News roundup

9/1/2008


News roundup
MetLife ($52; NYSE: MET) is divesting its 52% stake in Reinsurance Group of America ($46; NYSE: RGA).  MetLife shareholders can swap shares of MetLife for shares of RGA class B stock at a 10% discount to the value of RGA. For each $1.00 of MetLife exchanged, shareholders will receive roughly $1.11 of RGA stock. MetLife is a Long-Term Buy. Reinsurance Group of America is not rated, and we advise readers not to make the exchange . . . Shares of American International Group ($20; NYSE: AIG) have been volatile, reflecting a possible downgrade in the insurer’s credit rating, spurred by uncertainties about residential-mortgage exposure. A downgrade would force the company to raise collateral to meet regulatory requirements. Separately, an analyst warned that the company may face more write-downs than Wall Street expects. AIG is rated Neutral . . . June-quarter shipments of computer servers hit 2.3 million units, up a healthy 12% from a year earlier. Dell’s ($25; NASDAQ: DELL) server sales increased 15% in the quarter, outpacing an 11.5% gain for IBM ($123; NYSE: IBM) and a 3% increase for Hewlett-Packard ($47; NYSE: HPQ). IBM boasts a 31.2% share of the server market, followed by H-P’s 27.6% and Dell’s 13.0%. IBM is a Focus List Buy and a Long-Term Buy. H-P is a Buy and a Long-Term Buy. Dell’s growth is encouraging, but we need to see more from the company before upgrading it from Neutral . . . Gannett ($17; NYSE: GCI), the largest U.S. newspaper publisher, said July revenue fell 12% from year-earlier levels, hurt by lower ad spending and a sharp decline in classified ads. Publishing ad revenue declined 17%, while daily circulation fell 4%. With a Quadrix Value score of 96, the shares appear cheap. But Gannett’s weak operating momentum and uncertain profit outlook give us pause. Gannett is rated Neutral . . . Boeing ($63; NYSE: BA) is finalizing its proposal for a three-year machinist labor contract likely to go up for a vote Sept. 3. The International Association of Machinists, representing roughly 26,000 workers, is the company’s largest labor union. Separately, Boeing announced that the U.S. Army is buying at least 191 more CH-47F Chinook transport helicopters as part of a five-year deal worth $3.9 billion. Boeing is rated Neutral . . . Harris ($52; NYSE: HRS) raised its quarterly dividend 33% to $0.20 per share, payable Sept. 17. Harris, now yielding 1.5%, is a Focus List Buy and a Long-Term Buy . . . According to published reports, ConocoPhillips ($82; NYSE: COP) agreed to sell its last 600 gasoline stations for $800 million. Rivals Exxon Mobil ($80; NYSE: XOM) and BP ($57; NYSE: BP) have already announced plans to exit the low-margin retail business. Exxon is a Long-Term Buy. Conoco and BP are rated Neutral.

Health-care report
The Food and Drug Administration warned of dangerous pancreatic inflammation in patients taking Byetta, a diabetes drug from Eli Lilly ($47; NYSE: LLY) and Amylin Pharmaceuticals ($21; NASDAQ: AMLN). Regulators plan to add a stronger warning to the product’s label. In other news, Lilly said a study showed its Cymbalta antidepressant significantly reduced lower-back pain. Lilly is rated Neutral . . . The FDA approved Amgen’s ($64; NASDAQ: AMGN) Nplate, a last-resort treatment for a rare disorder that keeps blood from clotting. Nplate could eventually generate $400 million in annual revenue. Amgen is rated Neutral . . . Medtronic ($55; NYSE: MDT) raised its quarterly dividend 50% to $0.1875 per share, payable Oct. 24. Medtronic is rated Neutral.

July-quarter earnings
Heinz ($51; NYSE: HNZ) earned $0.72 per share, up 14% and $0.06 above the consensus, on 15% sales growth. Volume increased 5%. The company raised profit expectations for the year ending April. Heinz’s solid organic growth bears watching, but with a Quadrix Overall score of just 59, the stock remains a Neutral . . . Dollar Tree Stores ($39; NYSE: DLTR) reported per-share profits of $0.42, up 27%. Sales rose nearly 13% to $1.09 billion, with same-store sales up 6.5%. The discount retailer projects per-share profits of $2.33 to $2.43 in the year ending January, below the $2.44 consensus. Dollar Tree is rated Neutral.

Only the ugliest earn an Underperform
Of the 199 stocks on the Forecasts Monitored List, only 39 are members of the Buy List or Long-Term Buy List. Including two downgrades in this week’s issue, only seven stocks are rated Underperform, and it’s not because they are the only ones we dislike.

Our Neutral rating means that we either expect a stock to roughly match the market or are uncertain about how it will perform. In most cases, we advise subscribers to sell Neutrals, because we believe in limiting portfolios to our best ideas.

So if a Neutral rating often translates into a sell recommendation, what does Underperform mean? We expect the stock to lag the market.

Many investors like to hold onto their Neutrals to avoid paying taxes on gains. Neutral-rated stocks with high Quadrix Overall scores are less likely to hurt you badly. But Underperforms are a different matter. Our advice: Sell them. Immediately.

The Forecasts is stingy with its Underperform ratings for two reasons:

Quadrix on the upside. The Quadrix® stock-rating system has proved effective at identifying both winning and losing stocks. But low-scoring stocks tend to be volatile, with occasional bouts of very strong returns.

Betting against the house. The stock market’s long-term trend is upward, so predicting declines is riskier than predicting increases.

Underperforms
Company (Price; Ticker)
Quadrix
Overall
Score *
12-Mo.
Total
Return
(%)
Boston Scientific ($12; BSX)
29
(1)
Ford Motor ($4; F)
9
(42)
General Motors ($10; GM)
0
(65)
Motorola ($10; MOT)
15
(40)
Sprint Nextel ($9; S)
16
(53)
Wachovia ($14; WB)
5
(69)
Washington Mutual ($4; WM)
2
(90)
* Percentile ranks, with 100 the best.

As the table above shows, most of our Underperforms have performed poorly over the last year. All earn weak Quadrix scores, and all have subpar capital-gains potential over the next year. Two Neutrals are being downgraded this week.

Motorola ($10; NYSE: MOT), a maker of communications-networking equipment and mobile phones, has fallen 40% so far this year. The handset unit has had little success developing new and appealing phones, and Motorola has lost more than 10% in market share over the last two years. Motorola plans to spin off the handset unit in the third quarter of 2009. In the wake of two consecutive quarterly operating losses, consensus estimates project a 71% decline in per-share profits in 2008. Wall Street expects a strong recovery next year, but at 26 times the 2009 estimate, Motorola looks expensive. With a Quadrix Overall score of 15, Motorola is being downgraded to Underperform.


Wachovia ($14; NYSE: WB), a North Carolina bank known for years of acquisition-driven growth, can’t seem to digest its biggest meal. The October 2006 purchase of Golden West Financial for $25.5 billion boosted Wachovia’s exposure to mortgage lending — just months before the business started showing signs of serious problems. Golden West specialized in adjustable-rate mortgages, which turned out to be far riskier for lenders than originally believed. In the first six months of 2008, Wachovia wrote off more than $8 billion in assets. But heavy exposure to inflated California and Florida real-estate prices suggests more write-downs are in store. Wachovia could rebound if the mortgage-lending group bounces, but the stock seems among the least attractive of the big banks. Wachovia is being downgraded to Underperform.


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