Portfolio Review

3/23/2009


Genentech sells to Roche
Roche ended a rocky, eight-month courtship with Genentech ($94; DNA) by agreeing to acquire the 44% of the biotech company it doesn’t already own for $95 a share, or $46.8 billion. Genentech recommends investors accept the tender offer. In the third $40 billion-plus drug merger announced this year, Roche and Genentech will form the seventh-largest drugmaker in the U.S. as measured by market share. Added to the Long-Term Buy List in December at $83 per share, Genentech — trading about 1% below the merger price — is being dropped from coverage. Subscribers looking for a replacement should consider Biogen Idec ($50; BIIB), Johnson & Johnson ($51; JNJ), or Stryker ($34; SYK).

IBM stalks Sun, Cisco poaches
IBM ($93; IBM) is reportedly in talks to buy Sun Microsystems ($8; JAVA) for at least $6.5 billion, more than a 100% premium to Sun’s price before the report became public. The deal would give IBM more exposure to finance and telecommunications markets, while also boosting hardware revenue from 19% of total sales to roughly 33%.

As IBM seeks to bolster its hardware business, a new competitor is charging onto the field. Cisco Systems ($16; CSCO) said it will dive into the server market with a “unified computing system,” a platform for corporate data centers. Global shipments of servers — computers that control other computers in a system — fell about 12% in the December quarter. Cisco’s move will put it in direct competition with such major players as IBM and Hewlett-Packard ($30; HPQ). IBM is a Focus List Buy and a Long-Term Buy. H-P is a Buy and a Long-Term Buy. Sun Microsystems is rated Neutral.

Fed makes trillion-dollar move
The Federal Reserve plans to inject about $1 trillion into the economy, purchasing up to $300 billion in long-term Treasury bonds and about $750 billion in mortgage-backed securities. Both stocks and bonds rallied on the news. Fed Chairman Ben Bernanke says the economy’s problems will probably stabilize by the end of 2009 — as long as lawmakers back his efforts to revitalize the financial sector. Bernanke added that unemployment will likely rise in coming months, but he sees evidence of improving financial markets. Bernanke expects the recovery to begin in 2010.

Financial review
American International Group ($1; AIG) released names of the nearly 80 counterparties it paid using $105 billion in government loans. American companies include Goldman Sachs ($99; GS), $12.9 billion; Merrill Lynch, $6.8 billion; Bank of America ($6; BAC), $5.2 billion; and Citigroup ($3; C), $2.3 billion.

In related news, President Obama vowed to pursue all legal channels to block AIG’s contractual commitment to dole out $165 million in bonuses to the Financial Products unit, the epicenter of the insurer’s collapse. Andrew Cuomo, New York’s attorney general, subpoenaed a list of employees granted bonuses as he continues to push for disclosure of awards paid to Merrill Lynch executives before the merger with Bank of America.

In other news, Bank of America said it was profitable in the first two months of 2009 and won’t need more federal aid. The bank’s CEO said the company could earn $50 billion for the year before taxes and special items. AIG, Goldman Sachs, Bank of America, and Citigroup are rated Neutral.


Wells Fargo ($15; WFC) Chairman Richard Kovacevich criticized plans to impose restrictions on recipients of federal assistance, adding that his bank only accepted a $25 billion loan last fall at the government’s insistence. He also called the government’s decision to stress test 18 banks and delay announcement of the results as “asinine.” Wells Fargo is rated Neutral.


Having already slashed its dividend, General Electric ($10; GE) has now lost its prized AAA credit rating with Standard & Poor’s. But GE shares, weighed down by fears of a more substantial reduction, rose almost 10% on news that the company’s credit rating was cut to AA+. More hurdles lie ahead, as CEO Jeffrey Immelt expects “very high” write-offs at the GE Capital unit this year. GE is rated Neutral.

