Portfolio Review: April 4, 2016
Foot Locker ($66; FL) was slated to join the S&P 500 Index after the close of trading on April 1. Stocks often get a boost when they join the S&P 500, lifted by demand from funds that track the index. With newly added Foot Locker and Centene ($62; CNC), 21 of our 29 recommended stocks make the S&P 500. Among our other stocks most likely to join the S&P 500 next are Jones Lang LaSalle ($116; JLL) and Alaska Air Group ($82; ALK). Alaska's market capitalization of $10.44 billion ranks second-highest in the S&P 400 Midcap Index.
Noticeably absent from both the S&P 400 and S&P 500 is Lear ($112; LEA). The auto-parts supplier has a market value of $8.55 billion and sales greater than nearly three-fourths of S&P 500 constituents. But it derives just 23% of revenue from the U.S. while just 18% of its long-term assets reside in the U.S. — the S&P prefers that companies have a plurality of sales and fixed assets in the U.S. While no other country accounts for a larger portion of Lear's revenue than the U.S., Mexico houses more of Lear's assets than its home country. Alaska Air, Centene, Jones Lang, and Lear are Focus List Buys and Long-Term Buys. Foot Locker is a Buy and a Long-Term Buy.
Tickets for the June 16 opening of Disney's ($99; DIS) Shanghai Disneyland sold out within hours of going on sale. The two hotels in the park, which is three times bigger than Hong Kong Disneyland, are booked for the first two weeks. Disney has a 43% stake in Shanghai Disneyland. Parks and resorts account for 31% of Disney's revenue and should help insulate the company if growth at its cable business slows. Disney is a Long-Term Buy.
Centene ($62; CNC) completed its $6.0 billion acquisition of Health Net that was first announced in July. Centene had originally expected to close on Health Net on Feb. 1, then pushed back the deadline to March 1. With the deal, Centene expands its presence in California and becomes the largest U.S. private administrator of Medicaid programs. Management will update its 2016 guidance when it reports March-quarter results on April 26. Separately, Centene joined the S&P 500 Index after the market closed on March 29. At less than 21 times trailing earnings, Centene trades in line with the median for S&P 1500 health insurers and 18% below its own five-year average. Centene is a Focus List Buy and a Long-Term Buy.
A jury ordered Gilead Sciences ($92; GILD) to pay Merck ($53; MRK) $200 million in damages linked to a patent lawsuit involving Gilead's hepatitis C drugs Sovaldi and Harvoni. Merck had requested $2 billion. A separate trial will determine whether Gilead owes Merck royalties on future U.S. sales. Merck seeks 10% of U.S. sales for Sovaldi and Harvoni, which totaled $12.5 billion last year, or 38% of Gilead's total revenue. Gilead has vowed to appeal the ruling.
Both Sovaldi and Harvoni appear to be holding up pretty well amid new competition. AbbVie ($57; ABBV), Bristol-Myers Squibb ($63; BMY), and Merck have released rival hepatitis C drugs in the past nine months. Yet patients taking Gilead's hepatitis C treatments outnumbered those prescribed AbbVie's Viekira Pak by 20-to-1 in the week ended March 18, up from 16-to-1 in the last week of 2015. Moreover, Merck priced Zepatier at a 40% discount to Harvoni, yet none of the 20 largest Medicare plans cover the drug, while all 20 plans cover Harvoni. Gilead holds a 94% market share among new patients. Gilead is a Focus List Buy and a Long-Term Buy. AbbVie and Merck are rated B (average). Bristol-Myers is rated C (below average).
Shire ($169; SHPG) won a patent lawsuit that will block Allergan ($275; AGN) from selling a generic version of Lialda in the U.S. until 2020. Lialda treats ulcerative colitis, a form of inflammatory bowel disease, and generated 11% of Shire's total sales in 2015. The drug controlled a 36% share of its addressable U.S. market last year. Shire is a Long-Term Buy.
Airlines squabble over acquisition, Cuba routes
Both Alaska Air Group ($82; ALK) and JetBlue ($21; JBLU) made separate offers to acquire Virgin America ($38; VA), a low-fare airline that has put itself up for sale. With a stock-market value of $1.72 billion, Virgin America operates in the U.S. and Mexico, including many routes along the West Coast. Virgin America grew sales just 3% last year and reported lower operating profit margins than its rivals, two signals that it struggles to expand as larger airlines ramp capacity.
Analysts seem to agree the deal makes more sense for JetBlue. JetBlue and Virgin America fly the same type of airplanes, minimizing training needs for pilots and maintenance crews. They also have fewer overlapping routes, which would allow JetBlue to more cleanly extend its reach. A deal would remove yet another player in the industry, which has shrunk to four big airlines from eight since 2008; those four airlines now control more than 80% of the U.S. market. Virgin America ranks ninth among U.S. airlines by traffic, while JetBlue ranks fifth and Alaska Air sixth.
In other news, U.S. airlines took jabs at each other as they jockeyed for a slice of Cuba's market. The U.S. plans to approve 20 daily round-trip flights to Havana and 10 additional flights to smaller regional airports in Cuba. Major U.S. airlines have applied for a total of 41 daily routes to Havana, including JetBlue seeking 12 flights, Southwest Airlines ($45; LUV) nine, and Alaska Air two. In written responses to rival proposals, United Continental ($60; UAL) called Southwest's claims "capricious," while American Airlines Group ($41; AAL) belittled Alaska Air's claims about demand for flights to Havana from Los Angeles as "extreme." Alaska Air is a Focus List Buy and a Long-Term Buy. Southwest Airlines is a Buy and a Long-Term Buy. JetBlue is rated Best Buy at sister publication Upside.
No changes were made this week in Dow Theory Forecasts.