Portfolio Review

1/13/2014


Sell Bed Bath & Beyond

Bed Bath & Beyond ($79; BBBY) shares slumped after the retailer said November-quarter earnings per share rose 9% to $1.12, missing the consensus by $0.03. Same-store sales grew 1.3%, while total revenue advanced 6%, also below the consensus. Management slashed its February-quarter guidance for earnings per share to $1.60 to $1.67, below the $1.78 consensus. Bed Bath & Beyond is being dropped from the Buy and Long-Term Buy lists and is now rated B (average).

Stick with Celgene

Boston Children's Hospital has sued Celgene ($165; CELG) for allegedly halting royalty payments linked to Revlimid and Pomalyst, a pair of treatments for multiple myeloma, last March. Shares also face pressure from a downgrade at Goldman Sachs ($178; GS), which cited the stock's valuation, concerns about the expected launch of psoriasis treatment Apremilast, and the prospect of emerging competition from Bristol-Myers Squibb ($53; BMY) in the area of blood-cancer drugs.

We are keeping a close watch on Celgene. Its shares surged 115% in 2013, causing the Value score to fall to 22 and the Overall score to 66. However, the stock scores in the top half of our research universe for the other five Quadrix categories. Earlier this month, the European Commission approved Celgene's Abraxane to treat pancreatic cancer when the disease has spread to other parts of the body, while research partner Epizyme ($36; EPZM) reported encouraging results for a leukemia drug. Rising analyst estimates call for Celgene's per-share profits to jump 22% in 2014. Celgene shares trade at 23 times projected 2014 earnings, which seems rich until you view the valuation through the lens of its industry — the median for S&P 1500 biotech stocks is 24. Celgene remains a Long-Term Buy. Goldman Sachs is rated B (average). Bristol-Myers is rated C (below average).

New Year's acquisitions

Looking to build its presence in the oil-and-gas services industry, B/E Aerospace ($83; BEAV) agreed to pay a total of $265 million to acquire LT Energy Services and Wildcat Wireline, which offer rental equipment, logistics, and other services. The two takeover targets generated a combined $125 million in revenue in the 12 months ended September, versus B/E Aerospace's $3.38 billion. B/E said the energy-services industry could eventually account for 5% to 10% of total sales. Shares fell on the announcement, partly because the moves reduce the company's focus on aerospace, which enjoys bright prospects. B/E is a Buy and a Long-Term Buy.


U.S. Bancorp ($41; USB) agreed to acquire 94 Chicago branches from RBS Citizens Financial a deal that will roughly double its presence in Chicago. The bank gains $5.3 billion in deposits and $1.1 billion in loans. U.S. Bancorp paid an undisclosed sum, which included a $315 premium (6%) on the book value of the deposits. U.S. Bancorp is a Long-Term Buy.

Corporate roundup

J.P. Morgan Chase ($58; JPM) agreed to pay $2.24 billion to Bernie Madoff's former clients for failing to alert U.S. officials about dubious transactions and investment returns that were the underpinnings of a $17 billion Ponzi scheme. The bank will also reportedly pay a $350 million fine to the U.S. Office of the Comptroller of the Currency. Under anti-money laundering laws, U.S. banks must report suspicious activity to regulators, and though J.P. Morgan filed a formal report in the U.K., it failed to do so in the U.S. In other news, the bank will report December-quarter results on Jan. 14, with the consensus anticipating earnings of $1.32 per share, down 5%. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.


Macy's ($52; M) reported 4.3% higher same-store sales for November and December, up from 3.6% growth in the year-ago period. For fiscal 2015 ending January, Macy's expects per-share profits of $4.40 to $4.50, implying growth of 13% to 16% and exceeding the consensus of $4.32. The retailer also plans to slash about 2,500 jobs. Shares rallied on the news. In other news, Macy's settled its longstanding dispute with Martha Stewart Living Omnimedia ($5; MSO), though negotiations with J.C. Penney ($8; JCP) have reportedly stalled. Terms were not disclosed. Macy's has an exclusive contract to sell cookware, bedding, and bath merchandise designed by Martha Stewart. Macy's is a Buy and a Long-Term Buy.

Pay-TV update

Comcast ($53; CMCSa) shares rallied after CEO Brian Roberts said the video business "modestly grew customers" in the December quarter, ending a streak of 26 quarters of lower subscriber totals. Separately, in a subtle move to make its Philadelphia subscribers aware of retransmission fees, Comcast's monthly bills will break out a $1.50 charge for broadcast TV. In recent years, broadcasters have tried to extract fees from pay-TV operators to complement advertising revenue. Last summer, Time Warner Cable ($135; TWC) bowed to CBS' ($63; CBS) demands for monthly retransmission fees, reportedly around $2 per household. Comcast is a Buy and a Long-Term Buy.


DirecTV ($70; DTV), deep into negotiations to renew the NFL Sunday Ticket, could be forced to pay $1.4 billion for the 2015 football season, followed by 5% annual hikes, according to published reports. DirecTV currently pays $1 billion a year for exclusive rights under a four-year contract that expires at the end of next season. About 2 million subscribers pay up to $250 a year for the Sunday Ticket, and the service has helped establish the company's brand over the years. DirecTV has said it would consider giving up its exclusive rights if the price tag became too steep, potentially opening the door for Comcast and Time Warner Cable. DirecTV is a Focus List Buy and a Long-Term Buy.

Energy report

The U.S. government cautioned that light, sweet crude oil from the Bakken Shale formation in North Dakota could be more flammable than heavy crude drilled at other sites. The warning comes after a string of violent explosions involving tanker cars hauling the oil in the past year. Regulators are reinforcing testing requirements and could impose more safety features for railcars, potentially crimping short-term production in the state. North Dakota accounted for 10% of U.S. crude-oil production in 2012, up from 2% in 2007, according to the U.S. Energy Information Administration.

Domestic drilling has been a boon for energy companies and railroads alike. Continental Resources ($107; CLR) claims to be the largest leaseholder, driller, and producer in the Bakken. Union Pacific ($167; UNP) says crude oil, a significant growth driver in recent years, now accounts for 2% of its total volume. Continental and Union Pacific are Long-Term Buys.


Rank Changes

Bed Bath & Beyond ($79; BBBY) is being dropped from the Buy and Long-Term Buy lists.


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