Portfolio Review

3/2/2009


Health-care report
As expected, Genentech’s ($86; DNA) board came out against Swiss drugmaker Roche’s hostile takeover offer of $86.50 per share, calling the bid “inadequate and not in the best interest of shareholders.” Genentech maintains that it would consider a higher offer. Both companies have been unable to narrow the gulf separating their perceived value of Genentech since last summer, when Roche offered $89 per share and Genentech wanted $112. In other news, Genentech’s psoriasis treatment Raptiva might get pulled from the market in the U.S. and Europe for its link to a serious brain infection. While Raptiva has made headlines, any regulatory action should have little effect on Genentech’s results, as the drug accounts for less than 1% of revenue. Genentech is a Long-Term Buy . . . Medtronic ($35; MDT) agreed to pay more than $1 billion for two heart-valve makers. The medical device maker said it would acquire Ventor Technologies for $325 million and CoreValve for an initial $700 million plus milestone payments. Medtronic is rated Neutral . . . Shares of managed-care companies Coventry Health Care ($15; CVH), UnitedHealth Group ($24; UNH), and Humana ($31; HUM) sank on news that the government plans to increase Medicare reimbursements by a smaller amount than expected in 2010. Coventry, UnitedHealth, and Humana are all rated Neutral, and we would not be buying them on the dip . . . Citing disappointing clinical trials, Pfizer ($14; PFE) dropped drugs to treat anxiety and fibromyalgia; both were in the late stages of development. Pfizer is rated Neutral.

Ford makes labor deal
Ford Motor ($2; F) reached a tentative agreement with the United Auto Workers union over health-care expenses for retired workers. The deal would let Ford use company stock to fund 50% of payments scheduled to UAW health-care trusts. Ford owes $6.3 billion to UAW trusts by the end of the year. In other news, Swedish automaker Saab, a unit of General Motors ($2; GM), filed for bankruptcy protection and asked the Swedish government to help fund its reorganization as an independent company. GM said it planned to sell off Saab, its smallest U.S. brand, by 2010. Both GM and rival Chrysler are seeking bailout funds from foreign governments and asking for additional money from the U.S. GM and Ford are rated Underperform.

News roundup
Microsoft ($17; MSFT) CEO Steve Ballmer expects the economy to “be relatively weak for a relatively long period of time.” Yet, Microsoft does not plan to cut back on research spending, which it views as key to staying competitive. The company also wants to renew conversations with Yahoo ($13; YHOO) about an Internet-search deal, acknowledging that it will be tough to gain market share on Google ($345; GOOG) without help. Microsoft is rated a Buy and a Long-Term Buy. Google and Yahoo are rated Neutral.


Illustrating his frustration at runaway costs on military contracts, President Obama called the existing presidential helicopter suitable. The statement raised questions about Lockheed Martin’s ($71; LMT) contract to build a replacement — and heightened concerns about a broader cutback in defense outlays. Lockheed Martin is a Long-Term Buy.


Coca-Cola ($43; KO) raised its quarterly dividend 8% to $0.41 per share, payable April 1, the 47th consecutive annual increase. Coca-Cola is rated Neutral.


Abbott Laboratories ($55; ABT) raised its quarterly dividend 11% to $0.40 per share, payable May 15, marking 37 straight years of increases. Abbott is rated Neutral.

Feds fight fear
Federal Reserve Chairman Ben Bernanke predicted the economy will likely get worse this year before it gets better, then threw a bone to investors. Bernanke said, “If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009.”

Bernanke’s statement was no party invitation, but stocks jumped on the news, underscoring the level of pessimism currently in the market. Bernanke also promised the Fed would use all its tools to fix credit and labor markets.

In an effort to calm fears about the potential nationalization of U.S. banks, the Obama administration and federal bank regulators issued a joint statement of confidence. The government plans to test how well 20 of America’s biggest banks can hold up against severe economic stress, and financial stocks had plunged on fears of what would happen to banks that failed the stress test. Regulators said the bailout efforts have a “strong presumption” that “banks should remain in private hands.” While far from a promise not to nationalize, the statement seemed to mollify investors.

Government statements aside, the situation remains grim. Some financial companies, overwhelmed by mounting losses and shriveling share prices, appear incapable of riding out the recession without further assistance.

Facing a possible $60 billion loss in the December quarter, American International Group ($0.41; AIG) sought an easing of restrictions on its $150 billion federal bailout package. AIG seeks a lower interest rate and wants to repay a $60 billion loan with a combination of debt, equity, cash, and operating businesses, possibly a stake in its Asian life insurance unit. AIG, slated to release December-quarter results Monday, March 2, is rated Neutral.


Citigroup ($3; C) approached government officials about increasing federal ownership of the troubled bank. The U.S. could convert some of its $45 billion in preferred stock into common shares, acquiring a 25% to 40% stake and severely diluting shareholders’ stakes in the process. Citigroup is rated Neutral.

In other financial news:

Bank of America ($5; BAC) maintains it is not seeking increased federal ownership, though the banking giant faces other problems. Executives including CEO Kenneth Lewis were subpoenaed to testify about $3.6 billion in bonuses doled out by Merrill Lynch just before it was absorbed by Bank of America. Merrill lost $15.8 billion after taxes in the December quarter. Bank of America is rated Neutral.


Canadian insurer and money manager Manulife Financial ($11; MFC) said it will issue at least $350 million in preferred stock but has no plans to issue common shares. Manulife is rated Neutral.


Just a month after expressing confidence in its dividend, J.P. Morgan Chase ($21; JPM) slashed the quarterly payout 87% to a nickel. Allstate ($19; ALL) and Lincoln National ($13; LNC) also slashed their quarterly dividends — 51% and 95%, respectively — to save capital. J.P. Morgan Chase, Allstate, and Lincoln National are rated Neutral.


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