Portfolio Review: January 9, 2017

1/9/2017


For now, drug prices climbing

Despite political condemnation, drug prices continued to march higher in the first days of 2017, according to an analyst at Raymond James ($72; RJF). For many drugmakers, the price increases resembled those made in past years, said the analyst.

A notable exception was Biogen ($294; BIIB), which pushed through price hikes "measurably more aggressively than norm." Biogen's management kept quiet about the topic of price increases during its September-quarter earnings call. But as we noted in the Jan. 2 issue, Biogen has used price hikes to offset lower volumes for multiple sclerosis drug Avonex over the past decade.

Rising drug prices coincide with fewer treatments getting cleared by U.S. regulators. The U.S. Food and Drug Administration approved just 22 new drugs last year, the lowest total since 2010 and down 51% from 2015. The FDA attributes the decline in approvals to fewer applications for new drugs, more rejected or delayed applications, and several drugs getting the green light ahead of schedule. Incidentally, the last drug to win approval in 2016 was Spinraza for spinal muscular atrophy, a medicine co-developed by Biogen and Ionis Pharmaceuticals ($49; IONS). Spinraza costs $125,000 per dose, translating to a price tag upwards of $750,000 for a patient's first year of treatment. Biogen is a Buy and a Long-Term Buy.

Auto growth streak at risk

Shares of automakers and auto-parts suppliers have rallied in the opening days of 2017, shrugging off concerns that U.S. car sales may have peaked last year. After a strong month of December, all signs point to annual U.S. car sales rising in 2016, marking the seventh straight year of growth. Entering 2016, annual U.S. car sales had risen in six straight years. But stockpiles of unsold vehicles were running unusually high in November, and more car buyers are trading in cars worth less than what's left on their auto loans.

Industry researcher IHS expects U.S. car sales to fall in 2017. Still, low oil prices have steered more buyers toward trucks, cross-over vehicles, and sport-utility vehicles, which tend to require more seats and electrical content than passenger cars — a positive for Lear ($136; LEA). The U.S. accounts for about 23% of Lear's sales.

At the same time, U.S. automakers face pressure from President-elect Donald Trump to build more vehicles in the U.S., potentially pressuring their profit margins. Trump used Twitter ($17; TWTR) to slam General Motors ($37; GM) for producing its Chevrolet Cruze hatchback in Mexico and threatened to hit the automaker with a border tax for bringing the cars into the U.S. to sell.

Just hours later, Ford Motor ($13; F) announced that it had scrapped plans to construct a $1.6 billion factory in Mexico, citing lower demand for its Focus and other small cars. Ford said it will invest $700 million to upgrade a plant in Michigan to build electric, hybrid, and autonomous vehicles. Lear is a Focus List Buy and a Long-Term Buy. GM is rated A (above average). Ford is rated B (average).

Media update

Comcast ($70; CMCSa) and Fox News Channel, owned by Twenty-First Century Fox ($29; FOXa), struck a new four-year deal, allowing the cable company to continue to carry the network. The monthly carriage fee for Fox News will reportedly exceed $1.50 per Comcast subscriber. Only ESPN, TNT, and Disney Channel command higher subscription fees, reported The Wall Street Journal. Separately, Comcast's NBCUniversal extended negotiations with Charter Communications ($292; CHTR) to avoid a blackout as the two sides hammer out a new pact involving programming fees. Comcast is a Buy and a Long-Term Buy. Fox is rated A (Above Average).


Rogue One, Disney's ($107; DIS) latest Star Wars movie, topped the U.S. box office for the third straight week, sealing the company's place atop the movie industry. Disney generated $2.7 billion in U.S. ticket sales in 2016, taking about one-quarter of the market. Disney is a Long-Term Buy.


CBS ($66; CBS) reportedly agreed to bring its broadcast network and some cable programming to Hulu's live streaming service, set to launch in early 2017. Hulu will initially pay CBS $3 per monthly subscriber. CBS also offers its own streaming service, with about 1.2 million subscribers. Hulu is owned by rivals Comcast, Disney, Fox, and Time Warner ($97; TWX). In other news, CBS faces a $750 million lawsuit brought by Burke Ramsey after its network aired a documentary theorizing that Ramsey killed his sister JonBenet. CBS is a Focus List Buy and a Long-Term Buy. Time Warner is rated A (above average).

Abbott ties knot with St. Jude

Abbott Laboratories ($39; ABT) completed its $25 billion acquisition of St. Jude Medical ($81; STJ) after the market closed on Jan. 4. The cash-and-stock deal was first announced in April but required concessions from both companies to win over regulators in the U.S. and European Union. Abbott and St. Jude agreed to sell part of their vascular-closure and electrophysiology businesses for about $1.12 billion.

Speculation has swirled for years that Abbott and St. Jude would merge in order to improve negotiating leverage with hospitals, which have experienced their own wave of consolidation. With St. Jude, Abbott doubles the size of its medical-devices unit, a business that boasts higher profit margins than its nutrition, diagnostics, and drug segments. Medical devices now account for about 40% of Abbott's sales, up from 25%. St. Jude will also boost Abbott's exposure to the U.S. to about 36% of sales from 31%.

Organic sales for the combined company are projected to rise 5% in 2017. Management expects the deal to boost per-share profits by $0.21 in 2017 and $0.29 in 2018. Neither stock currently scores above 50 in Quadrix Overall, though the deal should boost Abbott's Momentum rank — and possibly to a lesser extent its Earnings Estimates and Value scores — in the coming months. Abbott Labs remains rated C (below average). St. Jude, formerly rated C (below average), is being dropped from coverage.

Corporate roundup

Apple ($116; AAPL) plans to curb iPhone production about 10% in the March quarter, according to multiple published reports. Those production cuts would echo behavior exhibited last year. Apple is a Buy and a Long-Term Buy.

FedEx ($189; FDX) launched the sale of $1.2 billion in bonds, with a portion of the proceeds expected to fund its pension plans. FedEx's balance sheet held $3.06 billion in cash, versus $13.55 billion in long-term debt at the end of November. FedEx is a Focus List Buy and a Long-Term Buy.


Southwest Airlines ($51; LUV) said its facilities maintenance technicians rejected a tentative, five-year contract agreement reached in October. The setback snaps the airline's streak of settling contract disputes with its labor unions. Southwest had secured contracts with its pilots, flight attendants, and appearance technicians in the last few months of 2016. Southwest Airlines is a Focus List Buy and a Long-Term Buy.


Alaska Air Group ($89; ALK) launched its long-awaited service to Cuba on Jan. 5. Alaska Air is a Buy and a Long-Term Buy.


J.P. Morgan Chase ($87; JPM) lost its status as the primary bond dealer in Indonesia after the bank's research department published a negative report on the country. J.P. Morgan is a Long-Term Buy.


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