Portfolio Review: June 5, 2017


Tech companies pursue AI deals

Alphabet ($987; GOOGL) made headlines in the past week when its AlphaGo, a program designed with artificial intelligence, beat the world's best player of Go, a board game that involves a greater range of potential moves than chess. Not surprisingly, companies aren't content to merely play around with the new technology. A total of 34 AI startups were acquired in the March quarter. Alphabetled the way by snapping up 11 AI companies, while Apple ($153; AAPL), Facebook ($151; FB), Intel ($36; INTC), and Ford Motor ($11; F) also participated in the buying spree.

Seeking to further expand its presence in the budding technology, Alphabet has also reportedly launched a new organization that will invest in AI startups. Separately, Apple has begun to design a semiconductor to power artificial intelligence for its mobile devices, according to Bloomberg. AI could also potentially provide the underpinning for Apple's push into autonomous-driving software and augmented reality. Apple CEO Tim Cook has said that he envisions a future where augmented reality is as ubiquitous as smartphones. Apple and Facebook are rated Buy and Long-Term Buy. Alphabet is a Focus List Buy and a Long-Term Buy. Intel is rated A (above average). Ford is rated B (average).

Airlines encounter turbulence

Last November, famed investor Warren Buffett revealed his stake in the four largest U.S. airlines, reversing his long-held strategy of avoiding an industry he once called a "death trap for investors." This year, however, it's been left to other investors to pan the industry.

The average S&P 1500 airline stock is down 2% in 2017, missing out on the broad index's average 3% gain. Airlines have seen their profits crimped by escalating operating expenses. Additionally, President Trump has threatened to end a pact between the U.S. and Cuba that eased travel hurdles between the two countries. Several airlines, including Alaska Air Group ($87; ALK) and Southwest Airlines ($60; LUV), launched U.S. flights to Cuba in the past six months.

Breaking out from the pack, Southwest shares have surged an industry-leading 21% this year. Management's plan to boost capacity 3.5% in 2017, down from 5.7% growth last year, shows a pullback from rapid expansion. Southwest expects unit revenue to climb 1% to 2% in the June quarter, and analyst profit estimates have crept higher over the past 60 days. There could be upside to current expectations if a recent fare hike proves successful.

U.S. airlines experienced mixed success in their attempt to raise fares during the week before Memorial Day, according to analysts at J.P. Morgan ($82; JPM). Delta Air Lines ($49; DAL) raised one-way tickets up to $5 in most markets, a move quickly matched by several other airlines, including Alaska Air. Southwest proceeded to hike prices on one-way tickets by $2, $5, or $10 in certain markets. However, Delta later backed off the rate hike in many of its markets, and it's not clear whether other airlines followed suit. Southwest Airlines is a Focus List Buy and a Long-Term Buy. Alaska Air and J.P. Morgan are a Buy and a Long-Term Buy. Delta is rated A (above average).

Technology roundup

At an analyst meeting, Citrix Systems ($83; CTXS) gave no update on published reports that it has solicited takeover offers. But the company reaffirmed its 2017 profit forecast, which brackets current consensus estimates. As cloud computing becomes a larger part of its business, Citrix plans to reshuffle its reporting structure and introduce new metrics in 2018. Management says its cloud business involves more services and less of its lower-margin computing and storage products, resulting in software-like gross margins. Citrix is a Buy and a Long-Term Buy.

Facebook ($151; FB) has formed deals with Vox Media, BuzzFeed, and other media companies to create shows for its forthcoming streaming-video service. The company plans to run ads during the shows, expected to range anywhere from five minutes to 30 minutes. Facebook has already reached a deal to stream 20 professional baseball games this year. Separately, Facebook will also be hosting a health-care conference aimed at generating more advertising revenue from drugmakers. The pharmaceutical industry has been slow to migrate toward digital advertising, partly because it faces strict regulations on how it can market through social media. Facebook is a Buy and a Long-Term Buy.

Media mashup

The number of TV households has risen 2% to 118.4 million over the past two years, estimates industry tracker Nielsen. But shifting viewership trends are bedeviling broadcasters and pay-TV companies. The pay-TV industry shed 762,000 subscribers in the March quarter. Disney's ($108; DIS) ESPN lost 4% of its subscribers in May, worse than the median decline of 3% for the 120 cable channels tracked by Nielson.

Comcast ($42; CMCSa) keeps gaining ground in the challenging environment, adding a net 42,000 subscribers in the March quarter. The company's subscriber count has grown in five of the past six quarters. Within the NBCUniversal unit, higher revenue from distribution and content licensing overcame softer advertising last quarter, resulting in cable networks growing sales 8% and broadcast TV 6%. Comcast shares have surged 21% in 2017 to reach a record high. Comcast is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Disney's latest Pirates of the Caribbean sequel took top honors at the box office by generating $285 million in global ticket sales for its opening weekend. In other news, CEO Bob Iger said he has seen no evidence that the company was hacked. Last month, Disney refused to pay a ransom to hackers who had threatened to release an upcoming movie. Disney is a Long-Term Buy.

Glenn Geller, a 21-year veteran of CBS ($61; CBS) and most recently president of CBS Entertainment, is resigning after suffering a heart attack. CBS has already named its replacement for Gellar, who had been viewed as one of the closest lieutenants of CEO Leslie Moonves. CBS is a Focus List Buy and a Long-Term Buy.

J.P. Morgan Chase ($82; JPM) said June-quarter trading volume is down 15% from the year-ago quarter, which was unusually strong. Bank of America ($22; BAC) also expects lower trading volume for the current quarter. J.P. Morgan is a Buy and a Long-Term Buy. Bank of America is rated A (above average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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