Portfolio Review: June 12, 2017


Foot Locker out, Juniper in

The clock has run out on Foot Locker ($55; FL), and we are dropping the stock from the Buy and Long-Term Buy lists. The shares have failed to rebound in the weeks since the retailer posted lower-than-expected quarterly profits but reaffirmed full-year targets. Its Quadrix Overall rank has slipped to 79, hurt by poor scores for Momentum, Earnings Estimates, and Performance.

At 11 times estimated current-year profits, Foot Locker shares rank among the cheapest 15% of stocks in our research universe. But analyst estimates are eroding, and a weak April quarter gives management little room for error for the remainder of the year. Despite falling 22% in 2017, the stock remains up 60% since we first recommended it in the Aug. 13, 2012 issue. Foot Locker should be sold.

Juniper Networks ($29; JNPR), a company that sells communications equipment and security services, joins the Buy and Long-Term Buy lists. Juniper enjoys solid operating momentum, as strength in switching and cloud products has overcome softness in routers. For the 12 months ended March, operating cash flow jumped 75% and free cash flow more than doubled to $1.13 billion, filling the balance sheet with nearly $900 million ($2.24 per share) in net cash.

The shares dipped last month on bellwether Cisco Systems' ($32; CSCO) weak guidance. But Juniper has since said that, from its vantage point, enterprise spending remains steady and business conditions have not changed since its last update in April.

Analyst profit estimates are ticking higher and yet still seem conservative. The consensus expects earnings per share to climb 7% on revenue growth of 5%. The stock earns a Quadrix Value rank of 85 and trades at just 13 times estimated 2017 earnings, versus the median of 18 for S&P 1500 communications-equipment stocks. Juniper earns an Overall score of 96, and both sector-specific ranks top 95. Cisco is rated B (average).

VMware leaves investors wanting a little more

VMware ($93; VMW) earned $0.99 per share for the April quarter excluding special items, versus $0.86 earned in the year-ago March quarter, topping the consensus by $0.04. Year-over-year results are not comparable because VMware shifted its reporting period by one month to conform with majority-owner Dell Technologies' ($68; DVMT) schedule. Revenue was up 9% from the first three months of 2016. For the stub one-month period of January 2017, the company reported revenue up 3% from the same month last year. VMware's guidance for the July quarter surpassed expectations.

Despite the solid results and outlook, VMware shares faltered. Heading into the report VMware shares were up 21% in 2017, reflecting high expectations. Some investors may have expected even stronger growth from the company pushing out deals from its stub period. Encouragingly, VMware's partnership with Amazon.com  ($1,010; AMZN) remains promising. A new service being tested to bring VMware's data-center software to Amazon Web Services has received positive feedback and "very strong" interest from customers. VMware is a Focus List Buy and a Long-Term Buy. Amazon.com is rated B (average)

Apple update

Apple ($155; AAPL) refreshed its roster of products at its annual developer conference. Perhaps most notable is HomePod, a voice-controlled speaker that marks Apple's first major new product in two years. The device incorporates digital assistant Siri to let users get music recommendations, send text messages, check the news, and control the thermostat. Apple also showed off its latest operating system, laptops, and iPad Pro tablet.

In the minds of many investors, these products are merely the warm-up act for the next iPhone's debut, expected this fall. In a rare analyst downgrade, Pacific Crest said investor expectations for the next iPhone "have gotten out of hand," adding that the iPhone's higher expected price tag may deter upgrades and new users.

The shares have surged 34% in 2017, outpacing the S&P 1500 technology sector's 21% advance and the broad index's 8% gain. That rally has pushed Apple's stock to 17 times estimated earnings for fiscal 2017, versus the average of 24 for S&P 1500 technology stocks. Apple's current 29% discount to its sector average lags its five-year average discount of 39%. Apple remains a Buy and a Long-Term Buy.

Broadcasters go international

Sentiment on U.S. broadcasters has soured, hurt by sluggish advertising revenue that shows no sign of near-term improvement. Softening the blow for CBS ($61; CBS) is a shift in strategy it made about 10 years ago. At that time, CBS made a push to own more of its shows rather than license them from studios. That decision has proved lucrative, as CBS now licenses shows to Netflix ($166; NFLX) and foreign markets.

The company's annual sales from licensing content overseas have tripled over the past decade to about $1.5 billion, roughly 10% of its total revenue. CBS currently owns all or part of more than 80% of shows for its upcoming fall season, according to Reuters. In June, CBS struck a deal to license its premium cable channel Showtime to Southeast Asia, Taiwan, and Hong Kong. CBS has recently reached similar pacts in multiple European markets.

Nevertheless, CBS shares have been weak in recent trading, possibly indicating investor concerns that the company may still pursue a merger with Viacom ($35; VIAb) The Redstone family owns significant stakes in both companies, which split in 2006. CBS is a Focus List Buy and a Long-Term Buy. Viacom is rated B (average).

To expand NBC News' global reach, Comcast ($42; CMCSa) acquired a 25% stake in Euronews, an international news network. Comcast is a Focus List Buy and a Long-Term Buy.

Corporate roundup

The European Union plans to hit Alphabet ($1,002; GOOGL) with a large fine by August, reported Reuters. The penalty would serve as a response to antitrust complaints that Alphabet manipulated Google search results to benefit its own shopping service. Separately, the company's autonomous-car business Waymo is designing self-driving trucks for potential use over long distances. Alphabet is a Focus List Buy and a Long-Term Buy.

D.R. Horton ($34; DHI) offered to pay $520 million for a 75% stake in Forestar Group ($16; FOR), a real estate developer based in Texas. That price tag translates to $16.25 per share, or a 14% premium to a tentative merger agreement between Forestar and investment firm Starwood Capital Group that also involved 75% of the company. D.R. Horton says the deal would boost its annual revenue by more than $1 billion over five years. D.R. Horton is a Buy and a Long-Term Buy.

Despite heavy promotions and upbeat economic conditions, U.S. auto sales slipped 1% to 1.51 million vehicles in May. U.S. sales rose 2% last month for Ford Motor ($11; F) but slipped 1% for General Motors ($34; GM). GM is rated A (above average). Ford is rated B (average).

Southwest Airlines ($60; LUV) said traffic climbed 3.4% in May on 4.0% higher capacity, causing its load factor to slip to 85.4% from 85.8%. Southwest Airlines is a Focus List Buy and a Long-Term Buy.

Rank Changes

Juniper Networks ($29; JNPR) is being initiated as a Buy and a Long-Term Buy. Foot Locker ($55; FL) is being dropped from the Buy and Long-Term Buy lists, and from coverage.

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