News report
Oracle’s ($15; ORCL) February-quarter profits rose 16% to $0.35 per share excluding special items, beating consensus estimates by $0.03. Sales grew to $5.45 billion, up 2% despite pressures from a stronger dollar and lower technology spending. Excluding currency translation, revenue rose 12% while per-share profits jumped 29%. Oracle also initiated a quarterly dividend of $0.05 per share, payable May 8. Oracle is a Buy and Long-Term Buy . . . Alcoa ($5; AA) will lower its quarterly dividend 82% to $0.03 per share, while also issuing $1.1 billion in shares and convertible notes, potentially diluting the share base by more than 20%. The consensus projects a March-quarter loss of $0.45 per share. Weak sales and low aluminum prices plague Neutral-rated Alcoa . . . Nucor ($34; NUE) warned of per-share losses between $0.55 and $0.65 in the March quarter, compared to a $1.41 profit in the year-earlier period and consensus expectations for a profit of $0.43 per share. Nucor is rated Neutral . . . Time Warner Cable ($27; TWC) completed a 1-for-3 reverse stock split as part of its long-awaited spin-off from Time Warner ($8; TWX). On March 27, shareholders will receive about one share of Time Warner Cable for every 12 Time Warner shares owned. After that, Time Warner plans to enact its own 1-for-3 reverse split. Time Warner is rated Neutral. We are initiating coverage of Time Warner Cable with a Neutral rating.

Health-care roundup
Wal-Mart Stores ($50; WMT) plans to enter the market for electronic medical records, hopefully dipping into the pool of $19 billion in incentives provided by the stimulus package. The discounter said its Sam’s Club division will work with Dell ($9; DELL) and a software partner to offer a package deal of hardware, software, and services that undercuts rivals’ prices by up to 50%. Wal-Mart is a Long-Term Buy. Dell is rated Neutral.


The Food and Drug Administration expressed concerns about internal bleeding and other risks for Xarelto, a blood thinner produced by Johnson & Johnson ($51; JNJ). However, in clinical trials, Xarelto has proved effective at preventing blood clots. Several studies currently under way should provide the safety data the FDA seeks. J&J is a Focus List Buy and a Long-Term Buy.


Gilead Sciences ($46; GILD) agreed to buy CV Therapeutics ($20; CVTX) for $1.4 billion, or $20 a share, a 25% premium to CV’s price at the time of the announcement. In 2008, CV generated $154 million in sales, equating to roughly 3% of Gilead’s revenue. Gilead is rated Neutral.


Mylan Laboratories ($14; MYL) won tentative FDA approval to produce a heat-resistant, generic HIV pill similar to Abbott Laboratories’ ($49; ABT) Kalestra. Mylan and Abbott are rated Neutral.

Digest
A federal court ruled against Broadcom ($19; BRCM), which claimed rival Qualcomm ($37; QCOM) was misusing patents and stifling competition. Qualcomm is a Long-Term Buy.


ConocoPhillips ($38; COP) says it has no plans to cut its quarterly dividend of $0.47 per share, which costs the company $2.8 billion a year. Conoco, yielding 5.2%, is rated Neutral.


AT&T ($25; T) CEO Randall Stephenson suggested the telecom provider’s dividend is safe by comparing the current environment to the one his company experienced in 2001, when it continued to raise the quarterly payout. AT&T is rated Neutral.


VF ($54; VFC) agreed to pay $161 million for the 67% interest in Mo Industries it does not already own. Mo owns sportswear brands Splendid and Ella Moss. VF is rated Neutral.


Medtronic ($28; MDT) said deaths linked to fractured defibrillator wires rose to 13, up from the five it first reported when the product was pulled from the market in October 2007. Medtronic is rated Neutral.

  RANK CHANGES
Genentech ($94; DNA) is being dropped from coverage. The Long-Term Buy List now has 38.4% in the Vanguard Short-Term Investment-Grade ($9.68; VFSTX) bond fund. Time Warner Cable ($27; TWC) is being initiated as a Neutral.

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