Portfolio Review: September 4, 2017


VMware's virtually perfect quarter

VMware ($107; VMW) earned $1.19 per share excluding special items in the July quarter, topping the consensus of $1.15, on sales of $1.90 billion, also ahead of analysts' expectations. VMware recently shifted its reporting schedule, making year-over-year comparisons difficult. For the June 2016 quarter, the closest year-over-year comparison to the July 2017 quarter, VMware earned $0.97 per share on revenue of $1.69 billion. Noting strength in cloud-management bookings, VMware raised its full-year guidance for operating cash flow. Shares rallied after VMware preannounced results on Aug. 14 and again on its complete report. VMware, a leader in virtualization software, is a Focus List Buy and a Long-Term Buy.

Implications of Hurricane Harvey

We are just beginning to grasp the tragedy of Hurricane Harvey hitting Texas last week and the catastrophic flooding that continues in Houston, the fourth-largest U.S. city. Besides the human toll, initial estimates put potential damages at $30 billion to $100 billion. Hurricane Katrina, which devastated New Orleans in 2005, resulted in a record $160 billion in economic damages.

Natural disasters tend create temporary declines in demand and production, often hurting retail sales and construction spending. Once the storm has passed, the affected areas then see a boost in economic activity as the recovery process begins.

As a rule, the broad stock market tends to ignore natural disasters. However, some individual stocks have been affected. Predictably, property-and-casualty insurers have slumped. Still, less than 30% of losses are expected to be covered by insurance, because most Houston residents carry coverage for damage caused by wind, not flooding.

At first glance, several of our recommended stocks have varying exposure to the catastrophe.

Home-repair stocks, including Lowe's ($74; LOW) and Owens Corning ($72; OC), rallied in anticipation of higher sales from repairs that will be required in coming months. Owens is a Focus List Buy and a Long-Term Buy. Lowe's is a Buy and a Long-Term Buy.

D.R. Horton ($35; DHI) and other homebuilder stocks initially slumped on reports of the devastation in Texas but have bounced back in recent days. The South Central region (encompassing Louisiana, Oklahoma, and Texas) is D.R. Horton's second-largest geographic market, accounting for 30% of homes sold in the first nine months of fiscal 2017 ending September. D.R. Horton does not break out sales for individual cities, but analysts at J.P. Morgan Chase ($91; JPM) estimate its Houston exposure at 7% of homes sold in 2016. The stock is a Buy and a Long-Term Buy.

Carnival ($69; CCL) canceled three cruises and Royal Caribbean Cruises ($122; RCL) one cruise that were scheduled disembark from Galveston, Texas, a town southeast of Houston, during the weekend of the hurricane. The cruise operators redirected the four ships to other cities in the Gulf of Mexico. The Port of Galveston said the morning of Aug. 28 that it would remain closed for the next 48 hours.

It's not clear how the storm and resulting damage will affect the cruise companies' operations in coming months. Both stocks were up modestly on the first trading day after the hurricane hit. Carnival is a Focus List Buy and a Long-Term Buy. Royal Caribbean is a Buy and a Long-Term Buy.

Airline stocks fell on concerns about rising fuel prices and flight disruptions. U.S. gasoline and jet-fuel prices jumped after the hurricane knocked offline about 23% of the country's refinery capacity. The extent of the damage to refiners remains uncertain. Additionally, Southwest Airlines ($52; LUV) and Alaska Air Group ($74; ALK) were among U.S. airlines to cancel flights at Houston's two major airports during the hurricane. Both airports remained closed for several days. Southwest Airlines is a Focus List Buy and a Long-Term Buy. Alaska Air is a Buy and a Long-Term Buy.

iPhone update

Apple ($163; AAPL) will reportedly hold a media event on Sept. 12, where it's expected to unveil three new iPhone models and Apple TV. The company has historically begun selling its new iPhones about 10 days after their introduction, though some analysts fear that some models could face delays. Apple's share of global smartphone profits shrank to 64% in the June quarter from 84% in the March quarter. That decline stems partly from the release of Samsung's latest Galaxy phone, which has garnered positive reviews. There are also some rumblings that Alphabet ($944; GOOGL) could announce its next Pixel smartphone on Oct. 5. In other news, Apple announced plans to invest at least $1.3 billion in the construction of a data center in Iowa after receiving tax credits worth $208 million from the area. Apple is a Buy and a Long-Term Buy. Alphabet is a Focus List Buy and a Long-Term Buy.


CBS ($65; CBS) agreed to acquire Ten Network Holdings, a financially distressed TV broadcaster that's also its biggest customer in Australia. The takeover helps pave the path for CBS to launch its online-subscription service in Australia. Terms of the deal were not disclosed, though analysts estimated Ten Network was worth $160 million to $200 million. CBS is a Focus List Buy and a Long-Term Buy.

Amazon.com ($968; AMZN) completed its $13.7 billion acquisition of Whole Foods Market after winning U.S. approval for the deal. Amazon.com wasted no time slashing the supermarket's prices up to 43%. Amazon.com is rated B (average). 

Gilead Sciences ($81; GILD) agreed to acquire Kite Pharma ($178; KITE) for $11.9 billion. Kite is developing an unsual form of cancer treatment called CAR-T, which extracts a patient's T-cells, genetically modifies those immune cells to kill tumors, and then re-injects the cells into the patient.

The drug could win U.S. approval to treat non-Hodgkin's lymphoma by the end of November. Gilead's last big deal came in 2012, when it paid $10.8 billion for Pharmasset, ultimately leading to blockbuster hepatitis C drugs. Gilead is rated B (average).

Laboratory Corp. of America ($154; LH) won U.S. approval to complete its $1.2 billion acquisition of Chiltern International. The all-cash deal, set to be completed around Sept. 1, would expand LabCorp's presence in the contract-research organization (CRO) market. LabCorp is a Buy and a Long-Term Buy.

Corporate roundup

A study found Amgen's ($174; AMGN) cholesterol drug Repatha cost-effective at an annual price of $9,669, below its list price of $14,500. Insurers have hesitated to cover Repatha, citing its high price tag. Amgen is a Buy and a Long-Term Buy.

Lear ($148; LEA) announced plans to build a new plant to manufacture automotive seats in Flint, Mich. Lear is a Focus List Buy and a Long-Term Buy.

Comcast ($41; CMCSa) is pushing into smart-home services, such as automated thermostats, that it hopes to package with its home-security offerings. Comcast is a Focus List Buy and a Long-Term Buy.

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