Portfolio Review: February 27, 2017


LabCorp passes quarterly test

Laboratory Corp. of America ($139; LH) said per-share profits rose 9% to $2.15 excluding special items in the December quarter, topping the consensus by $0.02. Revenue rose 6% to $2.39 billion on 8% growth from its traditional lab-testing unit and 4% growth from its drug-development business. Cash from operations climbed 12%, while free cash flow advanced 10% to $65 million. Looking ahead to 2017, management expects per-share profits to increase 6% to 10% on revenue growth of 5% to 7%. Analysts had anticipated 9% higher per-share profits on 4% revenue growth. LabCorp also expects free cash flow to rise 3% to 9% this year.

LabCorp shares rallied on the solid quarter and guidance, rebounding from a dip earlier this month. The stock had slumped on a report that LabCorp may be considering an $8 billion acquisition of contract-research organization Pharmaceutical Product Development. On the conference call with analysts, LabCorp obliquely addressed the rumors, noting it considers a number of deals that it ultimately rejects. LabCorp's balance sheet is already highly leveraged, with total net debt of $5.42 billion, so any large deal would likely need to be funded with stock. LabCorp is a Focus List Buy and a Long-Term Buy.

Retail review

Foot Locker ($71; FL) raised its quarterly dividend 13% to $0.31 per share, payable April 28. The retailer has increased its dividend 9% to 14% in each of the past six years. Management also approved a new $1.2 billion stock-buyback plan that will last through January 2020. Foot Locker spent $795 million of its prior $1 billion stock-repurchase program, announced two years ago. Under its previous plan, Foot Locker lowered its stock count by more than 7%.

The company sees capital expenditures slipping 2% to $277 million in fiscal 2018 ending January. Foot Locker was expected to offer additional details on its upcoming year when it reported January-quarter results on Friday, Feb. 24, after our deadline. The consensus targeted 14% higher per-share profits and 5% higher sales. Analyst estimates had held firm over the past 60 days. Foot Locker is a Buy and a Long-Term Buy.

Foot Locker's results coincide with improving retail trends. Core retail sales rose at a seasonally adjusted 5.6% rate in January, the strongest gain since March 2012. Growth accelerated for apparel, up 2.5%, while sales declines moderated for sporting goods, down 0.8%. Moreover, several retailers had already posted solid January-quarter results.

Wal-Mart Stores ($72; WMT) said earnings per share fell 13% to $1.30 excluding special items, easing past the consensus by a penny. U.S. same-store sales rose 1.8% excluding fuel, also ahead of analyst forecasts. Higher traffic helped to offset the effects of lower food prices. Wal-Mart raised its quarterly dividend 2% to $0.51 per share, payable April 3. The retailer has increased its distribution in 44 consecutive years. Wal-Mart Stores is rated A (above average).

Home Depot ($145; HD) grew per-share profits 23% to $1.44, comfortably ahead of the consensus estimate of $1.33. Same-stores sales advanced 5.8%. For fiscal 2018 ending January, the company expects per-share profits to rise 11% to $7.13, missing the consensus of $7.17. Same-store sales are projected to rise about 4.6% this year. Home Depot hiked its quarterly dividend 29% to $0.89, payable March 23. Home Depot is rated B (average).

Despite the strong operating results, the retail industry could face a major setback if lawmakers impose a 20% tax on imports (but not exports) to help fund cuts to the corporate-tax rate. A group of CEOs at retailers including Target ($66; TGT), AutoZone ($735; AZO), and Walgreens Boots Alliance ($86; WBA) met with President Trump to urge him to avoid the plan. Retailers claim their costs from a tax on imports would outweigh any benefits from lower corporate taxes. Automakers and oil refiners would also likely be hurt by the tax, while major exporters such as Boeing ($175; BA), General Electric ($30; GE), and Pfizer ($34; PFE) stand to benefit. Even among Republicans, the import tax has its share of staunch detractors. AutoZone and Walgreens are rated A (above average). Boeing, Pfizer, and Target are rated B (average). GE is rated C (below average).

Deals rumored, completed, and abandoned

Comcast's ($38; CMCSa) NBCUniversal has reportedly entered late-stage talks to acquire a 25% stake in European broadcaster Euronews. The deal could be worth around $30 million. Comcast is a Buy and a Long-Term Buy.

Apple ($137; AAPL) acquired RealFace, a start-up based in Israel that designs facial-recognition technology. Terms were not announced. Apple is a Buy and a Long-Term Buy.

Kraft Foods ($93; KHC) dropped its $143 billion offer to acquire Unilever ($47; UL) just days after its initial takeover proposal was met with derision by Unilever's CEO. Unilever, a maker of personal-care products such as soap and deodorant, cited the deal's price and Kraft's lack of experience in consumer staples for rejecting the offer.

Kraft's failed deal adds to the tally of massive takeover proposals to fall apart in the past year: Pfizer's ($34; PFE) $160 billion bid for Allergan ($246; AGN), Honeywell International's ($125; HON) $90.7 billion bid for United Technologies ($113; UTX), Anthem's ($163; ANTM) $48 billion bid for Cigna ($147; CI), and Aetna's ($129; AET) $34 billion bid for Humana ($206; HUM). The volume of withdrawn or rejected deals totaled $808 billion in 2016, an eight-year high and up 50% from 2015. Aetna and Anthem are rated A (above average). Cigna, Honeywell, Pfizer, and United Technologies are rated B (average). Kraft is rated C (below average).

Corporate roundup

In its latest effort to keep costs under control, Alphabet ($851; GOOGL) said its Project Loon will require far fewer balloons than previously planned, increasing the likelihood that the venture will become profitable. Project Loon uses balloons to beam the internet to remote regions. Alphabet is a Focus List Buy and a Long-Term Buy.

Carnival ($56; CCL) agreed to order the construction of its first cruise ships that will operate under a joint venture in China. Separately, Carnival won approval from Cuba's government to increase the number of voyages to the island, starting in June. Carnival is a Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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