Portfolio Review

12/2/2013


Comcast explores another big deal

Comcast ($50; CMCSa) and Charter Communications ($134; CHTR) have reportedly entered initial talks about jointly acquiring Time Warner Cable ($132; TWC). The two companies could break up Time Warner to expand their footprints into nearby markets and improve leverage with content providers when negotiating programming fees. Comcast may also be positioned to acquire Time Warner, which has a market value of $37.6 billion, on its own. Comcast generated $7.1 billion of free cash flow in the past year and has $5.7 billion of cash on its balance sheet.

In 2009, a U.S. court overturned Federal Communications Commission rules that prevented cable companies from taking more than 30% of U.S. subscribers. But a deal would still face close regulatory scrutiny. Comcast has a leading 21.6 million U.S. video subscribers, roughly 20% of the market. Time Warner is the second-largest U.S. cable company with 11.4 million subscribers, while Charter ranks fourth with 4.2 million subscribers. Comcast, yielding 1.6%, is a Buy and a Long-Term Buy.

Technology review

Apple ($524; AAPL) is scrambling to halt market-share erosion for its tablets (30% in the September quarter, down from 40% one year earlier) and smartphones (13%, 14%). Against that backdrop, Apple has quietly begun selling its iPad mini with retina display at some of its retail stores. The gradual roll out could be due to supply constraints, and analysts expect the device to become more widely available as the holiday shopping season shifts into high gear. Separately, China Mobile, the world's largest carrier with about 740 million subscribers, plans to launch a new mobile-service brand on Dec. 18, renewing speculation of a forthcoming iPhone launch.

In other news, Apple reportedly agreed to pay roughly $350 million for Primesense, a company based in Israel that made gesture-recognition technology used in Microsoft's ($38; MSFT) original Kinect device. Apple could integrate Primesense's technology in its long-awaited TV. Finally, a U.S. jury awarded Apple $290 million in the retrial of a patent lawsuit against Samsung. Apple had sought $380 million. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is rated A (above average).


Qualcomm ($72; QCOM) said that it faces an antitrust probe in China. In recent years, China has cracked down on foreign companies attempting to fix prices, and it has also begun taking steps to protect its domestic semiconductor industry. Some analysts call the investigation a negotiating tactic as China's major telecommunication companies prepare to roll out next-generation wireless in coming months. Qualcomm does not currently collect royalties from China Mobile but has hinted that it might begin to do so as the carrier migrates to the new network. China accounts for about 49% of Qualcomm's annual sales, though most of that revenue comes from manufacturers that ultimately ship devices elsewhere; its exposure to Chinese end markets could be less than 20%. Japan and South Korea have also launched antitrust cases against the company.

Qualcomm CEO Paul Jacobs also said that U.S. restrictions on Chinese companies and concerns about surveillance by the National Security Agency have chilled business in China for U.S. technology companies, echoing comments made by Cisco Systems ($21; CSCO). In other news, Qualcomm completed the sale of its Omnitracs business for about $800 million in cash. Qualcomm is a Focus List Buy and a Long-Term Buy.

Health-care update

Despite increasing pessimism surrounding the implementation of the Affordable Care Act, shares of generic-drug maker Mylan Laboratories ($44; MYL) have rallied 16% since Nov. 1. Mylan posted solid September-quarter results, and analysts have taken an increasingly bullish view on the company's prospects for the year ahead. Mylan and its development partner won approval from Indian regulators to sell Hertraz as a biosimilar treatment for breast cancer. Hertraz, expected to launch in early 2014, will be Mylan's first biosimilar drug to go on the market.

There are rumblings that Mylan — or other specialty drugmakers — could possibly merge with Teva Pharmaceutical Industries ($40; TEVA), a rudderless rival that has been without a CEO since October. With a market value of $34 billion, Teva is about double the size of Mylan. But Teva could lose patent protection for a key multiple sclerosis drug in May, and its shares trade at just eight times trailing earnings. In late November, Mylan and Teva settled a patent lawsuit in Europe, with terms of the agreement kept private. Mylan is also reportedly among three potential suitors seeking to acquire Bafna Pharmaceuticals, a generic-drug manufacturer based in India that could be valued at less than $50 million. Mylan is a Focus List Buy and a Long-Term Buy.


A European medical committee backed the use of Celgene's ($164; CELG) Abraxane in combination with another drug to treat pancreatic cancer, improving the chances that Abraxane will gain regulatory approval by early 2014. Celgene is a Long-Term Buy.


European regulators awarded Biogen Idec's ($296; BIIB) Tecfidera, a pill for multiple sclerosis, 10 years of shelter from generic competition. Annual sales for Tecfidera, approved for use in the U.S. in March, could reach $4.55 billion by 2018. Biogen Idec is rated B (average).

Corporate roundup

Foot Locker ($39; FL) grew October-quarter earnings per share 8% to $0.63 excluding special items to top the consensus by $0.02. Total revenue rose 6% to $1.62 billion, while same-store sales advanced 4.1%. Footwear drove growth, offsetting declines in apparel and accessories. Store traffic picked up in October, and same-store sales continued to rise by the middle-single digits in the first two weeks of November. Shares rallied to an all-time high on the results. Foot Locker is a Buy and a Long-Term Buy.


Union Pacific ($162; UNP) shares rose after the railroad announced plans to repurchase up to 60 million shares by the end of 2017, or 13% of outstanding stock. Union Pacific is a Long-Term Buy.


Starting fall 2014 U.S. Bancorp ($39; USB) will offer credit cards on the American Express ($85; AXP) network. Wells Fargo ($44; WFC) and Amex forged a similar pact in August. Wells Fargo is a Focus List Buy and a Long-Term Buy. Both Amex and U.S. Bancorp are Long-Term Buys.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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