PNC Financial Services: Top Buys With 4 Long Ideas, 1 Stock To Avoid

by: The Analyst Hub

PNC Financial Services Group (NYSE:PNC) manages $43 billion in equity assets, primarily through its investment advisory subsidiary PNC Wealth Management, which controls the PNC series of mutual funds.

Investment Strategy: PNC employs both the growth and value approaches to investing. The firm primarily invests in small- to large-cap companies, following a combination of fundamental and quantitative analysis. The firm utilizes a top-down approach in allocating assets, and a bottom-up strategy in selecting stocks. PNC holds stock for the long term, and has a very low turnover of 15.20% annually.

The following is a list of its top five buys by market value in the last quarter, as released in its most recent 13F filing with the SEC:



Shares Held - 09/30/2011

Shares Held - 12/31/2011

Change in shares






Comcast Corporation





Cisco Systems Inc.





FMC Corp.





Transocean ltd.





I believe Comcast Corporation (NASDAQ:CMCSA), Cisco Systems (NASDAQ:CSCO), FMC Corp (NYSE:FMC), and Transocean (NYSE:RIG) make for good long candidates among the above stocks. At the same time, I would like to avoid ConocoPhilips (NYSE:COP).

Comcast Corporation is the largest US provider of cable services, with over 22 million basic subscribers. Comcast is also a majority owner of NBCU, which includes the NBC TV Network, MSNBC, USA, Sci Fi, Bravo, E!, CNBC, and several other cable networks, Universal Films and Universal Theme Parks.

Comcast recently reported better-than-expected Q4 2011 earnings and beat street consensus on all operating metrics. The strong earnings were primarily driven by modest video subscriber losses and higher High Speed Data (HSD) net adds from product bundling. Comcast has also raised its dividend, with the yield now at a respectable 2.3%. Further, the management is keen to return cash to shareholders, with a $6.5 billion buyback authorization in 2012.

Going forward, the operating momentum seems sustainable, with improved video subscriber trends and solid growth potential in the high-margins HSD market. Management is expecting video subscriber growth for the first time in five years, which is a big positive. Also, smart initiatives by the management in advertising and SME offer further growth potential. I believe Comcast is a good buy with increasing shareholder returns, continued evidence of superior execution, and attractive valuation.

Cisco Systems designs, manufactures, and sells Internet protocol-based networking and other products related to the communications and information technology industry worldwide and provides services associated with these products and their use. Cisco's products are installed at large enterprises, public institutions, telecommunications companies, commercial businesses and personal residences.

Cisco recently posted impressive Q2 2012 results as revenues grew by 10.8% y-y against guidance of 8% and EPS of $0.47, versus consensus estimates of $0.43, driven by growth in routing and switching revenues. Cisco's routing revenues grew by 8.2%, clearly outperforming its competitor Juniper (NYSE:JNPR). Its switch business also showed a turnaround with 8% y-y growth from declines in the recent quarters.

Looking forward, trends in the routing business seem positive as Cisco is gaining market share, while Juniper is struggling with its product timing. Cisco's switches business is also expected to continue doing well with product refreshes in the Catalyst and Nexus lines. Margins are also expected to improve due to pricing power from product refreshes. Overall, I believe Cisco is well positioned for steady 6%-8% growth. With improving margins, product refreshes and a strong execution capability, there is good upside potential for the stock price in the near term.

FMC Corporation is a leading producer of chemicals for industry and agriculture, with revenues of ~$3.4 billion in 2011. The company has three principal segments: Agricultural Products (insecticides, herbicides and fungicides), Specialty Chemicals (biopolymers and lithium), and Industrial Chemicals (soda ash and hydrogen peroxide).

Recently, FMC reported Q4 2011 EPS of $1.58 excluding items, against consensus estimates of $1.37. Revenues grew by 12% y-y, well ahead of expectations. Agricultural sales rose by 22% y-y with Latin American markets showing strong performance. The Specialty segment posted improved margins, while the Industrial segment's growth was driven by higher soda ash volumes.

FMC has announced several accretive deals in the recent past that are expected to complement its organic growth going forward. Rovral and Spartak (both fungicides) are two such acquisitions that serve to broaden the company's product offerings outside the European markets.

In addition to good organic and inorganic topline growth, the company's margins are also expected to improve with realignment projects, manufacturing cost reductions, and an improved product mix in the Peroxygens business. With solid fundamentals and robust growth opportunities, I believe FMC warrants a premium over its peers and recommend a buy.

Transocean Ltd is the world's largest drilling contractor and has a leading share in the deepwater market. The company owns ultra-deepwater, deepwater, mid-water, and jackup rigs. Transocean's ultra-deepwater and deepwater rigs represent its largest source of earnings. The company is based in Switzerland.

Transocean recently provided positive February fleet update. The company announced that it was awarded three new short-term mid-water contracts at higher-than-expected rates. Additionally, RIG also announced that its 2012 downtime decreased by 17 days, which indicates an incremental improvement from the previous downtime updates.

With positive news on the operational front, the focus is now on the Macondo trial. A recent ruling upheld RIG's indemnity provisions, putting the company in a strong position to go in for a settlement with BP. Any favorable settlement on this front could be a positive catalyst for the stock and also enable RIG to raise its dividend yield. RIG's current dividend yield is 6.2%.

ConocoPhillips is an integrated energy company. The company operates three segments: Exploration and Production, Midstream Services, and Refining and Marketing business. In July 2011, COP announced its intent to separate its upstream and downstream businesses. The spin-off is expected to be completed by Q2 2012. COP's PE multiple has expanded over the last few quarters in anticipation of the spin-off. I don't see any further chances of multiple appreciation from these levels.

In fact, once the spin-off is completed, there could be downside in the stock prices of individual entities, as COP shifts from an integrated energy business to the pure-play E&P business. E&P businesses are usually valued using cash flow multiples. COP's E&P assets seem less attractive than its pure-play peers, with expected long-term growth of 3%-4%, which is well below the large-cap E&P average of 8%-9%. Also, COP's low organic free cash flow is likely to limit its ability for share buybacks after its asset divestiture program is completed, and its dividend might be at risk as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.