Portfolio Review: March 20, 2017


Airline review

Alaska Air Group ($95; ALK) said traffic rose 1.7% in February on 1.2% capacity growth. Its load factor, a measure of efficiency, improved to 80.4%. In other news, Alaska continues its aggressive expansion in San Francisco's market, winning tentative approval for a new route to Mexico City, while also announcing nine additional nonstop routes to midsized U.S. cities. In December, Alaska Air paid $2.6 billion to acquire Virgin America, which flies nonstop to 21 destinations from San Francisco. Alaska Air is a Buy and a Long-Term Buy.

Southwest Airlines ($54; LUV) reported 1.1% higher traffic and 1.2% higher capacity for February. Management now sees operating revenue per available seat mile falling 2% to 3% for the March quarter, versus its prior guidance of flat to down 1%. Southwest experienced unexpected weakness for last-minute bookings in the second half of February, though demand has rebounded in March. Southwest Airlines is a Focus List Buy and a Long-Term Buy.

Technology update

Citrix Systems ($83; CTXS) shares rallied on published reports that the company may put itself up for sale. Citrix has hired Goldman Sachs ($247; GS) to gauge takeover interest from potential suitors. But investors should keep expectations about a takeover in check. First, several private-equity firms reportedly passed on pursuing a deal with Citrix, though one is still interested. Second, Citrix shares have surged 40% in the past year, potentially limiting any takeover premium. Third, these reports don't always lead to an immediate sale; last June, Reuters said F5 Networks ($146; FFIV) had hired Goldman to explore a potential sale. A firm offer has yet to materialize. Citrix has a market value of roughly $13 billion. Citrix and F5 are rated Buy and a Long-Term Buy. Goldman is rated A (above average).

Alphabet's ($868; GOOGL) venture-capital business led a $25 million investment in Currencycloud, a startup company that supplies technical infrastructure for customers to send funds internationally through mobile applications. In other news, the head of Alphabet's Project Loon business quit after just six months on the job. In trying to scale back costs, Alphabet recently revamped the venture, which aims to provide internet access to rural and remote areas. Alphabet is a Focus List Buy and a Long-Term Buy.

Intel ($35; INTC) agreed to pay $15.3 billion to acquire Mobileye ($61; MBLY), a company that designs integrated cameras, semiconductors, and software for self-driving cars. The price tag represents roughly a 33% premium to where Mobileye shares traded before the deal's announcement. With its core personal-computer market stubbornly sluggish, Intel has invested in more than 10 start-up companies in the nascent self-driving-car industry. Citing the amount of data vehicles could potentially encounter, Intel CEO Brian Krzanich told The Wall Street Journal that he views the automobile as "a server on wheels." Intel is rated A (above average).

Corporate roundup

A late-stage study revealed that Amgen's ($183; AMGN) Repatha lowered bad cholesterol in patients, reducing the need for invasive procedures. U.S. regulators approved Repatha in 2015, but insurers have been reluctant to cover the cholesterol-lowering drug, which carries a list price of more than $14,500 a year. Amgen is a Buy and a Long-Term Buy.

Both Carnival ($57; CCL) and rival Royal Caribbean Cruises ($97; RCL) plan to cancel visits to South Korean ports for China-based cruises. Relations between China and South Korea have deteriorated since the U.S. and South Korea announced plans to establish a missile system as a defense against North Korea. Chinese officials claim the missile system could target China. Carnival is a Buy and a Long-Term Buy.

The market for initial public offerings, off to a slow start in 2017, may be showing signs of a pickup. A group of  banks including J.P. Morgan Chase ($92; JPM) was hired to help Cloudera pursue an IPO later this year. Cloudera, a data-analytics company, could be valued at roughly $4 billion.

Separately, J.P. Morgan continues to prepare for the implementation of the Labor Department's fiduciary rule, aimed at eliminating potential conflicts of interest for advisers who manage clients' retirement accounts. To comply with the new regulations, J.P. Morgan plans to stop collecting commissions on retirement accounts, which will either be charged a flat adviser fee or moved to an online platform for investors to manage themselves. The fiduciary rule affects about 5% of J.P. Morgan's $1.1 trillion in client assets. The U.S. has proposed a 60-day delay for the fiduciary rule, originally set to launch on April 10, as the White House considers repealing or revising the regulation. J.P. Morgan is a Buy and a Long-Term Buy.

Republican proposal fails to get clean bill of health

The Republican health-care proposal to replace the Affordable Care Act received a mixed report card from the nonpartisan Congressional Budget Office. The plan would help lower the federal deficit by an estimated $337 billion in a decade, says the CBO. That savings, however, could come at a big cost for millions of Americans and some health insurers. About 14 million people could lose their insurance next year under the new plan, estimates the CBO, and that number could reach 24 million by 2026.

The CBO sees insurance premiums climbing 15% to 20% in the next couple years before falling 10% from current levels in a decade as younger people sign up for less-comprehensive coverage. However, income-based subsidies would be replaced with age-based tax credits less generous for low-income Americans. As a result, premiums paid by some people under the new health plan are expected to rise sharply, potentially pricing them out of the market.

Medicaid, representing 17% of overall health spending, would also undergo major changes. ACA extended Medicaid coverage to 12 million people in 31 states who couldn't afford private insurance but did not qualify for the program previously. The Republican proposal would roll back Medicaid expansion by 2020 and reduce spending on Medicaid by $880 billion, or 25%, in 10 years, says the CBO.

Reducing Medicaid's reach could pose a challenge to Centene ($69; CNC), the largest Medicaid insurer, with a 13% share of the market. Since ACA launched in 2014, Centene's Medicaid membership has more than doubled to 6.9 million people, representing about 61% of its total medical members. Other health insurers with significant exposure to Medicaid include Anthem ($169; ANTM), Molina Healthcare ($45; MOH), and UnitedHealth ($172; UNH). Centene shares have fallen 5% since the new health plan was unveiled on March 6 but remain up 19% in 2017.

The health proposal has come under attack from members of both political parties. Other groups, including the AARP and major associations representing physicians, hospitals, and insurers, also oppose the plan. The CBO report card creates more doubt that the current proposal will become law. Several Republican senators suggest the current bill has no future without major changes. But they seem divided over whether the cutbacks on Medicaid and government assistance through tax credits go too far or not far enough. Centene is a Focus List Buy and a Long-Term Buy. Both Anthem and UnitedHealth are rated A (above average).

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