Portfolio Review: October 9, 2017


Focus List upgrade

Chemical maker Chemours ($53; CC) is being upgraded to the Focus List. Although the stock has more than doubled in 2017, we see room for more gains. Analyst profit estimates are rising, as commodity prices should support sales growth and expand profit margins. The stock remains reasonably valued at 15 times estimated 2017 profits and 11 times estimated 2018 profits — both ratios are more than 30% below the median S&P 1500 chemical stock and lower than more than 75% of stocks in our research universe.

Chemours primarily manufactures fluoroproducts (used for refrigerants) and titanium dioxide (used in industrial coatings and packaging). Outside of China, global producers of titanium dioxide are not expected to increase capacity in the next few years.

The company's cash quadrupled to $1.53 billion in the past year, helped by $685 million from asset sales and 12-month operating cash flow of $362 million. The strong balance sheet positions Chemours to pursue bolt-on acquisitions and possibly grow its dividend. The stock is also a Long-Term Buy.

Focus List downgrades

Carnival ($65; CCL) and Mohawk Industries ($257; MHK) are being dropped from the Focus List. Their Quadrix Overall scores have slipped below 80, hurt by slowing operating momentum and falling profit estimates. Both stocks have slipped in the past month but remain up more than 20% for 2017.

Although Carnival and Mohawk no longer rank among our top 15 or so stocks, we remain opportunistic about their prospects. Carnival says port closures will hurt November-quarter results but expects ports in Puerto Rico and the Caribbean to be back online by December. Also encouraging, booking trends for the coming year are outpacing levels experienced last year.

Mohawk has ramped capital spending in recent quarters, integrating recent acquisitions and boosting manufacturing capacity, which has bitten into free cash flow. But those investments should strengthen Mohawk's long-term prospects. The company should benefit from hurricane-related demand, as homeowners replace tile, carpet, and wood flooring damaged by the recent storms. The company continues to push through price hikes to offset higher costs for raw materials. Carnival and Mohawk retain their Buy and Long-Term Buy ratings.

Buy List upgrade

Regional bank Comerica ($75; CMA) joins the Buy List. The stock earns Quadrix scores of at least 70 for all six categories, contributing to an Overall score of 98. Comerica shares have surged 10% in the past month as the backdrop for banks shows signs of improving. The Federal Reserve recently reaffirmed its plan to raise rates for the third time this year.

Last month Comerica gave an upbeat update on its September quarter, noting better deposit growth and higher loan yields. Additionally, analyst profit estimates for the second half of 2017 and full-year 2018 have steadily climbed over the past 90 days. Comerica is also a Long-Term Buy.

Hurricanes produce opposite effects on airlines, automakers

Southwest Airlines ($58; LUV) said the cancellation of roughly 5,000 flights due to natural disasters in the past couple months would reduce revenue by $100 million in the September quarter. Management also scaled back expectations for the September quarter's unit revenue, while conceding that unit costs may rise by more than previously forecasted. Southwest is a Buy and a Long-Term Buy.

Citing 2,200 canceled flights, Delta Air Lines ($52; DAL) said Hurricane Irma reduced September-quarter results by $120 million. But unit revenue rose about 2% for the quarter, causing the shares to rally. Delta is rated A (above average).

Consumers began to replace vehicles destroyed by recent hurricanes, giving automakers their first monthly sales gains for the year. Sales rose 15% for Toyota Motor ($121; TM), 12% for General Motors ($44; GM), and 9% for Ford Motor ($12; F). Both GM and Ford reported especially strong sales of SUVs, which tend to require more seats and electrical components — good news for auto-parts supplier Lear ($176; LEA). Hurricanes Harvey and Irma damaged upwards of 700,000 vehicles. Industry experts see replacement demand boosting auto sales through at least November. Lear is a Focus List Buy and a Long-Term Buy. GM is rated A (above average). Ford and Toyota are rated B (average).

Peering into drug pipelines

Amgen ($189; AMGN) agreed to hold off launching Amgevita, a biosimilar version of AbbVie's ($90; ABBV) Humira, in the U.S. until 2023. But it will introduce the drug, used to treat rheumatoid arthritis, in Europe in October 2018. Humira is the top-selling drug in the world, generating $10.43 billion in the U.S. and $5.65 billion in foreign markets last year. Patent challenges have ensnared Amgevita since the drug was approved by U.S. regulators in September 2016 and the EU earlier this year.

In other news, Amgen announced a partnership with CytomX Therapeutics ($23; CTMX) to develop oncology drugs. Amgen will pay CytomX $60 million up front, with milestone payments potentially reaching $1.41 billion. Amgen is a Buy and a Long-Term Buy. AbbVie is rated A (above average).

Celgene ($147; CELG) increased its investment in Acceleron ($38; XLRN) by $28 million, putting its stake at 14%. Celgene and Acceleron are beginning clinical trials for luspatercept, a drug designed to boost red-blood-cell production. Acceleron says the experimental drug could ultimately generate $2 billion in sales. Celgene is a Focus List Buy and a Long-Term Buy.

Technology roundup

Lawmakers have asked executives at Facebook ($168; FB), Alphabet ($967; GOOGL), and Twitter ($18; TWTR) to testify at a Senate committee meeting on Nov. 1, as investigators probe Russia's role in meddling with the 2016 presidential election. Facebook estimates that Russian-backed groups spent about $100,000 on ads ultimately viewed by 10 million people.

The company has pledged to add more than 1,000 people to review advertisements displayed on its social network, while adding tighter controls on the content of ads accepted and ensuring the authenticity of companies seeking to place those ads.

Alphabet has launched a broad internal review of its services and advertising businesses, despite previously claiming it did not sell any ads to Russian groups. But congressional investigators are starting to turn their attention to Alphabet's YouTube, which contains uploaded videos created by Kremlin-linked media. Facebook is a Focus List Buy and a Long-Term Buy.

In other news, Alphabet continued its push into hardware by unveiling its latest roster of products. The company showed off the second generation of its Pixel smartphone, a laptop personal computer, a voice-activated speaker, and a lightweight camera that can clip to furniture or clothing.

A common theme running through all these devices is Alphabet's emphasis on harnessing artificial intelligence. Many of the products use digital assistants or machine-learning technology that recognizes users' habits and preferences. Alphabet is a Focus List Buy and a Long-Term Buy.

In its latest move to crack down on tax loopholes, the European Union sued Ireland for failing to collect $13.5 billion in taxes from Apple ($153; AAPL). Last year the EU ruled that Apple received unfair aid from Ireland and ordered the company to pay back taxes. The EU has also ordered Luxembourg to recover $294 million in taxes from Amazon.com ($965; AMZN). The EU is concerned that some European countries are attracting multinational companies by unfairly dangling lax tax regulations.

Separately, Apple says its base of paying subscribers to Apple Music has climbed 11% to 30 million in the past three months. Rival Spotify has about 60 million paying subscribers. Apple is a Buy and a Long-Term Buy. Amazon.com is rated B (average).

Rank Changes

Chemours ($53; CC) is joining the Focus List, while Carnival ($65; CCL) and Mohawk Industries ($257; MHK) are coming off the Focus List but keeping their Buy and Long-Term Buy ratings. Comerica ($75; CMA) is being added to the Buy List.

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