Portfolio Review

2/16/2009


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Dolby sounds like a Buy
While Dolby Laboratories ($32; DLB) may be best known for the technology used in movie soundtracks and stereos, new markets are key to tomorrow’s growth. Expansion into sound systems for personal computers and video games is countering weakness in demand for consumer electronics. In the December quarter, Dolby earned $0.56 per share excluding a one-time gain, up 33% and $0.13 above the consensus. Sales rose 20%. The company raised its profit target and the shares jumped on the news.

Founder Ray Dolby controls about 91% of the company’s voting stock, which adds an element of risk to the shares. However, Dolby’s strong position in a number of growth markets in the U.S. and overseas should drive continued sales growth. The company topped consensus profit estimates by an average of 26% in each of the last three quarters and seems capable of more positive surprises. Dolby is being initiated as a Buy.

Government action fails to lift stocks
Bailout plan: Treasury Secretary Timothy Geithner rolled out a recovery plan to spark lending and clear toxic assets from banks’ balance sheets. First, the Treasury will inject banks with some of the remaining $350 billion set aside for the original Troubled Asset Recovery Plan. To be eligible, banks must pass a “stress test” and illustrate how the federal aid will create new lending. Second, the Treasury and Federal Reserve will create a lending program to help consumers and small businesses finance up to $1 trillion in student and car loans and credit card debt. Finally, The Public-Private Investment Fund, popularly called the “bad bank,” will acquire illiquid assets from banks. The fund, financed partially by private investors, will start with a capacity of $500 billion and could reach $1 trillion.

The bailout dollars are staggering. However, the stock market fell on the news, led by a sharp decline in financial stocks. Contributing to the decline was a combination of a lack of details about the plan, the requirement that banks prove themselves fundamentally sound through a stress test, and private investors’ lack of interest in funding the bad bank.

Stimulus plan: Congress and the White House have settled on a tentative $789 billion stimulus package, though the distribution of certain funds is still being debated. Tax cuts will likely make up about 35% of the bill. It also promises huge outlays on programs for education, health care, energy, and technology, while also helping jobless and low-income Americans. Critics loudly question both the cost and effectiveness of the proposal.

December-quarter earnings
Biogen Idec ($51; BIIB) posted profits of $0.93 per share excluding special items, up 4% . Sales of Avonex, a multiple sclerosis drug accounting for about half of Biogen’s revenue, increased 13%. Biogen’s other MS offering, Tysabri, posted 74% sales growth, but management expressed doubt about reaching its goal of treating 100,000 patients by 2010. Tysabri’s growth has decelerated since the September quarter on fears of a deadly brain infection that has now struck five patients. At the end of 2008, 37,600 people were taking Tysabri, and 20,000 had been taking it for at least a year. Despite the risks, Biogen says more than 90% of neurologists consider Tysabri the most effective therapy for multiple sclerosis. Biogen expects profits to exceed $4.00 in 2009, up at least 9%. In other news, activist investor Carl Icahn nominated four candidates for the board of directors, renewing an attempt made last year to increase his influence. Biogen is a Buy and a Long-Term Buy.


DirecTV ($22; DTV) earned $0.31 per share from continuing operations, up 3% but $0.02 short of the consensus. Sales rose 9% to $5.31 billion, paced by 15% growth in Latin America. The U.S. subscriber count climbed 4.6%, with the increase of 301,000 subscribers the highest in more than three years. Free cash flow advanced 20%. DirecTV is a Focus List Buy and a Long-Term Buy.

AstraZeneca ($38; AZN) earned $1.25 per share, up 13%, or 6% excluding currency fluctuations. Strong sales in the cardiovascular and respiratory segments slightly offset weaker oncology sales to nudge net revenue up marginally. In other news, the company will license potential depression medications in collaboration with the Mayo Clinic and Virginia Tech Intellectual Properties. AstraZeneca is a Buy.

Sigma-Aldrich’s ($38; SIAL) profits grew 6% to $0.68 per share, and $0.03 better than the consensus. Sales fell 3% but rose 4% excluding currency fluctuations. Sigma-Aldrich raised its quarterly dividend 12% to $0.145 per share, payable March 16. Sigma-Aldrich, trading at 14 times estimated 2009 earnings, is a Long-Term Buy.

News roundup
When Genentech ($83; DNA) and Swiss drugmaker Roche talked merger in December, the biotech firm sought $112 per share, far more than Roche’s original offer of $89 or the current hostile offer of $86.50. Genentech has asked shareholders to wait before deciding whether to accept Roche’s bid, promising to issue a formal statement later this month. Subscribers should not accept the tender offer for Genentech, a Long-Term Buy. Roche will probably have to raise its offer to do the deal, and Genentech has appeal as an independent company if the merger does not go through . . . Bucking the trend of a difficult January for retailers, Wal-Mart Stores’ ($48; WMT) same-store sales rose 2.1% excluding gasoline in the U.S. Total January sales rose 1.8% to $27.42 billion, as a 7% decline in international sales offset solid growth in the U.S. Excluding currency effects, international sales rose 11%. Wal-Mart is a Long-Term Buy . . . With a Feb. 17 deadline looming to prove its viability before Congress, General Motors ($3; GM) plans to eliminate 10,000 salaried jobs and cut the pay of most other salaried employees. In other news, Bob Lutz, the force behind the company’s recent car designs, said he will resign in April after more than 45 years in the auto industry. GM is an Underperform . . . Citing concerns about increased government scrutiny for banks that received federal cash infusions, Goldman Sachs ($90; GS) announced plans to repay its $10 billion bailout loan by the end of the year. Goldman is rated Neutral . . . Bank of America ($6; BAC) CEO Ken Lewis bought nearly $1 million in shares one day after his company’s stock fell to a 25-year low. Lewis called worries about the nationalization of Bank of America “absurd.” Bank of America is rated Neutral . . . On Feb. 9, AGL Resources ($32; AGL) changed its New York Stock Exchange ticker symbol to AGL from its longtime ATG. AGL Resources is a component of our Top 15 Utilities portfolio and earns an A rating in our Utility Update.

  RANK CHANGES
Dolby Laboratories ($32; DLB) is being initiated as a Buy with a 2.7% target weighting. The Buy List’s weighting for the Vanguard Short-Term Investment-Grade ($9.84; VFSTX) fund falls to 32.5%.


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