Portfolio Review

12/3/2012


Health-care update

UnitedHealth Group ($53; UNH) said it expects per-share profits of $5.25 to $5.50 in 2013, short of the $5.58 consensus at the time of the announcement but consistent with the insurer's warning last month that analysts' profit estimates were too high. UnitedHealth's sales forecast of $123 billion to $124 billion exceeded Wall Street's target of $119 billion. The company expects cash provided by operations to rise 3% to 9%, while buybacks are projected to trim 5% to 6% from the share count. UnitedHealth looks to add up to 4 million new members in 2013, implying enrollment growth of more than 4%.

The insurer's guidance doesn't take into account a potential recession caused by the looming fiscal cliff, but it does acknowledge lingering weakness in U.S. employment, continued pressure on reimbursement rates, and a slight uptick in the percentage of premiums used to cover medical costs. Shares slipped on the news but already reflect some pessimism. UnitedHealth Group, trading at 10 times the midpoint of its 2013 profit guidance, 5% below the peer-group median, is a Focus List Buy and a Long-Term Buy.


Fresh off an upgrade to its credit rating, Mylan Laboratories ($27; MYL) announced a $500 million stock-repurchase program, equating to more than 4% of outstanding shares at current prices. In other news, Mylan could get a boost after a rival announced the recall of a generic version of cholesterol drug Lipitor. Roughly 1 million prescriptions for generic Lipitor are written each week in the U.S. Mylan is a Buy and Long-Term Buy.


St. Jude Medical ($32; STJ) shares slumped after the U.S. Food and Drug Administration raised fresh concerns about the device maker's leads — wires that connect implantable defibrillators to patients' hearts. At a St. Jude facility, regulators discovered problems with the way the company tests its Durata leads. In the past year St. Jude recalled its older Riata leads because of reports that insulation wore away to expose the bare cables. All along, St. Jude maintained the problems were constrained to the older models, but the FDA's findings could drive some doctors away from the newer leads. St. Jude Medical is rated B (average).


Baxter International ($66; BAX) is reportedly close to striking an agreement to acquire Gambro AB, a medical-equipment maker based in Sweden. The $4 billion deal would combine the second- and third-largest kidney-dialysis businesses in the world. Baxter is rated B (average).

Corporate roundup

Chevron's ($103; CVX) lengthy environmental lawsuit in Ecuador has spread to a Canadian court, set to hear the case in late November. The plaintiffs hope to collect their $19 billion award by convincing courts in other countries to enforce the verdict and seize Chevron assets. The plaintiffs have also appealed to courts in Argentina and Brazil. Chevron is a Buy and a Long-Term Buy.


Apple ($585; AAPL) appears to be making headway on its iPhone 5 backlog, helping lift its share of U.S. smartphone sales to 48% for the three months ended October, easing past Google's ($671; GOOG) 47% share, according to researcher Kantar WorldPanel. Existing Apple customers accounted for 62% of iPhone 5 sales. In related news, citing stronger-than-expected demand for consumer electronics in North America and China, Corning ($12; GLW) raised its target for December-quarter sales of liquid-crystal displays for televisions and hardened glass for handheld devices. Corning's Gorilla Glass is used in Apple's iPhone and iPad, as well as many other mobile devices. Apple and Google are rated Focus List Buy and Long-Term Buy. Corning is rated B (average).


With Microsoft ($27; MSFT) still desperate to gain a toehold in the mobile market, its partners Nokia ($3; NOK) and HTC have reportedly slashed prices on their respective Windows Phone 8 models in the hope of gaining share. Microsoft is also deploying a second strategy to tap into the mobile market: It plans to raise licensing fees for businesses whose employees access company software from mobile devices. In other news, Microsoft has sold 40 million licenses for its Windows 8 operating system since the Oct. 26 launch, ahead of the pace set by the company's previous operating system. However, the numbers could be inflated by the new software's unusually low price point, and at least one laptop maker has called demand for Windows 8 slow. A strong debut could help Microsoft win over application developers. Microsoft also said that its Xbox video-game console continued to outsell Nintendo even as the rival introduced a new Wii console. Microsoft is a Buy and a Long-Term Buy.

Retailers ring up shoppers

Retail sales advanced 13% to $59.1 billion during the four-day Thanksgiving weekend, said the National Retail Federation, compared to a 16% gain last year. That figure includes both in-store and online purchases. On average, shoppers spent 6% more over the weekend than they did last year, as more store openings crept into Thanksgiving night. Building on that momentum, retailers reported 30% higher internet sales on "Cyber Monday," according to a survey of 500 online stores conducted by IBM ($191; IBM). These gains came despite a sharp increase in online sales over the holiday weekend that some feared would eat into Monday's results.

The strong start is encouraging. But the week leading up to Christmas remains crucial for retailers, and shopper behavior could be shaped by the tone of negotiations in Washington, D.C., to stave off automatic tax hikes and spending cuts. For now, the National Retail Federation predicts sales during the holiday season (the last two months of the year) will climb 4.1% to $586.1 billion after 5.7% growth in 2011.

Department stores and specialty retailers look like the early winners. Traffic appeared strong at Macy's ($40; M), which relied on door-buster discounts to draw shoppers. Macy's has said Hurricane Sandy would affect same-store sales for November, which the consensus projects will rise 1.5%. Macy's is a Focus List Buy and a Long-Term Buy.


Bed Bath & Beyond ($59; BBBY), which has a history of being disciplined with coupons and markdowns, took 20% off shoppers' total purchases  on Black Friday. Last holiday season, the retailer's limited use of discounts preserved gross profit margins but caused its share of the home-furnishings market to shrink. Bed Bath & Beyond is a Buy and a Long-Term Buy.


Some analysts seem encouraged by customer traffic at Wal-Mart Stores ($70; WMT), which opened its doors two hours earlier on Thanksgiving night and weathered worker protests around the country. A strong turnout of families helped the retail giant draw 22 million shoppers Thursday. Large-screen TVs sold well, as did more mundane household items such as bed sheets, towels, and food containers. Wal-Mart Stores is a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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