Portfolio Review: January 30, 2017


Earnings roll call

Regional banks

For the December quarter, Citizens Financial Group ($38; CFG) reported per-share profits of $0.55, up 31% and $0.03 above the consensus. Revenue increased 11% to $1.36 billion. Net interest income advanced 4% on loan growth and a higher net interest margin. Total average deposits rose 8%. Citizens said its previously announced 17% dividend hike to $0.14 per share will be payable on Feb. 16.

Looking ahead to 2017, management expects 5.5% to 7% growth in loans and deposits, a wider net interest margin, and 3% to 5% higher fee income. The consensus expects per-share profits to rise 15%. Citizens Financial is a Focus List Buy and a Long-Term Buy.

Zions Bancorp's ($43; ZION) December-quarter earnings per share surged 40% to $0.60, topping the consensus by $0.08. Net interest income increased 7%, while the bank's net interest margin widened to 3.37% from 3.23%. Loans grew 5% and deposits 6%.

Headwinds eased for oil-and-gas loans, which represent 5% of Zions' loan portfolio. Net charge-offs for energy-related loans totaled $16 million, down from $41 million in the September quarter. The criticized-loan ratio, which identifies problematic loans, stood at 38% for oil-and-gas loans, compared to 42% in the September quarter. Zions expects higher customer fees, net interest income, and loan balances to support growth in 2017. The consensus projects 21% growth in per-share profits this year. The stock is a Focus List Buy and a Long-Term Buy.


Citrix Systems ($96; CTXS) reported per-share profits of $1.61 excluding special items, down 3% but ahead of the consensus estimate of $1.50. Revenue held virtually flat at $908 million but topped the consensus. Management's guidance for both the March quarter and 2017 missed analysts' expectations by a wide margin. Its outlook excludes the GoTo business, expected to be spun off on Jan. 31; analysts may have still included GoTo in their models. Citrix also announced a $500 million share-repurchase program. Citrix is a Focus List Buy and a Long-Term Buy.

F5 Networks ($146; FFIV) said December-quarter earnings per share rose 14% to $1.98, topping the consensus by $0.04. Sales advanced 5% to $516 million. For the March quarter, F5 gave guidance targets with midpoints of $1.965 for earnings per share, up 17%, and $523 million for revenue, up 8%; both were a sliver below the consensus. F5 is a Focus List Buy and a Long-Term Buy.

Lam Research ($117; LRCX) earned $2.24 per share excluding special items in the December quarter, up 43% and $0.05 above the consensus. Revenue jumped 31% to $1.88 billion, slightly ahead of the consensus. Lam's March-quarter guidance also surpassed analyst expectations. The midpoint of management's outlook calls for earnings per share of $2.55, implying 116% growth, on revenue of $2.13 billion, up 62%. Lam is a Focus List Buy and a Long-Term Buy.


D.R. Horton ($31; DHI) grew earnings per share 31% to $0.55 in the December quarter, comfortably ahead of the consensus estimate of $0.48. Total revenue, up 20% to $2.90 billion, also surpassed analysts' expectations. Net sales orders rose 15% by volume and 17% by value, while the cancelation rate slipped to 22%. The backlog rose 7% to $3.4 billion, equating to about one-quarter of annual sales. Shares rallied on the results.

In one of his first actions as president, Donald Trump revoked a plan to lower mortgage-insurance premiums on federally insured home loans. The plan was designed to keep homes affordable as interest rates rise, and Trump's move could weigh on mortgage volumes this year. Encouragingly, D.R. Horton reaffirmed its full-year guidance, adding that it's well-positioned for the crucial spring selling season. The midpoint of D.R. Horton's sales guidance for fiscal 2017 ending September is $13.60 billion, slightly ahead of the consensus of $13.56 billion at the time of the announcement. D.R. Horton is a Buy and a Long-Term Buy.

Things fall apart

A U.S. judge blocked Aetna's ($119; AET) $34 billion acquisition of Humana ($202; HUM) due to competition concerns. The deal, first announced in July, had proposed combining the second- and fourth-largest Medicare insurers. Hoping to steer clear of antitrust roadblocks, Aetna and Humana had arranged to sell off health plans covering 290,000 customers in 21 states to Molina Healthcare ($57; MOH). They now must decide between appealing the decision and abandoning the deal. Humana will collect a $1 billion breakup fee from Aetna if the acquisition fails to close. Aetna is rated A (above average).

The Aetna ruling adds more doubt that Anthem ($154; ANTM) will win approval for its cash-and-stock acquisition of Cigna ($149; CI), currently valued at $54 billion. The New York Post has reported that a federal judge is expected to block the deal. Earlier this month, Anthem extended its deadline for completing the takeover to April 30. Anthem could face a termination fee of $1.8 billion. Anthem is rated A (above average). Cigna is rated B (average).

Antitrust worries continue to plague Walgreens Boots Alliance's ($82; WBA) pending $9.4 billion acquisition of Rite Aid ($7; RAD). The Federal Trade Commission remains unconvinced that Walgreens' plan to sell 865 drugstores to Fred's ($15; FRED) will sufficiently preserve competition in the retail-pharmacy industry. The deal would merge the second- and third-largest U.S. pharmacy chains. Walgreens is rated A (above average).

Corporate roundup

Apple ($122; AAPL) filed a $1 billion lawsuit against Qualcomm ($57; QCOM) that claims the semiconductor company used its large market position to extract "unreasonable" licensing terms for its patents. The U.S. Federal Trade Commission has also accused Qualcomm of using illegal tactics to limit competition for certain semiconductors used in smartphones. Apple is a Buy and a Long-Term Buy. Qualcomm is rated A (above average).

Alphabet ($858; GOOGL) agreed to acquire Fabric, a business owned by Twitter ($17; TWTR), which makes development tools for mobile applications. Terms of the deal were not announced. Alphabet is a Focus List Buy and a Long-Term Buy.

Kroger ($33; KR) announced plans to add 10,000 workers in the coming year. The grocer's work force increased by 12,000 jobs, or 3%, in the past year. Kroger is a Buy and a Long-Term Buy.

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