Portfolio Review

4/6/2015


Health-care update

Mylan ($58; MYL) announced a public offering of 35 million shares, or nearly one-third of Abbott Laboratories' ($46; ABT) $6.5 billion stake in the company. The underwriters have the option to purchase an additional 5.2 million shares. Mylan issued 110 million shares to Abbott in February to complete its acquisition of Abbott's branded-generics and specialty units for developed markets outside of the U.S. Abbott has said from the start that it intends to divest its 22% interest in Mylan fairly quickly.

In other news, Mylan rival Teva Pharmaceutical Industries ($63; TEVA) agreed to pay about $3.5 billion in cash to acquire Auspex Pharmaceuticals ($100; ASPX). The deal represents a 42% premium to Auspex's stock price prior to the announcement. Teva had avoided making big deals in the past few years, but CEO Erez Vigodman, who took the helm last year, said in February that the drug giant would pursue either a major acquisition or several smaller ones. Those comments have led to speculation that Mylan, with a stock-market value of about $23 billion, could become a takeover target. Analysts say Teva still enjoys the financial flexibility to make a larger deal down the road and would consider a hostile takeover. Mylan is a Buy and a Long-Term Buy. Abbott is rated B (average).


Gilead Sciences ($98; GILD) won regulatory approval to sell hepatitis C drug Sovaldi in Japan. Japanese approval for Gilead's other hepatitis C treatment, Harvoni, is expected in the second half of the year. Gilead is a Long-Term Buy.

Semiconductor stocks hit speed bump

Semiconductor stocks have been one of the better-performing S&P 1500 industries this year, with stocks averaging total returns of 12%. But the group has been hit hard in the past couple weeks, amid warnings issued by Intel ($31; INTC) and SanDisk ($65; SNDK). Taiwan Semiconductor Manufacturing ($23; TSM) also reported a recent slowdown.

Shares of Nvidia ($21; NVDA) and Micron Technology ($27; MU) have slumped at least 2% in the past two weeks. The sell-off has extended to equipment maker Lam Research ($70; LRCX), hurt by fears that key customer Samsung Electronics has postponed orders.

Skyworks Solutions ($97; SWKS) is a notable exception, with its shares flat over the last couple weeks, possibly supported by anticipation surrounding the April debuts of the Apple Watch and Samsung Galaxy S6 smartphone. The stock may also have gotten a lift from joining the S&P 500 Index on March 11.

Micron shook off some of the gloom by posting results that exceeded modest expectations. Micron earned $0.81 per share in the February quarter excluding special items, down 5% but above the consensus estimate of $0.73. Sales crept 1% higher to $4.17 billion, also ahead of analysts' expectations. Cash from operations fell 10% to $1.25 billion. Operating profit margins slipped as Micron said prices lagged November-quarter levels. Management's May-quarter sales guidance fell short of the consensus.

Intel has reportedly entered talks to acquire Altera ($42; ALTR), a maker of programmable semiconductors that had a market value of $10.4 billion before news of a potential takeover surfaced. The deal could help jump-start Intel's growth — earnings per share are projected to fall 7% this year on flat revenue — and reduce the company's reliance on personal computers, which account for about 60% of sales. Altera has a large presence in the telecommunications, military, and aerospace end markets.

A deal could fuel further consolidation in an industry that has already gotten off to a busy start on the acquisition front. The global volume of announced mergers and acquisitions for the semiconductor industry had topped $21 billion through late March, according to Dealogic, up 122% from a year ago and the most since at least 1995. Both Lam and Nvidia remain Focus List Buys and Long-Term Buys. Micron and Skyworks are Buys and Long-Term Buys. Intel is rated A (above average). Altera and SanDisk are rated B (average).

Corporate roundup

Comcast ($57; CMCSa) said it now expects to complete its pending $45 billion acquisition of Time Warner Cable ($152; TWC) in the middle of the year. The delay stems from the Federal Communications Commission's decision last month to pause its review of the deal. Comcast had previously told investors the deal would be done in the March quarter. In other news, Comcast formed a new company that will invest up to $4.1 billion in growth businesses around the world. Comcast is a Buy and a Long-Term Buy.


Magna International ($53; MGA) is reportedly discussing the sale of its car-interior business to Grupo Antolin of Spain. The business produces annual revenue of about $3 billion, or 8% of Magna's total sales. Magna is a Focus List Buy and a Long-Term Buy.


Eurasia Drilling extended its deadline to sell a 46% percent stake in itself to Schlumberger ($84; SLB) for $1.7 billion. Russian regulators continue to deliberate over approving the deal, originally expected to close by the end of March. Eurasia Drilling owns Russia's largest fleet of land-drilling rigs. Separately, Schlumberger agreed to pay a $233 million penalty — less than 5% of 2014 free cash flow — and plead guilty to violating U.S. sanctions in Iran and Sudan. The investigation spanned six years, and Schlumberger has wound down operations in both countries over the past two years. Schlumberger is a Long-Term Buy.


The chairman of the U.S. Senate's antitrust panel seeks more information on the Federal Trade Commission's probe into Google ($549; GOOGL). Last month the FTC inadvertently released a 2012 staff report that had recommended filing an antitrust lawsuit against Google. The FTC ended its probe in early 2013, with Google voluntarily agreeing to change its practices. Google is a Buy and a Long-Term Buy.

Banks gear up for earnings

The S&P 500 Index's financial stocks have averaged a total return of 0.4% so far this year, lagging the average of 2.0% for the broader Index. But financial stocks have gained momentum heading into earnings season, posting the second-highest return among the 10 sectors in the past month.

The sector's share-price momentum coincides with a much-needed dose of good news for banks. Trading volumes turned sharply higher in the March quarter, while demand for home loans has also been unexpectedly strong in 2015. The average company in the financial sector is projected to grow per-share profits 11% in the first quarter, tops among all sectors.

Over the past 60 days, analyst estimates for full-year 2015 have held mostly firm at U.S. Bancorp ($43; USB), expected to report 6% higher per-share profits, and Wells Fargo ($54; WFC), expected to grow 1%. Profit estimates rose slightly for J.P. Morgan Chase ($60; JPM) and project 9% growth.Both J.P. Morgan and Wells Fargo will report results on April 14, followed by U.S. Bancorp on April 15. All three banks are rated Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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