Portfolio Review

6/23/2014


Two kinds of splits

B/E Aerospace ($93; BEAV) announced plans to split into two separate companies by March 2015. The first company, Manufacturing Co., will house B/E's aircraft-interiors business, which should generate annual revenue of about $2.5 billion. Meanwhile, Services Co. will include logistical and services for the aerospace and energy markets, targeting annual sales of about $1.6 billion. B/E also raised its 2014 guidance for per-share profits by a nickel to $4.35. While the profit target lagged the consensus of $4.39 at the time of the announcement, the consensus has since risen to $4.41.

B/E shares fell on the news, likely reflecting disappointment that a sale of the company is not imminent. B/E announced in May that it was exploring strategic alternatives, including an outright sale. Still, the split could ultimately make the resulting companies into more attractive takeover candidates. B/E Aerospace is a Buy and a Long-Term Buy.


Alaska Air Group ($95; ALK) declared a 2-for-1 stock split to occur July 9. The company last split its stock in March 2012. Alaska Air also reported 5% higher traffic in May and raised its 2014 capacity guidance, now projecting about 7% growth. Alaska Air is a Focus List Buy and a Long-Term Buy.

Deals fast and furious in health sector

With the health-care sector consolidating, Shire ($187; SHPG) reportedly hired Citigroup ($48; C) as an adviser for any takeover offers that may come its way. With a market value of nearly $37 billion, the drugmaker has been domiciled in tax-friendly Ireland since 2008. According to published reports, Allergan ($161; AGN) explored acquiring Shire earlier this year, though talks were preliminary. Shire shares have rallied 10% in June on takeover speculation. At least one analyst says a deal could be "imminent" between Shire and Allergan, which is trying to shake off unwanted advances from suitor Valeant Pharmaceuticals ($119; VRX).

Separately, the U.S. Food and Drug Administration asked Shire to test Vyvanse on children age four and five with attention deficit hyperactivity disorder. Vyvanse, Shire's top-selling drug with 25% of the company's total sales, is currently approved for children age six and older. Shire is also testing Vyvanse to treat binge-eating disorder. Shire is a Buy and a Long-Term Buy. Citigroup is rated B (average).


Medtronic ($62; MDT) agreed to acquire rival Covidien ($88; COV) for $42.9 billion in cash and stock. That price tag represents a fairly steep 29% premium to the value of Covidien's shares prior to the announcement. The deal would allow Medtronic to reap tax advantages by shifting its domiciliation to Ireland, which has a corporate tax rate of 12.5%, versus 35% in the U.S., though Medtronic said its tax rate is 18% and won't change much because of the acquisition. Both Covidien and Medtronic are rated B (average).


Merck ($58; MRK) said it will pay $3.85 billion to acquire Idenix Pharmaceuticals ($24; IDIX), best known for developing hepatitis C drugs. The cash deal values Idenix at more than three times its share price immediately before the announcement. Merck is rated C (below average).

Corporate roundup

Aetna ($81; AET) says it will submit plans to raise premiums by less than 20% in 2015 for its plans under the Affordable Care Act (ACA). Many insurers, including Aetna, have lost money this year with ACA plans; thus the increases. However, unlike most rivals, Aetna has experienced disenrollment from the ACA exchanges, possibly due to younger participants dropping out. It expects ACA exchange membership to fall 21% to 450,000 participants by the end of the year. The ACA exchanges represent less than 3% of Aetna's medical membership. The insurer added that utilization trends remain steady. Aetna is a Long-Term Buy.


A U.S. judge ruled that J.C. Penney ($9; JCP) interfered with Macy's ($58; M) exclusive contract with Martha Stewart Living Omnimedia ($4; MSO). A separate hearing will determine the damages. Macy's and Martha Stewart Living reached a settlement earlier this year for an undisclosed sum. Macy's is a Buy and a Long-Term Buy.


U.S. Bancorp ($43; USB) raised its quarterly dividend 7% to $0.245 per share, payable July 15 and consistent with the plan approved by the Federal Reserve. U.S. Bancorp is a Long-Term Buy.

Technology update

Looking to expand its presence in data centers, SanDisk ($103; SNDK) agreed to acquire Fusion-io ($11; FIO) for roughly $1.1 billion in cash. That price tag translates to $11.25 per share, a 21% premium to the company's price before the deal was disclosed. Fusion-io supplies storage systems to Apple ($92; AAPL) and Facebook ($64; FB). SanDisk's balance sheet held $2.81 billion of cash and $2.01 billion of debt at the end of March. SanDisk is a Focus List Buy. Apple is a Buy and a Long-Term Buy. Facebook is rated B (average).


Apple ($92; AAPL) settled a longstanding e-book lawsuit in order to avoid a trial at which it faced up to $840 million in damages. Terms of the deal, which still requires court approval, were not disclosed. Five publishers accused of working with Apple to fix e-book prices had already settled, paying a total of about $166 million.

Separately, European Union regulators are probing tax-avoidance strategies used by Apple, Starbucks ($75; SBUX), and Fiat ($10; FIATY). The EU is investigating how the companies cut deals with individual countries to maneuver profits between corporate subsidiaries that ultimately minimized their tax bills. In other news, Apple launched a new entry-level iMac desktop computer, priced at $1,099, or $200 below its previous model. The new iMac features a slower processor and a smaller hard drive. Apple is a Buy and a Long-Term Buy. Starbucks is rated C (below average).


Google ($551; GOOGL) said it will pay $500 million to acquire Skybox Imaging, a company that makes fairly inexpensive satellites that snap daily photos of the earth. The deal will boost Google's mapping business and could eventually help the company expand internet coverage in remote regions. Google is also reportedly planning to invest hundreds of millions of dollars in a joint venture and purchase a $30 million stake in Virgin Galactic, a company developing a satellite-launching system as well as offering plans for space tours. Google is a Focus List Buy and a Long-Term Buy.


Amazon.com ($326; AMZN) launched Fire Phone, a new smartphone with a screen that projects images that move where you do, like 3-D. It also includes a service called Firefly that recognizes products with the phone's camera, making it easier for shoppers to check out merchandise at a traditional store before ordering online. The phone starts at $200. Amazon.com is rated C (below average).


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