Portfolio Review: October 2, 2017


Carnival shares reverse course

Carnival ($64; CCL) shares slumped 7% in the month leading up to its August-quarter report as investors tried to gauge how multiple hurricanes disrupted the cruise operator's business. But the company delivered a strong quarterly report, issued guidance that may not be as weak as some feared, and noted the continuation of strong booking trends.

Carnival grew earnings per share 19% to $2.29 excluding special items, topping the consensus estimate by $0.09. Sales, up 8% to $5.52 billion, also surpassed the consensus.

For the November quarter, management targets earnings per share of $0.44 to $0.50, versus $0.67 earned in the year-ago quarter and the consensus of $0.63 at the time of the announcement. Carnival expects port closures caused by recent hurricanes to reduce per-share profits by $0.10 to $0.12, while changes in fuel prices and currency rates could shave an additional $0.04 from earnings. But Carnival says booking volumes and prices for first half of fiscal 2018 ending November are running ahead of levels seen least year. Shares rose on the report. Carnival is a Focus List Buy and a Long-Term Buy.

Health-care review

Republicans' hopes of repealing the Affordable Care this fall were dashed after they failed to round up enough senators within their ranks to support the legislation. Opposition to the proposal swelled to include insurers, hospitals, doctors, and even Republican governors. As the bill unraveled, Centene ($94; CNC) shares have rebounded to within 6% of their record high, set in September.

Looking ahead, some Republicans may be willing to work with Democrats to hammer out a compromise that fixes flaws in the current law. Republicans could also approve a new budget for fiscal 2018 that again uses the reconciliation process, which lets a new bill be approved by only a simple majority. Centene is a Focus List Buy and a Long-Term Buy.

Laboratory Corp. of America ($149; LH) shares fell after the Centers for Medicare and Medicaid Services proposed reducing Medicare reimbursement rates for lab tests by 8% in 2018 and nearly 10% annually through 2020, steeper cuts than anticipated. The proposed Medicare rate change effects about 8% of LabCorp's revenue, estimated an analyst at Barclays. LabCorp objected to the planned rate cut. LabCorp is a Buy and a Long-Term Buy.

Amgen ($185; AMGN) reaffirmed its 2017 guidance, adding that its manufacturing facilities in Puerto Rico did not suffer any significant damage from Hurricane Maria. Amgen is a Buy and a Long-Term Buy.

Technology update

Applied Materials ($49; AMAT) shares surged to a record high after management gave bullish long-term guidance and announced a new stock-buyback plan. Applied Materials expects to earn $5.08 per share in fiscal 2020 ending October, implying 16% annualized growth over the next three years. It targets revenue of $19.6 billion for fiscal 2020, equating to 11% annualized growth. To reach those 2020 goals, Applied Materials expects to grow its market share to about 26.5% of the wafer-equipment market, potentially worth about $45 billion. The company also approved $3 billion in stock buybacks, enough to repurchase about 6% of outstanding shares at current prices. Applied Materials is a Buy and a Long-Term Buy.

Preorders for Apple's ($154; AAPL) iPhone 8 were weak, likely a sign of tepid reviews and consumers waiting for the iPhone X, due Nov. 3. But the iPhone X may have its own problems. Apple reportedly told suppliers to withhold part of their shipments, suggesting the company could be concerned about demand for the new model. Additionally, the iPhone X has reportedly encountered production delays due to glitches with its facial-recognition technology. If the problems persist, Apple could experience shortages during the holidays. Finally, profit margins for the iPhone 8 are now estimated to be similar to its predecessor, despite carrying a $50 higher price tag. Analysts have been expecting Apple's margins to benefit from higher iPhone prices. Apple is a Buy and a Long-Term Buy.

Facebook ($168; FB) has come under fire since disclosing that it was paid by a Russian agency for online ads designed to influence the U.S. presidential election last year. A group of lawmakers has urged the Federal Election Commission to impose disclosure rules on political ads on social networks, similar to requirements for broadcast ads. Facebook agreed to submit to Congress 3,0000 election-related ads purchased by a Russian group as it cooperates with a U.S. probe into the 2016 election. Facebook also pledged to install tougher policies — and more human oversite — for reviewing both political ads and ads targeting hate groups.

In other news, Facebook bowed to shareholder pressure by backing off plans to add a new stock class that lacked any voting power. The move would have helped CEO Mark Zuckerberg maintain control of the company while he sells off his stock. Facebook is a Buy and a Long-Term Buy.

Alphabet ($960; GOOGL) agreed to pay $1.1 billion for HTC's business that designs its Pixel smartphones. The deal marks Alphabet's second venture into smartphone hardware; it paid $12.5 billion for Motorola Mobility in 2012, only to divest the business two years later for less than $3 billion. Alphabet's Pixel has less than a 1% share of the global smartphone market, says industry researcher IDC. Separately, Waymo, Alphabet's autonomous-car unit, has accused Uber of stealing trade secrets and seeks $1.86 billion in damages from the ride-sharing company. Alphabet is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Citing hurricane-related delays, homebuilder D.R. Horton ($38; DHI) slashed its 2017 target for operating cash flow to $150 million from $300 million. The company also said its backlog-conversion rate for the December quarter would be slightly lower than previously anticipated, while operating costs may be higher. Rebuilding efforts could increase costs for materials and labor. Management does not expect the hurricanes to affect its year-ahead guidance. D.R. Horton is a Buy and a Long-Term Buy.

FedEx ($220; FDX) now expects integration costs TNT Express to reach $350 million for fiscal 2018 ending May, up from its prior target of $275 million. The company is accelerating its integration efforts after TNT Express was attacked by hackers in June. Total costs from the deal could total $800 million over four years. FedEx completed its $4.8 billion acquisition of the Dutch shipping company in May 2016. FedEx is a Long-Term Buy.

Initial forecasts point to a robust holiday season for retailers, as shoppers enjoy higher disposable incomes. Industry analysts expect sales to rise 3.5% to 4.5%, with online sales possibly growing about 20%. With the U.S. unemployment rate near a 16-year low, the labor market for seasonal workers is expected to be tight.

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