Portfolio Review

7/14/2014


AbbVie makes new pass at Shire

U.S. drug giant AbbVie ($56; ABBV) raised its offer to purchase smaller Irish rival Shire ($235; SHPG) by 11% to $51.3 billion, or about $260 per U.S.-traded share. The deal consists of 56% stock and 44% cash, a proportion similar to the last offer. Shire says it will consider the latest bid, but the company has rejected three earlier offers and might try to squeeze another sweetener out of AbbVie.

Shire shares fell on the news and as of July 9 traded at a 10% discount to the offer price, suggesting investors have become less confident the deal will go through. Some analysts were projecting a higher bid and a greater percentage of cash.

AbbVie's current bid represents a 36% premium to Shire's price before news of the purchase attempt broke last month, and it's uncertain how much higher the suitor will go. The U.S. company has not ruled out appealing directly to shareholders, and the lack of public opposition to the deal from anyone outside of Shire management suggests a hostile takeover might work. U.K. regulations require AbbVie to make a firm offer by July 18 or walk away. If the deal goes through, the Internal Revenue Service will treat the acquisition as if AbbVie owners had sold their shares, meaning longtime holders could face hefty capital-gains taxes.

Shire has excellent growth potential on its own; the consensus projects profit growth of 33% this year and 15% annually over the next five. However, the shares have rallied 21% since news of AbbVie's interest broke and currently trade at 28 times trailing earnings, 29% above the industry median, and sport an even higher premium on price/sales, price/book, and price/operating cash flow. We continue to rate Shire a Buy and a Long-Term Buy, though the shares could take a short-term hit if the deal falls through.

Qualcomm eyes new niches

Qualcomm ($81; QCOM) agreed to acquire Wilocity, a semiconductor company at the forefront of developing a new wireless technology called WiGig that transmits data up to four times faster than the fastest Wi-Fi. One report estimated the deal at $300 million. Qualcomm plans to add WiGig capabilities to its own semiconductors.

The company also hopes to expand in the automotive industry. Qualcomm currently supplies semiconductors that turn some Tesla and Audi cars into a new type of mobile device. Qualcomm has shipped 10 million semiconductors that offer wireless connectivity for cars.

In the immediate future, investors need to see better operating momentum from Qualcomm. Cash from operations fell 18% in the March quarter, the first year-over-year decline since the three months ended September 2012. Revenue growth decelerated in three consecutive quarters to just 4% in the March quarter. Sales appear poised to rebound, with the consensus projecting 5% growth in the June quarter, followed by a 10% gain in the September quarter. June-quarter earnings per share are expected to climb 18% to $1.22. Qualcomm, set to post results on July 23, is a Buy and a Long-Term Buy.

Apple owners giddy for gadgets

Samsung issued a profit warning for the June quarter, consistent with recent comments made by analysts that Apple ($95; AAPL) may be growing smartphone sales faster than Samsung. Apple's momentum could suffer if China's government follows through on plans to encourage wireless carriers to slash subsidies for the iPhone and other devices. Still, Apple shares have generated a total return of 28% in the past three months, partly driven by investors anticipating a wave of new products.

Production for two larger iPhones — with displays measuring 4.7 inches and 5.5 inches — could reportedly begin in July. The current iPhone features a 4-inch screen.

Mass production of an Apple smartwatch could commence this summer, with the commercial launch possibly coming in October. Early entrants in the so-called wearables category have failed to win over consumers, with global shipments of wearable devices amounting to just 2.9 million units in the March quarter. Apple reportedly expects to ship 50 million units within the first year.

Apple has also secured agreements with nearly 30 auto brands for CarPlay, a platform that lets drivers run smartphone applications on their in-dash screens. Vehicles featuring CarPlay are expected to debut later this year. Apple is a Buy and a Long-Term Buy.

Keep flying with Alaska

Alaska Air Group ($97; ALK) shares have generated a total return of 33% in 2014, well ahead of the 21% average for S&P 1500 airline stocks. But turbulence has jostled airline stocks in the past month. First, European airline Lufthansa issued a profit warning, citing pressure on airfares due to rapid expansion by Middle Eastern airlines. Then Delta Air Lines ($36; DAL) cited higher global capacity (resulting in lower yields) and blamed the FIFA World Cup for disappointing business travel to Latin America. Alaska Air's stock has fallen 3% in the past month, falling prey to an industry sell-off.

Yet Alaska Air, primarily a domestic airline, said its traffic rose 5% and capacity 6% in June. On July 9, rivals American Airlines Group ($40; AAL) and Southwest Airlines ($27; LUV) impressed investors by forecasting strong passenger revenue per available seat mile for the June quarter. Analyst profit estimates for Alaska Air's June quarter continue to rise, with the consensus projecting 44% higher earnings per share. Alaska Air will report its full quarterly results on July 24. The stock looks cheap, with trailing and forward P/E ratios at least 18% below peer-group medians. Alaska Air remains a Focus List Buy and a Long-Term Buy. Southwest is rated A (above average).

Performance update

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• But any newsletter can have a good year, so you also want to look for consistent returns. Among all newsletters monitored by Hulbert, Dow Theory Forecasts is one of only five that outperformed the Wilshire 5000 for the one, 10, and 15 years ended June 30.

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Rank Changes

No changes were made this week in Dow Theory Forecasts.


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