Portfolio Review

4/13/2009


Retailer's got game
GameStop ($29; GME) controls about 20% of the global market for video-game retailing, operating more than 6,200 stores in the U.S., Australia, Canada, and Europe. The company enjoys strong operating momentum and a solid track record, with excellent results in the January quarter and favorable guidance for the year ahead.

Amazon.com’s ($76; AMZN) attempt to enter the used game market represents a direct assault on GameStop’s business model. But such efforts have been tried before with little success. While GameStop shares dropped on the Amazon news, it has risen 25% since, gaining back the lost ground and then some.

A strong balance sheet provides flexibility for GameStop’s aggressive expansion efforts. The company plans to open more than 400 stores this year, boosting the store count by nearly 7%. The company expects same-store sales to rise 4% to 6% in fiscal 2010 ending January, with per-share earnings up 18% to 22%.

Trading at 12 times trailing earnings, GameStop shares look cheap. Over the next 12 months, the stock’s P/E ratio could expand to 13 or 14 and the price rise above $37. GameStop is being initiated as a Buy.

Financial review
Hoping to unclog credit markets, the Financial Accounting Standards Board eased strictures on how banks value their assets. The new guidelines will let banks report some distressed assets at prices above market value, limiting the need to recognize losses on bad debts. While this rule should boost banks’ profits in the year ahead, it could also reduce Wall Street’s confidence in those profits.

The U.S. Treasury will extend bailout funds to life insurers. The program is reserved for insurers that own federally chartered banks, qualifying companies such as Hartford Financial ($8; HIG), Lincoln National ($7; LNC) and MetLife ($24; MET), but probably not Aflac ($20; AFL). Lincoln and Hartford have applied to the Troubled Asset Relief Program. Aflac is a Long-Term Buy. MetLife, Hartford, and Lincoln National are rated Neutral.


American International Group ($1; AIG) completed the sale of its Canadian life-insurance segment for $263 million and the Hartford Steam Boiler unit for $739 million. The distressed insurer has received offers of up to $800 million for an asset-management unit with a $100 billion portfolio. AIG is rated Neutral.

Playing defense
Defense Secretary Robert Gates gave details of his proposed 15% cut to the 2010 defense budget. He recommended canceling a presidential helicopter program and ending production of F-22 fighter jets — both projects contracted to Lockheed Martin ($74; LMT). However, Gates also suggested boosting 2010 funding for another Lockheed program, the new F-35 jet, by 65% to $11.2 billion.

General Dynamics ($44; GD) stands to benefit from Gates’ plans, which call for the company to make three next-generation stealth destroyers at a cost of about $2.5 billion apiece. Shares of Lockheed and General Dynamics surged on the news. General Dynamics is a Buy and a Long-Term Buy. Lockheed Martin is a Long-Term Buy.

Corporate roundup
After weeks of discussion, IBM ($99; IBM) withdrew a $7 billion offer to purchase Sun Microsystems ($6; JAVA). Talks collapsed when IBM lowered its bid to $9.40 per share from $9.55 per share and then refused to grant “guarantees” suggested by Sun’s board. Sun’s shares sank 23% on the news. IBM is a Focus List Buy and a Long-Term Buy. Sun is rated Neutral . . . NII Holdings ($13; NIHD) added 266,000 net subscribers in the March quarter, below the company’s expectations because of lower demand in Mexico. Management also projected net subscriber additions of 1.1 million and 1.2 million in 2009, below an earlier estimate and the 1.47 million added in 2008. NII Holdings is a Focus List Buy . . . Exxon Mobil ($69; XOM) said it won’t curtail spending during the recession, but will instead fund $129 billion in new projects over the next five years. The oil giant had already announced plans to increase spending 11% to $29 billion in 2009. Exxon Mobil is a Long-Term Buy . . . After completing its $16.5 billion acquisition of Rohm & Haas, Dow Chemical ($10; DOW) now plans to sell off noncore assets to pay down debt. First up is the Morton Salt unit, which Dow has agreed to sell to a German fertilizer maker for $1.68 billion. Dow is rated Neutral . . . Ford ($3; F) has lowered its total debt by $9.9 billion, or 28%, by exchanging cash and equity for bonds. Rival General Motors ($2; GM) asked the U.S. Energy Department for an additional $2.6 billion in low-interest loans to fund the development of hybrid vehicles, upping its aid request to $10.3 billion for the new technology. Meanwhile, the automaker seeks buyers for less-profitable brands, including Saab, which has 20 potential suitors and could be sold by June, company officials say. Ford and GM are rated Underperform . . . Cognizant Technology Solutions ($22; CTSH) is one of four parties expected to submit bids for Satyam Computer Systems, India’s fourth-largest consulting company, on April 13. Cognizant is a Buy and a Long-Term Buy . . . National Oilwell Varco ($30; NOV) acquired European rig-equipment makers ASEP Group Holding and Anson for an unspecified amount. National Oilwell Varco is a Buy and a Long-Term Buy.

Health-care report
Biogen Idec’s ($52; BIIB) management urged shareholders to reject overtures made by billionaire investor Carl Icahn to seize control of the company. In other news, the shares rose on rumors of a separate takeover bid, though no official statements have been made. Biogen Idec is a Focus List Buy and a Long-Term Buy . . . AstraZeneca’s ($34; AZN) application to widen distribution of Seroquel received a mixed response from an FDA panel, which found the drug unsafe as a sole treatment for depression but recommend its use as a secondary therapy. The panel has expressed concern that nonstandard antipsychotic drugs, including Seroquel, could raise risks of sudden cardiac death, weight gain, and an involuntary-movement disorder called tardive dyskinesia. The panel recommended against Seroquel as a treatment for anxiety. Separately, the FDA requested more information on asthma drug Symbicort before deciding if it can be marketed to children. AstraZeneca is a Buy and a Long-Term Buy . . . To satisfy antitrust concerns, the Federal Trade Commission requested more information from Pfizer ($14; PFE) regarding the drugmaker’s proposed $68 billion acquisition of Wyeth ($42; WYE). In other news, Pfizer ended a trial of Sutent for late-stage breast cancer but will keep testing the drug’s effectiveness on other types of cancer. On a more positive note, Pfizer moved two arthritis treatments into the late stage of patient study. Separately, Wyeth cited safety concerns as its reason for discontinuing a portion of Phase III trials that involved the highest dosage of bapineuzumab for Alzheimer’s. Pfizer and Wyeth are rated Neutral . . . Bristol-Myers Squibb ($20; BMY) extended the U.S. licensing rights of $2.15 billion schizophrenia drug Abilify until 2015 — two years longer than an earlier agreement with the drug’s inventor, Otsuka Pharmaceutical of Japan. Bristol-Meyers is rated Neutral.

News briefs
Walgreen’s ($27; WAG) same-store sales rose 1.5% in March, as total monthly sales climbed 7% to $5.46 billion. Walgreen is rated Neutral.


Harley-Davidson ($16; HOG) announced that Johnson Controls ($15; JCI) executive Keith Wandell will succeed CEO James Ziemer, who is retiring after 40 years at the company. Harley is rated Neutral.


TJX ($26; TJX) hiked its quarterly dividend 9% to $0.12 per share, payable June 4. TJX is rated Neutral.

  RANK CHANGES
GameStop ($29; GME) is being initiated as a Buy. The Buy List’s position in Vanguard Short-Term Investment-Grade ($9.76; VFSTX) falls to 32.5%.

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