Portfolio Review: May 15, 2017


ON Semiconductor leaps onto buy lists

ON Semiconductor ($15; ON) delivered solid March-quarter results and upbeat guidance for the June quarter, reflecting robust demand for its sensors and power-management components in automotive, industrial, and computing products. The company, which acquired Fairchild Semiconductor in September, said per-share profits doubled to $0.18 last quarter. Revenue surged 76%. Operating cash flow rose 34% in the 12 months ending March, while free cash flow has more than doubled to $484 million. Analyst estimates are rising after management said sales should climb 35% to 40% in the June quarter.

With a stock-market value of $6.3 billion, ON is a small player in the volatile, highly cyclical semiconductor industry. But its shares look unduly cheap, trading below 12 times estimated 2017 profits, versus an industry median of 19. The consensus anticipates 41% higher per-share profits for the year. ON, earning a Quadrix Overall rank of 91, joins the Buy and Long-Term Buy lists.

Stick with CommScope for now

CommScope ($38; COMM) reported solid March-quarter results but gave dismal guidance for the June quarter, casting doubt on its prospects for the remainder of the year. Last quarter the company grew earnings per share 8% to $0.52 excluding special items to match the consensus. Sales slipped 1% to $1.13 billion, roughly in line with analyst expectations.

CommScope said it anticipates more cautious spending on its networking-infrastructure gear in the June quarter before demand rebounds in the second half of the year. For the June quarter, management's target per-share-profit range has a midpoint of $0.645, down 13%, on 7% lower revenue; the consensus had projected per-share profits of $0.81 on 1% higher revenue at the time of the announcement. CommScope also cut its 2017 guidance.

The shares plunged 15% on the day of the report, though they have regained 7% since then. We plan to hold the stock in anticipation of a continuing rebound. We may consider selling the shares if they reach $41 to $45. For now, CommScope remains a Buy and a Long-Term Buy.

Traditional TV titans struggle to navigate new digital world

The pay-TV industry set a record by losing a net 762,000 subscribers in the March quarter, amplifying investor concerns about the long-term viability of traditional TV. TV ratings have declined 33% over the past four years while TV advertising rates have climbed 20%, reported Bloomberg. In a sign that advertisers are increasingly reluctant to spend more for dwindling audiences, national TV ad spending rose just 1% last quarter.

Encouragingly, CBS ($63; CBS) CEO Leslie Moonves said, "We are not being affected in any way by any changes in subscription numbers throughout the industry." CBS said adjusted per-share profits from continuing operations climbed 9% to $1.04 in the March quarter, topping the consensus by $0.08. Revenue fell 7% to $3.34 billion but surpassed analyst expectations. CBS blamed the sales decline on airing two fewer NFL playoff games last quarter, one being the Super Bowl. Retransmission revenues and fees from CBS affiliated stations and digital-subscription services grew 28% last quarter, putting CBS on track for 25% full-year  growth. Shares rose on the report. CBS is a Focus List Buy and a Long-Term Buy.

Troubles continue to brew at Disney's ($110; DIS) ESPN, which faced higher programming costs and subscriber losses last quarter. Disney grewMarch-quarter earnings per share 10% to $1.50 excluding special items, surpassing the consensus of $1.41. Revenue, up 3% to $13.37 billion, missed the consensus estimate. Despite the challenging environment, CEO Bob Iger seemed upbeat about consumer interest in digital services featuring ESPN. Disney plans to launch a digital version of ESPN this year, though the streaming subscription service will not replicate the current cable product. The strategy could help Disney grab a growing share of ad spending that is migrating to the internet. But some analysts say the industry's broad shift toward streaming packages could eventually cut out ESPN, which has far higher carriage fees than most other networks. Disney is a Long-Term Buy.

Citrix takeover in works?

At least three private-equity firms submitted bids to acquire Citrix Systems ($87; CTXS), reported Bloomberg. The company has also caught the eye of at least one strategic suitor. Citrix has hired Goldman Sachs ($225; GS) to gauge takeover interest. Citrix found no takers when it attempted to sell itself in 2015. Since then it has sold off assets, spun off its GoTo business, and given a board seat to Elliott Management, an activist investor that successfully pressured four companies to sell themselves in 2016.

Citrix's enterprise ratio (market value and debt minus cash, divided by earnings before interest, taxes, depreciation, and amortization) of 13.5 looks expensive relative to other stocks in our research universe, though the ratio is more than 15% below its own five-year average and the median S&P 1500 application-software stock. However, the company has a market value of $13.78 billion, and few leveraged buyouts have exceeded $10 billion in the past decade. Citrix remains a Buy and a Long-Term Buy. Goldman is rated A (above average).

Technology update

Qualcomm ($55; QCOM) reportedly seeks to block Apple ($153; AAPL) from importing the iPhone into the U.S., as their feud over licensing fees intensifies. Apple claims Qualcomm improperly used its market position to charge excessive fees. In a countersuit, Qualcomm accused Apple of withholding licensing payments. Apple is a Buy and a Long-Term Buy. Qualcomm is rated B (average).

Facebook ($150; FB) shuttered its animation studio that made short films for its virtual-reality headset Oculus. Facebook is a Buy and a Long-Term Buy.

Corporate roundup

Alaska Air Group ($83; ALK) grew traffic 7.8% in April, while expanding capacity 4.6%. Its load factor, a key efficiency metric for airlines, improved to 86.6% from 84.1% in April 2016. Southwest Airlines ($58; LUV) reported 8.4% higher traffic last month, on capacity growth of 7.6%, pushing its load factor to 84.0% from 83.4%. Alaska Air is a Buy and a Long-Term Buy. Southwest Airlines is a Focus List Buy and a Long-Term Buy.

Celgene ($120; CELG) shares dipped after partner OncoMed ($4; OMED) said it was discontinuing trials for an experimental drug for lung cancer that failed an early-stage study. OnocoMed said it will review the program with Celgene. Celgene is a Focus List Buy and a Long-Term Buy.

Owens Corning ($62; OC) will receive $30 million in cash after settling a contract dispute with customer TopBuild ($52; BLD), one of the largest U.S. insulation distributors. Both companies said they expect to continue their commercial relationship — good news for Owens, which has a contract with TopBuild for about $130 million in annualized sales, according to Goldman Sachs ($225; GS). Owens first disclosed the contract dispute in April 2016. Owens is a Focus List Buy and a Long-Term Buy. Goldman is rated A (above average).

Rank Changes

ON Semiconductor ($15; ON) is being initiated as a Buy and a Long-Term Buy. Vanguard Short-Term Corporate Bond ($80; VCSH) exchange-traded fund now accounts for 8.8% of the Buy List and 10.8% of the Long-Term Buy List.

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