Portfolio Review: August 14, 2017


Rank changes: 1 up, 2 down, 1 new

Laboratory Corp. of America ($158; LH) joins the Buy List after delivering solid June-quarter results and raising its 2017 outlook. LabCorp's traditional laboratory business continues to outperform, while its Covance drug-development unit has begun to stabilize after a rocky start to the year. Management now expects 2017 profits to grow 5% to 9% and revenue 5% to 7%. The shares have rallied 23% this year yet trade at a reasonable 17 times trailing earnings, a 19% discount to the median health-care services stock in the S&P 1500 Index. LabCorp, earning a Quadrix Overall score of 87, is also rated Long-Term Buy.

We are dropping Citrix Systems ($76; CTXS) from the Buy and Long-Term Buy lists. Citrix has seen its Overall score slip to 76, hurt by slowing operating momentum and weak share-price action. The June quarter did nothing to dispel these concerns, as per-share profits rose 3% and sales 2%. Operating cash flow fell 34% — the third decline in as many quarters. Although the results topped analyst expectations, management's guidance for the current quarter was disappointing. The stock no longer ranks among our favorite stocks and should be sold. We are also dropping Citrix from the Monitored List.

Disney ($103; DIS) entered earnings season on thin ice. A middling June quarter, combined with an Overall score of just 59, prompts us to drop the stock from the Long-Term Buy List. Disney earned $1.58 per-share, down 2% but $0.03 above the consensus. Sales held virtually flat at $14.24 billion, missing the consensus.

Management announced several moves to push further into digital media: the launch of an ESPN-branded online service next year, an additional 42% stake in video-streaming company BAMTech for $1.58 billion, and the end of a distribution deal with Netflix ($176; NFLX) in 2019. But even taken together, these plans are unlikely to make a measurable difference to the media giant's operations over the next couple years. Disney is now rated B (average).

Comerica ($72; CMA) is being initiated as a Long-Term Buy. At 16 times estimated 2017 earnings, the stock trades modestly above the average P/E of 15 for regional banks in the S&P 500 Index industry. But Comerica offers superior growth prospects, with per-share profits projected to jump 54% this year, versus its industry average of 19% growth. Among the smallest S&P 500 regional banks, Comerica has expanded its net interest margin at a faster rate than any of its peers over the past six quarters. Its per-share profits more than doubled in the first half of 2017 on 8% higher revenue. In Quadrix, the stock scores above 60 for all six categories, contributing to an Overall score of 98.

2 changes for Top 15 Utilities

Entergy's ($77; ETR) Quadrix scores have eroded in recent months, reflecting the company's tepid fundamentals. The power unit has dragged on operating results, resulting in weak scores for Momentum and Earnings Estimates. The company's gradual exit from the nuclear-plant business is probably a good thing, but the change will take time, leaving Entergy vulnerable to political risks most other utilities don't face. Analysts project profit declines this year and next.

Scana ($63; SCG) also faces nuclear issues. The company should get paid for the money it has already invested in an abandoned project to build nuclear plants, but there are no guarantees. And if regulators don't allow the company to earn a return on the money invested in those plants, earnings could suffer. We don't try to predict the actions of regulators, but the situation could grow more uncertain in the near term.

Both Entergy and Scana trade at discounts to their peers, but valuation alone doesn't justify holding the stocks. Scana in particular isn't cheap enough to compensate for its risks.

CMS Energy ($47; CMS) provides electricity to 1.8 million customers and gas to 1.7 million in Michigan. The consensus projects per-share-profit growth of more than 7% this year and next year. CMS' mix of production and distribution assets, coupled with an aggressive capital-improvement program, suggests the company can continue growing faster than its industry going forward. For that kind of profit expansion, we'll accept the stock's slight valuation premium.

WEC Energy ($64; WEC), which changed its name from Wisconsin Energy in 2015, serves 4.4 million customers (1.6 million electric and 2.8 million gas), mostly in Wisconsin and Illinois. The company earned $0.63 per share in the June quarter, up 11% and topping the consensus by $0.05. More than 99% of the company's earnings come from regulated operations, limiting its exposure to the riskier nonregulated businesses operated by most of its peers. WEC targets long-term profit growth of 5% to 7% a year, with the dividend increasing at a similar pace.

ON posts strong quarter

For the June quarter, ON Semiconductor ($16; ON) reported per-share profits of $0.36 excluding special items, up from $0.06 earned in the year-ago quarter and the consensus estimate of $0.32. Sales jumped 52% to $1.34 billion. Looking ahead to the September quarter, ON expects revenue of $1.34 billion to $1.39 billion, up 41% to 46%, versus the consensus of $1.35 billion at the time of the announcement. Shares rallied on the report. ON is a Focus List Buy and a Long-Term Buy.

Technology review: Digging new revenue streams

Many investors expect the forthcoming iPhone to jumpstart Apple's ($161; AAPL) product momentum. But the company might have another pathway to growth. Its next Apple Watch, expected to launch later this year, could address two major consumer gripes with the current model. The new smartwatch reportedly features a significantly better battery and can connect to cellular networks without being tethered to a nearby iPhone. Apple is a Buy and a Long-Term Buy.

Alphabet ($940; GOOGL) is testing a new platform to let media companies publish stories told through a series of slides that integrate text, photos, and video.  Users should be able to advance the slides by swiping, similar to the popular Snapchat application developed by Snap ($14; SNAP). Alphabet is a Focus List Buy and a Long-Term Buy.

Industrials update

Ingersoll-Rand ($87; IR) hiked its quarterly dividend 13% to $0.45 per share, payable Sept. 29. The company has raised its distribution at a double-digit rate every year since 2011. Ingersoll, yielding 2.1%, is a Long-Term Buy.

Snap-on ($155; SNA) announced a fresh $500 million stock-buyback plan. Snap-on has steadily repurchased shares since 2010, offsetting stock-based compensation and keeping the share count virtually flat. Snap-on is a Long-Term Buy.

Rank Changes

LabCorp of America ($158; LH) is joining the Buy List. Citrix Systems ($76; CTXS) is being dropped from the Buy and Long-Term Buy lists and from coverage. Comerica ($72; CMA) is being initiated as a Long-Term Buy. Disney ($103; DIS) is coming off the Long-Term Buy List. In the Top 15 Utilities portfolio, CMS Energy ($47; CMS) and WEC Energy Group ($64; WEC) are in and Entergy ($77; ETR) and Scana ($63; SCG) are out. In the wake of these changes, Vanguard Short-Term Corporate Bond ($80; VCSH) exchange-traded fund accounts for 5.2% of the Buy List and 7.8% of the Long-Term Buy List.

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