Genentech in, Walgreen out

12/29/2008


Genentech ($83; NYSE: DNA) is being added to the Long-Term Buy List. The biotech company specializes in drugs that treat cancer and autoimmune disorders. At 26 times trailing earnings, the shares are not cheap relative to the market. But Genentech is 17% off the August high and trades well below its three-year average P/E ratio of nearly 37. Roche Holding, the majority shareholder, has offered to acquire Genentech at $89 per share. While support for the deal is lukewarm, many market watchers expect Roche to sweeten its bid.

Genentech has submitted 21 new compounds into clinical study since 2006. While the new compounds should support long-term growth, the company lacks a major new drug to market in the next year. Fortunately, Genentech continues to generate growth from its existing product line. Consensus estimates project profit growth of 15% in 2009 and 14% in 2010. Genentech is being added to the Long-Term Buy List.


Walgreen’s ($25; NYSE: WAG) November-quarter profits dropped 11% to $0.41 per share, missing the consensus by $0.05. A 1.7% increase in same-store sales couldn’t offset an upsurge in expenses caused by opening a record 212 stores in the quarter. Walgreen has slashed expansion plans, but slowing the rollout could prove more difficult than the company anticipates. In other news, price wars for generic drugs threaten to erode a previously reliable source of income. Walgreen’s weak profit guidance suggests there is no near-term fix. Walgreen is being downgraded to Neutral.

November-quarter earnings
Accenture ($32; NYSE: ACN) earned $0.74 per share, up 24% and $0.06 above consensus estimates. Revenue and profits rose in four of five business segments, led by the resources group, where sales rose 16% and income nearly 24%. To reflect changing currency assumptions, the company lowered profit guidance for fiscal 2009, though it still expects growth of at least 5%. Accenture is a Focus List Buy and a Long-Term Buy . . . Oracle’s ($18; NASDAQ: ORCL) profits rose 9% to $0.34 per share, in line with expectations. Revenue for software license updates and product support, comprising more than half of total sales, grew 20% at constant currency. Early indicators suggest that the new, faster database Oracle introduced in the past quarter is gaining popularity and should drive growth over the next 18 months. Oracle is a Buy and Long-Term Buy . . . Per-share earnings for FedEx ($63; NYSE: FDX) climbed 3% to $1.58, topping the consensus by a penny. In what FedEx calls some of the worst economic conditions in its 35-year history, the company intends to lower costs by $1 billion in fiscal 2009 ending May. FedEx is rated Neutral . . . Nike ($49; NYSE: NKE) posted profits of $0.80 per share, up 13% on higher gross profit margins and strong growth in international sales, particularly in Asia-Pacific and Latin America. Orders scheduled for delivery from December through April fell 1% from year-ago levels, though they rose 6% at constant currency. Nike is rated Neutral.

Mergers and deals
The government extended a $17.4 billion bailout package to General Motors ($4; NYSE: GM) and Chrysler. The deal gives the automakers $13.4 billion in December and January, with the balance available in February. In exchange, the government will receive warrants for nonvoting stock, and its debt will take priority over existing debt. The automakers must also forgo dividend payments. GM and Chrysler have until March to prove themselves financially viable or repay the loans. In other news, GM has reportedly resumed merger talks with Chrysler and could be close to a deal. General Motors is an Underperform.


A team led by General Dynamics ($55; NYSE: GD) received a $14 billion contract to build eight Virginia-class submarines for the U.S. Navy over the next five years. The deal was not unexpected, but the official announcement eliminates some of the uncertainty surrounding the stock. In other news, the company won a $217 million contract to build 244 threat-detecting vehicles for the Swiss Army. General Dynamics is a Buy and a Long-Term Buy.


St. Jude Medical ($32; NYSE: STJ) paid $250 million in cash for Radi Medical Systems AB, a Swedish maker of devices for heart treatment and wound closure. A day later, St. Jude completed a $300 million deal to buy MediGuide, an Israeli firm that makes cardiac-surgery equipment. St. Jude Medical is a Focus List Buy and a Long-Term Buy.


American International Group ($2; NYSE: AIG) agreed to sell its Harford Steam Boiler segment for $742 million, well below the unit’s estimated value of $1 billion to $2 billion. Munich Re, a German reinsurer, plans to complete the deal in early 2009. HSB specializes in engineering insurance and inspection. AIG has agreed to sell interests in at least four businesses as part of efforts to repay $150 billion in federal loans. American international Group is rated Neutral.


Wal-Mart Stores ($56; NYSE: WMT) launched a tender offer for Distribucion y Servicio (D&S), Chile’s largest supermarket chain. The deal could be worth up to $2.66 billion. While many retailers are struggling to rein in domestic expansion to cope with the economic downturn, Wal-Mart began cutting back two years ago, shifting its focus to international markets with better growth potential. Wal-Mart Stores, which recently settled a series of class-action labor lawsuits for up to $640 million, is a Long-Term Buy.

News roundup
The U.S. Food and Drug Administration approved a stevia-based, zero-calorie sweetener for PepsiCo ($54; NYSE: PEP) to use in three new SoBe Lifewater flavors. The most popular chemical sweeteners have real or perceived health risks, and a natural, zero-calorie option should increase PepsiCo’s addressable market. The FDA approved a similar sweetener for use in Coca-Cola ($45; NYSE: KO) products. PepsiCo is a Buy and a Long-Term Buy. Coca-Cola is rated Neutral.


The FDA delayed ruling on Johnson & Johnson’s ($59; NYSE: JNJ) experimental psoriasis treatment ustekinumab until it receives additional information on the drug’s risks. J&J plans to respond in the next month. In clinical trials, ustekinumab showed promise, as infrequent injections treated the skin disease with generally mild side effects — a sharp contrast to the potentially severe side effects of current treatments. J&J is a Focus List Buy and a Long-Term Buy.


Credit-rating agency Standard and Poor’s warned General Electric ($16; NYSE: GE) that the conglomerate’s finance unit put its AAA credit rating at risk. S&P said GE’s earnings could be worse than expected in 2009 and 2010 and that GE has a one-in-three chance of losing its AAA rating during that time. GE is rated Neutral.


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