Price isn't right for Shire
Shire ($228; SHPG) rejected three unsolicited takeover bids from AbbVie ($55; ABBV), including a cash and stock deal worth $46.5 billion, roughly a 23% premium to Shire's price before the announcement. Management claims AbbVie's offers "fundamentally undervalued Shire and its prospects." To buttress that argument, Shire released on June 23 new projections calling for its annual sales to double to $10 billion organically by 2020, up from $5.02 billion last year. On June 25, Shire said it won a U.S. court ruling blocking generic versions of its top-selling product, Vyvanse, a treatment for attention deficit hyperactivity disorder. Unless the generic drugmakers win on appeal, they will be blocked from introducing a generic copy of the drug until 2023, Shire says.
Although talks have reportedly ceased, AbbVie is considering making a higher bid. Under British takeover law, which applies because of Shire's London-listed shares, AbbVie has until July 18 to make a formal offer for Shire. Otherwise, AbbVie will need to walk away for six months. Shire, based in Ireland for tax purposes, could attract bids from other drugmakers seeking a lower tax rate, such as Bristol-Myers Squibb ($50; BMY). While Shire could be volatile in the near term depending on takeover developments, the stock remains a Buy and a Long-Term Buy. AbbVie is rated B (average), while Bristol-Myers is rated C (below average).
For Quanta Services, June-quarter report crucial
Quanta Services ($34; PWR) shares, while up 8% for 2014, have slumped 6% in the past three months. It has an Overall Quadrix score of 76, lowest among our Buy-rated stocks and down from 93 at the end of April. The Momentum score has dropped to 45, partly because of weak cash-flow trends that stem from an unusual charge in the March quarter.
In early May, Quanta reiterated its 2014 targets for per-share profits and sales, both calling for double-digit growth. But Quanta's June-quarter outlook was unexpectedly light, putting pressure on management to deliver strong second-half results to meet its full-year guidance. Adding to those concerns, rival MasTec ($29; MTZ) warned for the June quarter, citing weakness in its energy unit and unexpected delays in telecom spending. Quanta, the largest specialty contractor for pipelines and electricity-transmission networks, does not operate in the telecom space.
Still, Quanta's underlying March-quarter results were solid, with per-share profits up 16% on 11% sales growth. The backlog rose 29% to a record $9.05 billion in the March quarter and represents more than a year's worth of revenue. At 20 times trailing earnings, Quanta offers a decent value, trading 21% below its five-year average P/E ratio. We'll be looking for confirmation that Quanta's profit growth and orders remain on track when it reports June-quarter results in late July or early August, but for now Quanta is a Buy and a Long-Term Buy.
For the April quarter, Kroger ($49; KR) said per-share profits jumped 18% to $1.09 excluding special items, topping the consensus by $0.04. Total revenue grew 10% to $32.96 billion, while same-store sales excluding fuel advanced 4.6%. Results benefited from Kroger's $2.44 billion acquisition of Harris Teeter, completed in January. Shopping trends are also improving, and Kroger says higher-than-expected sales growth has continued in the July quarter. The company boosted its full-year guidance slightly. Kroger, with a Quadrix Value score of 73 and Overall rank of 90, is a Focus List Buy and a Long-Term Buy.
Walgreen ($72; WAG) said May-quarter earnings per share rose 7% to $0.91 excluding special items, missing the consensus of $0.94. Revenue, up 6% to $19.40 billion, also missed the consensus. Same-store sales increased 4.8%. The company filled 5% more prescriptions than it did in the year-ago quarter, helped by market-share gains and likely the expanded insurance coverage from the Affordable Care Act. Walgreen said margins were pressured by lower reimbursement rates from third-party payers. Shares of both Walgreen and rival CVS Caremark ($75; CVS) dipped on the report. Profits at CVS tend to be better insulated from reimbursement rates because its pharmacy benefit management unit creates less exposure to third-party payers.
Walgreen also withdrew its guidance for fiscal 2016 ending August, inviting speculation that it might acquire the remaining stake of Switzerland's Alliance Boots in order to complete a corporate inversion that would lower its tax bill. In 2012, Walgreen paid $6.7 billion for a 45% stake in Alliance Boots in a deal that included an option to buy the rest of the company by 2016. CVS is a Buy and a Long-Term Buy. Walgreen is rated B (average).
Google ($573; GOOGL) has made a flurry of acquisitions in recent weeks, most notably the $555 million purchase of Dropcam, a company that provides internet-connected video monitoring and security services. The deal signals Google's ongoing interest in building a business of connected devices used around the home. Google bought Nest Labs, a maker of digital thermostats, for $3.2 billion earlier this year. Google plans to introduce a television set-top box, likely by licensing its new Android TV software to device makers. Google also acquired startups Alpental Technologies (next-generation wireless technology), MDialog (video advertising), and Baarzo (search and advertising) for undisclosed sums. Google is a Focus List Buy and a Long-Term Buy.
Oracle ($41; ORCL) agreed to pay $5.3 billion to purchase Micros Systems ($68; MCRS), which makes cash registers that connect to the internet for restaurants, hotels, and casinos. Oracle hopes the deal, its biggest since the $7.4 billion purchase of Sun Microsystems in 2010, will help revive its operating momentum. For the May quarter, per-share profits rose 6% excluding special items on 3% sales growth — both missed consensus estimates as the company struggles to adjust to the shift toward cloud computing. Oracle is being downgraded to B (average) from A (above average).
General Electric ($27; GE) agreed to buy Alstrom's power-equipment business in a $16.9 billion deal. Based in France, the Alstrom unit makes gas and steam turbines for power plants. GE also agreed to sell its rail-signaling business to Alstrom for $825 million. GE is rated C (below average).
The Commerce Department approved Pioneer Natural Resources ($222; PXD) and Enterprise Products Partners ($76; EPD) to ship condensate, a type of light oil, after minimal processing. Officials insist that decision does not indicate a change in U.S. policy. But investors took the ruling as a signal that the U.S. may begin to relax its ban on exporting unrefined oil, which could lead to higher realized oil prices and increased production. Shares of U.S. energy producers and oilfield services providers rallied on the news, while refiners plunged.
Separately, shares of Schlumberger ($114; SLB) surged after the oilfield services giant provided encouraging long-term profit guidance. The company predicted 17% to 20% annual growth in per-share profits from 2013 to 2017, with per-share profits of $9 to $10 in 2017. Schlumberger said it intends to return 60% of its earnings via dividends and share repurchases. Schlumberger is a Focus List Buy and a Long-Term Buy.
No changes were made to our buy lists this week, though Empire District Electric ($25; EDE) is replacing Southwest Gas ($52; SWX) in the Top 15 Utilities portfolio.