Portfolio Review: May 22, 2017


Sales shift doesn't dim Owens' outlook

In April, Owens Corning ($61; OC) reported an unexpectedly strong March quarter, with per-share profits surging 60% on revenue growth of 20%. That growth was partly an aberration, driven by customers ramping purchases ahead of a March price hike that essentially sucked sales out of the June quarter. The price increases helped Owens counter rising inflation for the raw materials that comprise its insulation and roofing products.

Not surprisingly, analyst profit estimates for the June quarter have slipped since the report, with the consensus now projecting a 19% decline versus its previous 3% dip. But Owens said its 2017 outlook allows room for upside if plans for more price hikes later this year prove successful. Although management refrained from raising full-year guidance, analyst estimates for 2017 are rising, with the consensus profit-growth target now 10%, versus its previous 6% estimate.

Further juicing the company's 2017 outlook, Owens agreed on May 15 to pay $560 million in cash to acquire Pittsburgh Corning, a company that makes cellular-glass insulation for commercial and residential buildings. Operating in 17 countries, Pittsburgh Corning generated more than $240 million in revenue last year, roughly 4% of Owens' sales. The deal is expected to close in the September quarter. Owens' shares have rallied 18% in 2017, well above the 5% advance by the S&P 500 Index. Owens is a Focus List Buy and a Long-Term Buy.

Apple keeps busy ahead of next iPhone

Apple's ($150; AAPL) iPhone 7 and larger 7 Plus were the top-selling smartphones in the March quarter, said industry researcher Strategy Analytics. The iPhone 7 took a 6% share of the global smartphone market, while the iPhone 7 Plus model's 5% slice may have been larger if supplies had kept up with demand. The iPhone sales seem especially impressive considering some consumers have likely postponed upgrading until Apple releases its next iteration, expected this fall. Some analysts say the so-called iPhone 8 could command a starting price of $999; the iPhone 7 costs $649 and the iPhone 7 Plus $769. The higher price could provide some relief for Apple's sagging gross profit margin, down in five consecutive quarters.

With the attention of many investors centered on the forthcoming iPhone, Apple made a couple of small deals aimed at boosting its technology portfolio and widening the appeal of its existing devices. It reportedly spent about $200 million to acquire Lattice Data, which uses artificial intelligence that organizes unstructured, digital data so it can be measured by researchers and analysts. Apple also bought Beddit, a company that makes a sensor strip that tracks users' sleeping patterns. The device, currently sold in Apple stores for $150, can be synced to Apple products. The Beddit deal could be especially beneficial for the Apple Watch, which has been marketed as a fitness device. Separately, chatter has surfaced that Apple may equip future Apple Watch models with the ability to monitor users' glucose levels. Apple is a Buy and a Long-Term Buy.

Ingersoll shares heat up

Ingersoll-Rand ($88; IR) shares have rallied 17% in 2017, including a 3% gain since posting upbeat March-quarter results and raising the full-year forecast. Leveraged to the improving commercial- and residential-construction markets, Ingersoll operates two units: climate (78% of 2016 revenue, with products including heating, ventilation, and air conditioning systems) and industrials (22%, compressed-air systems, power tools, and fluid-management equipment). It has launched more than 200 new products in the past three years and refreshed 85% of its product portfolio since 2012, giving management confidence that it can outgrow its markets.

Ingersoll sees organic revenue climbing at annual rate of 4% to 4.5% through 2020. Expanding profit margins and stock buybacks should help support annual per-share-profit growth of 11% to 13%. Analyst estimates have drifted higher over the past 60 days but may not yet fully reflect management's guidance. The consensus targets 3% higher revenue on 9% growth for per-share profits in 2017, followed by 4% sales growth and 13% profit growth in 2018. Ingersoll is a Long-Term Buy.

CDW finds new growth avenues

Long known as a distributor of personal computers, printers, and software, CDW ($59; CDW) has seen recent growth driven by value-added — and more profitable — solutions such as security, services, and cloud-related products. The improving product mix led CDW in May to increase its target for operating profit margin through 2018. Management continues to forecast double-digit growth for per-share profits through 2018 as its revenue outpaces overall U.S. information-technology spending by 200 to 300 basis points. CDW expects U.S. tech spending to increase 2% to 3% this year.

Although CDW has steadily taken share from peers in recent years, it controls just a 6% share of its addressable market, leaving a long runway for future growth. The 2015 acquisition of technology-services provider Kelway expanded CDW's footprint in the U.K. The deal is also helping CDW win more business from existing customers with international operations.

CDW has grown sales in at least 27 straight quarters, while per-share profits consistently rise more than 10%; both trends are expected to continue through at least the September quarter. The stock has struggled to keep pace with operating growth, despite delivering a total return of 43% over the past 12 months. Its trailing P/E ratio lingers below 17, near its lowest level since CDW's initial public offering in July 2013. CDW is a Focus List Buy and a Long-Term Buy.        

Corporate roundup

Hackers have threatened to post online an unreleased movie they claim to have stolen from Disney ($106; DIS), said CEO Bob Iger. Disney did not confirm that the theft occurred and said it would refuse to pay the ransom sought by the hackers. Disney is a Long-Term Buy.

The possible Disney hack appears unrelated to the cyberattacks that ensnared more than 200,000 computers around the world by exploiting a flaw in Microsoft's ($67; MSFT) software. Microsoft had issued companies and individuals on newer systems a patch to inoculate personal computers. It's unclear whether the attack will boost demand for licensed Microsoft software by PC users who have come to rely on pirated or outdated software. Microsoft is rated B (average).

Anthem ($176; ANTM) formally ended its bid to acquire Cigna ($158; CI) after losing a key court battle that stalled its contentious pursuit of the smaller insurer. Anthem says it has no intention of paying the $1.85 billion breakup fee to Cigna, which seeks an additional $13 billion in damages. Citing antitrust concerns, a federal judge blocked the $48 billion deal in February. Anthem and Cigna are rated A (above average).

Aetna ($139; AET) plans to pull out of health exchanges in Delaware and Nebraska next year, which would mark the end of its participation in marketplaces under the Affordable Care Act. In 2016, Aetna said it would withdraw from exchanges in 11 states. This year it has announced its departure from two more states. Aetna is rated A (above average).

Alphabet's ($942; GOOGL) autonomous-car division has partnered with ride-hailing company Lyft to develop self-driving technology. Alphabet is a Focus List Buy and a Long-Term Buy.

Facebook ($145; FB) plans to reimburse advertisers after discovering a software flaw that incorrectly billed some clients. Facebook said a video-advertising format had miscounted the number of times users clicked a button that took them to clients' websites. Facebook said the problem affected 0.04% of displayed ads. Facebook is a Buy and a Long-Term Buy.

Southwest Airlines ($57; LUV) hiked its quarterly dividend 25% to $0.125 per share, payable June 28. The company also approved a new $2.0 billion stock-repurchase plan, roughly 6% of outstanding shares at the current price. Southwest Airlines is a Focus List Buy and a Long-Term Buy.

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