Portfolio Review: March 27, 2017


FedEx delivers mixed quarter

FedEx ($196; FDX) said February-quarter earnings per share fell 6% to $2.35 excluding special items, missing the consensus by $0.27. Revenue increased 19% to $15 billion, in line with analysts' estimates. Management blamed the uneven results mostly on higher fuel and operating costs. Holiday volumes weren't as strong as expected, but overall volume rose for the quarter in all three business segments.

FedEx reaffirmed its outlook for adjusted per-share profit in fiscal 2017 ending May, which has a midpoint of $12.10, good for 12% growth and above the current consensus of $12.00. That guidance implies May-quarter earnings per share of $4.05, up 23%, and well ahead of the consensus of $3.65 at the time of the announcement; such back-loaded guidance adds risk to the shares. For now, FedEx remains a Focus List Buy and a Long-Term Buy.

Top 15 Utilities: 2 in, 2 out

Edison International's ($80; EIX) infrastructure investments are starting to pay off in the form of higher growth. Over the last 12 months, the utility managed 32% growth in per-share profits. The consensus projects growth of 4% this year and next year, targets the utility should be able to beat — estimates are on the rise. The shares look slightly more expensive than their peers, but we're willing to pay a modest premium for the superior growth and rising profit margins. Over the last three years, Edison has boosted its dividend at an annualized rate of 15%. Edison, which serves nearly 5 million electricity customers in California, yields 2.7%. This stock is joining the Top 15 Utilities portfolio.

On the strength of improving operating momentum, the Quadrix Overall score for Eversource Energy ($60; ES) has risen nearly 20 points in the last month. Eversource, which supplies electricity or natural gas to about 3.5 million customers in Connecticut, New Hampshire, and Massachusetts, is less likely to deliver a big upside surprise than the typical utility — and less likely to disappoint. Regular investments in its transmission network should keep profits growing, and a steady stream of conversions from oil to natural-gas heat should keep profit margins rising. We're adding Eversource, yielding 3.2%, to the Top 15 Utilities portfolio.

Allete ($67; ALE) earns the weakest Quadrix scores in the Top 15 Utilities portfolio, with a 34 Overall and even lower scores for both of our sector-specific ranks. Growth has been weak, and profit estimates are falling. Despite Allete's erosion of fundamentals, the shares have returned 6% over the last three months and trade at 22 times trailing earnings, 7% above the industry median. Sell on the strength. Allete is being dropped from the Top 15 Utilities and reduced to a B (average) rating on our Utility Update.

CONE Midstream Partners ($21; CNNX) has not reacted well to the slump in natural-gas prices. The MLP is down 10% so far this year; many other master limited partnerships have also declined. With gas markets oversupplied, CONE could see a decline in transmission volumes through its pipelines, and producers might cut back on exploration. In the wake of a lackluster December quarter, profit estimates for this year and next year have fallen. CONE has also seen declines in its Quadrix Overall and sector-specific scores. We're dropping CONE from the Top 15 Utilities portfolio.

Technology review

Alphabet ($850; GOOGL) has found itself on opposite ends of a pair of mishaps in the past month. First, a rare server outage at Amazon.com ($848; AMZN) caused Amazon's cloud services to go down for several hours on Feb. 28. Rivals Alphabet and Microsoft ($65; MSFT) could capitalize on the disruption. With the leading share of the cloud-services market, Amazon Web Services generated about $12.2 billion in sales last year, well ahead of estimated sales of $2.5 billion for Microsoft and $1 billion for Alphabet. However, Amazon clients may be motivated to reduce their reliance on a single cloud provider.

Heavy investments made by Microsoft and Alphabet in the past year could also help close the gap. Alphabet has already won several new contracts in 2017 with high-profile customers, including Snap ($22; SNAP), Colgate-Palmolive ($74; CL), eBay ($34; EBAY), Schlumberger ($78; SLB), and Verizon Communications ($50; VZ).

Second, several large U.K. retailers and banks pulled ads from Alphabet'sYouTube after their spots appeared alongside offensive videos. Alphabet apologized for the blunder and pledged to boost its staff to monitor videos uploaded to the website. The company estimates that 400 hours of video is uploaded to YouTube every minute. Alphabet is a Focus List Buy and a Long-Term Buy. Amazon.com, eBay, and Verizon are rated B (average). Colgate, Microsoft, and Schlumberger are rated C (below average).

Apple ($141; AAPL) refreshed several popular devices and showed off new video-messaging software that encroaches on turf held by Snap and Facebook ($140; FB) in the world of messaging applications. Apple unveiled its latest iPad tablet, featuring a brighter screen and a lower starting price of $329. The company also introduced a limited-edition iPhone 7 and 7 Plus that comes in a red finish; a portion of the proceeds from red iPhones will fund AIDS research. Additionally, Apple increased the storage capacity of its smaller iPhone SE model.

Separately, Apple said it now plans to open four research facilities in China later this year, double its original target. Apple has pledged to spend roughly $500 million on research and development in China, as it tries to revive sales in the country. Apple's revenue in China slumped 24% in the 12 months ended December. Apple is a Buy and a Long-Term Buy. Facebook is a Long-Term Buy.

Media update

Disney ($112; DIS) appears to have another blockbuster movie on its hands after Beauty and the Beast took in $350 million globally in its opening weekend. The movie's debut came in well ahead of the expectations of several analysts. Playing in 66% of the international market, the movie has yet to open in such key countries as Australia, France, and Japan. Disney is a Long-Term Buy.

Comcast ($37; CMCSa) has reportedly entered talks to divest its 45% stake in a joint venture between DreamWorks Animation and Chinese backers. Comcast inherited the venture when it acquired DreamWorks in August for $3.8 billion. Comcast's Universal unit has already established its own presence in China. Comcast is a Buy and a Long-Term Buy.

Corporate roundup

Amgen ($167; AMGN) shares fell after the company released the full results of a study involving cholesterol-lowering drug Repatha. Researchers found that Repatha reduced risk of death, heart attacks, and strokes by 20% and reduced a broad range of heart-related events by 15%. However, some analysts were disappointed that Repatha wasn't more effective and questioned whether insurers will become more open to covering the pricey drug. Amgen is a Buy and a Long-Term Buy.

Biogen ($278; BIIB) won a ruling against a hedge fund concerning the intellectual property rights for multiple schlerosis drug Tecfidera. The decision, though subject to appeal, should help Biogen stave off generic competition for its top drug. Biogen is a Buy and a Long-Term Buy.

Southwest Airlines ($52; LUV) plans to invest up to $300 million in new technology, in addition to $500 million committed to upgrading its reservation system. Management expects these investments to pay for themselves by 2020. Southwest targets $2.3 billion in capital spending this year, up 15%, with about $1.3 billion earmarked for new airplanes. The stock is a Focus List Buy and a Long-Term Buy.

J.P. Morgan Chase ($88; JPM) raised its quarterly dividend 4% to $0.50 per share, payable April 6. J.P. Morgan is a Buy and a Long-Term Buy.

Rank Changes

We are making no changes to our buy lists this week. In the Top 15 Utilities portfolio, Edison International ($80; EIX) and Eversource Energy ($60; ES) are replacing Allete ($67; ALE) and CONE Midstream Partners ($21; CNNX).

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