Portfolio Review

3/9/2015


Health-care update

Mylan ($56; MYL) said December-quarter earnings per share increased 35% to $1.05 excluding special items to match the consensus. Revenue climbed 15% to $2.08 billion. Generic-drug sales rose 12%, with a 17% gain in North America offsetting a dip in Europe. Specialty-drug sales jumped 38%, primarily due to higher volumes for the EpiPen Auto-Injector.

The midpoint of Mylan's 2015 guidance targets 17% higher per-share profits on revenue growth of 28%, roughly in line with analyst estimates at the time of the announcement. Cash from operations is projected to rise 32% to 49%.

Part of that growth will come from Mylan's acquisition of Abbott Laboratories' ($47; ABT) branded-generics and specialty units for developed markets outside of the U.S. Mylan funded the deal by issuing to Abbott 110 million shares valued at $6.31 billion on Feb. 27, when the deal was completed. The deal allowed Mylan to reincorporate itself in the tax-friendly Netherlands, with each share of Mylan common stock automatically converting into a share of the newly combined company, forcing investors to recognize taxable gains. Abbott had previously indicated it would quickly sell off its 22% stake in Mylan, which could create short-term pressure on the shares. Mylan said it will explore making more deals this year. Mylan is a Buy and a Long-Term Buy. Abbott is rated B (average).


Gilead Sciences ($103; GILD) said an experimental HIV treatment was as effective in a study as Viread, the company's existing HIV drug, yet caused fewer side effects. Viread's U.S. patent expires in 2017, so this new drug could help shield Gilead from generic competition in coming years. Viread generated 4% of Gilead's revenue last year. Gilead also reported encouraging results from a late-stage study that used Harvoni to treat hepatitis C in patients also afflicted with HIV. Gilead is a Long-Term Buy.


Shire ($240; SHPG) filed for U.S. approval for a drug designed to treat dry-eye disease, which affects 25 million adults in the U.S. Shire is a Focus List Buy and a Long-Term Buy.

Auto-parts suppliers shine

Lear ($109; LEA) shares are up 9% and Magna International ($109; MGA) shares 13% since the end of January, despite a modestly disappointing U.S. auto sales for February. With several parts of the country hammered by heavy snow, total car sales rose 5% last month, missing the consensus target of 7% growth. Sales increased 4% for General Motors ($38; GM), while slipping 2% for Ford Motor ($16; F). Lear generates 22% of sales from GM and 21% from Ford. Magna draws 18% of revenue from GM 13% and from Ford.

Magna expects a sixth straight year of higher global production of light vehicles, though some signs indicate the auto industry may be at risk of overheating. Wells Fargo ($55; WFC) vowed to limit the volume of subprime auto-loan originations to 10% of the total value of its auto originations. Car loans to the riskiest borrowers have soared in the past couple years, providing a boon for banks. But U.S. officials are investigating auto-lending practices. In some cases, borrowers are taking on loans for several times their vehicles' value, increasing the risk that they may fall behind and eventually default on the loans. Lear and Magna are Focus List Buys and Long-Term Buys. Wells Fargo is a Long-Term Buy. GM is rated A (above average). Ford is rated B (average).

Technology report

EMC ($28; EMC) has reportedly decided to retain its 80% stake in VMware ($86; VMW) after reviewing a shareholder proposal that had called for the company to divest its stake. EMC is a Long-Term Buy. VMware is rated B (average).


Nvidia ($22; NVDA) showed off Shield, a set-top box for streaming movies and playing video games over the internet. Nvidia will face formidable competition from Microsoft ($43; MSFT) and Sony ($28; SNE), though unlike the established gaming systems, which use discs, Shield will stream games from data centers.  Priced at $199, Shield will go on sale in May. Nvidia is a Buy and a Long-Term Buy. Microsoft is rated B (average).


Google ($578; GOOGL) announced plans to offer wireless services in the U.S. but stressed its service will be on a small scale, which should limit its competition with the major wireless companies that support its Android mobile operating system. Google is a Buy and a Long-Term Buy.


Samsung Electronics showed off its newest smartphone, the Galaxy S6, scheduled to launch on April 10 in 20 countries. The company hopes to recover from the disappointing Galaxy S5, which flopped with consumers and contributed to Samsung's losing its lead on Apple ($129; AAPL). Each company captured a 20% share of the global smartphone market in the December quarter, according to researcher Strategy Analytics, while Gartner said Apple took a slight lead. So far, Samsung's new Galaxy S6 has received a positive initial reception. Corning's ($25; GLW) Gorilla Glass covers the front and back of the device. Samsung also plans to take on Apple Pay by launching its own mobile-payment service in the U.S. during the second half of 2015. Apple is a Focus List Buy and a Long-Term Buy. Corning is a Buy and a Long-Term Buy.


Shares of Micron Technology ($29; MU) slumped following an analyst downgrade on concerns that the company is losing market share to Samsung and has fallen behind on commercializing new technology. Samsung reportedly expanded its supply deal with Apple last month. However, other analysts say Micron seems capable of boosting its profit margins to offset lost market share. A lot of pessimism is already built into the stock, which trades at eight times estimated year-ahead earnings, while S&P 1500 semiconductor stocks average 22. Micron, earning a Quadrix® Overall score of 97 and Value score of 93, remains a Buy and a Long-Term Buy.

Corporate roundup

Jones Lang LaSalle ($160; JLL) increased its credit facility 67% to $2 billion to help support the company's long-term growth strategy. The company may take that new credit out for a spin fairly soon, as management expects 55% of discretionary spending to go toward acquisitions this year. Operating cash flow surged 70% to $499 million last year, allowing management to improve its balance sheet, as net debt fell 58% to $128 million. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.


The Federal Communications Commission approved tougher rules for Comcast ($60; CMCSa) and other internet providers. Broadband providers face heavier regulations, similar to traditional telephone services, and can no longer charge companies such as Netflix ($470; NFLX) higher prices in exchange for faster delivery of web content. In other news, Comcast reportedly entered talks to acquire Visible World, which delivers target ads to viewers based on ZIP codes. Comcast is a Buy and a Long-Term Buy.

Airline review

Southwest Airlines ($44; LUV) raised its March-quarter guidance for fuel costs to $2.00 a gallon from the $1.90 a gallon it projected in January. Southwest paid $3.10 a gallon for fuel in the year-ago quarter and canceled its 2015 fuel hedges earlier this year. In other news, Southwest said on Feb. 27 it had inspected 115 of the 128 jets that missed a routine maintenance check and expected to complete the rest over the weekend. Southwest Airlines is a Long-Term Buy.


Alaska Air Group ($66; ALK) reported 8% higher traffic and capacity growth of 9% in February. Alaska Air is a Focus List Buy and a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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