Portfolio Review: September 25, 2017


Utility swap

In the 12 months ended June, Sempra Energy ($117; SRE) managed growth of 10% in sales and 40% in per-share profits, helped by aggressive infrastructure investments and fast-growing South American operations. Such growth is unusual for utilities, and Sempra projects earnings gains of 12% annualized through 2020. A planned $9.45 billion purchase of Texas electric utility Oncor could put a strain on the balance sheet, and growth targets depend heavily on the success of liquefied natural gas (LNG) projects. However, we view Sempra's growth potential as worth the risk. Sempra is being added to the Top 15 Utilities portfolio.

Unitil's ($49; UTL) Quadrix Overall score has fallen to 42, among the lowest in the Top 15, hurt by weak operating momentum. Despite the growth erosion, the shares trade at a premium to their peers. We see few potential growth catalysts here. Unitil is being dropped from the Top 15 Utilities portfolio. Sell it if you own it.

Eye on media

Creditors of Australia's Ten Network agreed to a $167 million takeover offer from CBS ($59; CBS), which found itself in a brief bidding war for the insolvent network. CBS is a Long-Term Buy.

Seeking to attract more commercial customers, Comcast ($37; CMCSa) introduced a new platform that gives branch offices a faster connection to data centers or their corporate headquarters. At a time when Comcast is struggling to retain traditional cable-television subscribers, its business-services revenue rose 16% to $5.51 billion last year (7% of total company revenue). Comcast is a Focus List Buy and a Long-Term Buy.

Verizon Communications ($49; VZ) CEO Lowell McAdam said he has ended his brief pursuit of trying to acquire Comcast or Charter Communications ($367; CHTR). In April, McAdam had expressed interest in exploring a merger with a large cable or broadcasting company. Verizon is rated A (above average). Charter is rated B (average).

Hurricanes wipe out profits

Southwest Airlines ($54; LUV) CEO Gary Kelly said canceled flights from Hurricane Harvey could cost the airline $40 million to $60 million. Hurricane Irma could have a similar financial effect, he added. Southwest Airlines is a Buy and a Long-Term Buy.

Carnival ($64; CCL) and Royal Caribbean Cruises ($116; RCL) have yet to update investors on the financial toll of Hurricane Irma. Morgan Stanley ($48; MS) estimates that cancelations and route changes may have reduced annual per-share profits by $0.03 for Carnival and $0.07 for Royal Caribbean. J.P. Morgan Chase ($95; JPM) says the storm could shave up to $0.18 per share from Royal Caribbean's profits.Consensus 2017 profit estimates have not budged for either company over the past 30 days.

An estimated 51 cruises experienced delays, rerouting, or cancelations since Hurricane Irma ripped through the Caribbean and Florida, says industry researcher Cruise Critic. The storm hit about 25 ports, severely damaging 10 of them. Carnival and Royal Caribbean are putting together new itineraries to avoid the areas hurt most. Carnival is a Focus List Buy and a Long-Term Buy. Royal Caribbean is a Buy and a Long-Term Buy.

Corporate roundup

Seeking to avoid additional antitrust fines levied by the European Union, Alphabet ($948; GOOGL) proposed to auction off the rights for competitors to display their comparison-shopping websites. Alphabet's rivals panned the plan. In June, the EU fined Alphabet a record $2.9 billion for unfairly favoring its own shopping service. Alphabet is a Focus List Buy and a Long-Term Buy.

Amgen ($188; AMGN) won U.S. approval to sell Mvasi, a biosimilar version of Roche Holding's ($32; RHHBY) cancer drug Avastin. Mvasi is the first biosimilar drug to be approved by the U.S. for cancer. Avastin generated about $3.5 billion in sales in the first half of 2017. Amgen is a Buy and a Long-Term Buy. 

Walgreens Boots Alliance ($79; WBA) won U.S. approval to acquire a large portion of Rite Aid's ($2; RAD) business, concluding an 18-month regulatory review that forced the companies to repeatedly revise terms of the deal. The final pact, valued at $4.38 billion, involves 1,932 Rite Aid stores, down from the original $9.4 billion deal for roughly 4,600 stores. Rite Aid will remain a separate company with about 2,600 stores, six distribution centers and its pharmacy-benefit manager, EnvisionRx. Walgreens is rated A (above average).

ACA on chopping block again

A new push by Republican lawmakers to repeal the Affordable Care Act caused health insurers to slump, with Medicaid providers such as Centene ($91; CNC) hit hardest. The bill would eliminate the penalties for Americans who choose not to sign up for insurance and also allow insurers to charge higher rates to patients with pre-existing conditions.

The bill would send federal funding to states to establish their own health systems. These block grants to states would replace the current system's tax credits, insurer subsidies, and Medicaid expansion. This proposal can pass with just 50 votes from senators through a process called reconciliation, which expires at the end of September. Centene is a Focus List Buy and a Long-Term Buy.

Lear races to new highs

Lear ($167; LEA) shares have surged to a record high in September as investors anticipate the recovery from hurricanes Harvey and Irma will boost automobile sales in coming months.

The stock also appears to have gotten a lift after Autoliv ($123; ALV) announced plans to split into two publicly traded companies, spinning off its fast-growing electrical business (autonomous-car technology) from its safety-products unit (air bags, seat belts, and steering wheels). Autoliv's decision to separate its businesses follows the lead of Johnson Controls ($40; JCI) and Delphi ($101; DLPH), two other auto-parts suppliers that have announced or completed similar strategies.

However, Lear told analysts in July that it has no plans to break up its seating and electrical units. Management added that its electrical unit wouldn't qualify as a tax-free spin-off because the majority of its revenue comes from outside of the U.S. Lear shares have rallied 26% in 2017 yet still earn a Quadrix Value rank of 95. Lear is a Focus List Buy and a Long-Term Buy.

Hackers cut into FedEx's profits

FedEx's ($221; FDX) per-share profits fell 11% to $2.51 in the August quarter excluding special items, missing the consensus of $3.09. The company says per-share profits were reduced $0.79 by a June cyber attack that disrupted its TNT Express business and $0.02 by Hurricane Harvey. Revenue climbed 4% to $15.3 billion.

Citing the cyberattack, management cut its full-year view for earnings per share to $12.00 to $12.80, below the consensus of $13.38. But the company says robust manufacturing activity is contributing to the strongest global freight growth since 2011. FedEx also plans to raise shipping rates by an average of 5% on Jan. 1. FedEx shares rose on the report and remain a Buy and a Long-Term Buy.

Rank Changes

We are making no changes to our recommended lists today. On the Top 15 Utilities portfolio, Sempra Energy ($117; SRE) replaces Unitil ($49; UTL).

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