to ease past the consensus by a penny. Total revenue, down 2% to $28.50 billion, missed analyst expectations due to weakness across all three business units. Same-store sales climbed 1.1% at U.S. retail pharmacies. Management raised the low end of its profit-guidance range for fiscal 2017 ending August, with the new midpoint of $5.05 per share implying 10% growth and exceeding the consensus at the time of the announcement. Walgreens is rated A (above average).

FedEx ($189; FDX) will begin to roll out a delivery service at Walgreens' retail pharmacies in the coming months and expects to expand to all 8,000 locations by the fall of 2018. FedEx is a Focus List Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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