While we will stick with an out-of-favor recommendation if its fundamentals remain intact, we’ve learned that it is usually best to sell when both the share price and Quadrix scores are deteriorating. So, based on Quadrix scores and third-quarter results, we’re making several rank changes.
Biogen Idec ($47; NASDAQ: BIIB), reviewed in Quadrix Spotlight, is being added to the Focus List, Buy List, and Long-Term Buy List.
AstraZeneca ($42; NYSE: AZN) is being added to the Buy List. The British drugmaker offers an intriguing blend of value and growth potential. A study released this month showed that the company’s cholesterol drug Crestor reduced the risk of various heart problems by 44%. The study could potentially expand Crestor’s addressable market to include millions of new patients, though AstraZeneca is soft-pedaling the potential benefits.
Wall Street expects per-share-profit growth of 5% in 2009 and 2% in 2010, targets likely to rise in coming weeks. The company also boasts a deep product pipeline and has no significant patent expirations until at least 2010. Despite its competitive advantages in the growth-starved drug industry, AstraZeneca trades at just 8.5 times projected 2009 earnings, a 17% discount to the average valuation of the 10 largest U.S.-traded drugmakers. AstraZeneca, which earns a Quadrix Overall score of 94 and yields 4.5%, is being added to the Buy List.
Freeport-McMoRan ($25; NYSE: FCX) is being downgraded to Neutral, reflecting lower Quadrix scores and a worsening profit outlook. Copper prices continue to fall, dropping another 9% since Oct. 31, and several analysts now expect Freeport to post a loss in the fourth quarter. Some rebound in copper prices seems probable, but Freeport seems likely to earn less than $2.50 per share for 2009 unless prices rebound dramatically. With profit comparisons likely to be unfavorable over the next four quarters — and Quadrix scores likely to drop further — the stock no longer qualifies as a top pick. Risk-tolerant investors may want to wait for a bounce near $30 to sell. But a drop below the October low of $22.28 would be bearish, and we’re dropping the stock from our Focus List, Buy List, and Long-Term Buy List.
Lockheed Martin ($74; NYSE: LMT) is being dropped from the Focus List and Buy List but retained as a Long-Term Buy. The stock’s Quadrix Overall Score has dropped to 76, down from 92 in late October, because of a disappointing September quarter and weak share-price action. Big near-term cuts to defense spending seem unlikely, but the rapid growth seen over the past eight years is unlikely to continue. Trading at a modest nine times expected 2009 earnings, Lockheed’s share price appears to reflect such a slowdown, and investors buying now should reap solid returns over the next 24 to 48 months. But the stock no longer represents one of our top picks for the next 12 months.
Disney ($22; NYSE: DIS) posted per-share earnings of $0.43 excluding special items in the September quarter, up 2% and $0.06 below the consensus. Disney expects park bookings to decline in coming quarters, and consensus profit estimates have already begun to fall. The stock’s Quadrix Overall score has declined to 74, and the profit shortfall and estimate cuts are likely to drive the rank even lower. We are no longer confident that Disney will outperform the market over the next two to four years, and are downgrading the stock to Neutral. Subscribers tracking our Long-Term Buy List should sell Disney.
DirecTV ($21; NASDAQ: DTV) earned $0.33 per share, up 22% but $0.02 below consensus estimates. Sales rose 15% to $4.98 billion, paced by 49% growth in Latin America. Free cash flow quadrupled to $332 million on higher operating profit margins and lower capital expenditures. DirecTV is a Focus List Buy . . . Qualcomm ($35; NASDAQ: QCOM) earned $0.63 per share excluding special items, up 17% and $0.03 ahead of the consensus. Revenue rose 44% to $3.33 billion. Qualcomm trimmed its profit target for fiscal 2009 ending September to reflect weak demand for wireless devices and now expects a per-share-profit decline of 7% to 11%. Wall Street expects per-share-profit growth of at least 24% in fiscal 2010 and 2011, and the company’s 2009 guidance sounds overly conservative. Qualcomm retains its Focus List Buy and Long-Term Buy ratings.
American International Group ($2; NYSE: AIG) negotiated a new $150 billion rescue package that will reduce interest rates to about 6% on a portion of the loan. The deal also calls for the creation of two new entities that will take on the risk of some of AIG’s particularly troublesome assets. The new package should give the insurer more time and flexibility to recover from its tailspin, but risks still abound, and it is too early to consider Neutral-rated AIG . . . Wells Fargo ($29; NYSE: WFC) issued $11 billion in shares to help pay for its $12.3 billion all-stock purchase of Wachovia ($6; NYSE: WB). Wells Fargo is rated Neutral . . . Credit-card giant American Express ($22; NYSE: AXP) will become a bank holding company, gaining access to loans from the Federal Reserve — and the $700 billion bailout plan. The company has requested $3.5 billion in federal aid. Amex is rated Neutral.
The weakest October in at least 39 years has left retailers bracing for a harsh holiday season. Despite a decline in gasoline prices that presumably eased pressure on consumer budgets, same-store sales at chain stores fell 0.9% for the month, according to the International Council of Shopping Centers. Reflecting the grim news, J.C. Penney ($20; NYSE: JCP) cut profit guidance for the October quarter. TJX ($23; NYSE: TJX) slashed guidance for fiscal 2009 ending January. As consumers scrimp and scramble for bargains, retailers known for low prices, like discount giant Wal-Mart Stores ($55; NYSE: WMT), bucked the trend. Wal-Mart’s same-store sales rose 2.5% in October. Wal-Mart Stores is a Long-Term Buy. TJX and J.C. Penney are rated Neutral.
Microsoft keeps its distance from Yahoo
Google ($311; NASDAQ: GOOG) is scrapping plans for an advertising partnership with Yahoo ($11; NASDAQ: YHOO) that drew the attention of antitrust regulators. Yahoo, jilted and facing waning sales, sought out Microsoft ($21; NASDAQ: MSFT), asking the software giant to revisit a takeover offer it made earlier this year. However, CEO Steve Ballmer said Microsoft was no longer interested in purchasing Yahoo, though he did not rule out a deal regarding Yahoo’s search business. Microsoft is a Buy and a Long-Term Buy. Google, Verizon, and Yahoo are rated Neutral.