Portfolio Review

4/27/2009


Oracle buying Sun
Oracle ($20; ORCL) agreed to acquire Sun Microsystems ($9; JAVA) for about $7.4 billion in cash and the assumption of debt just days after jilted suitor IBM ($102; IBM) said it would no longer pursue a deal at any price. Oracle offered $9.50 per share, about $0.10 more than IBM’s highest bid.

By purchasing Sun, Oracle gains a strong foothold in the market for the server computers used to run its databases and the popular Java programming software used in mobile phones and Web sites. Oracle expects the deal to add at least $0.15 per share to annual profits in the first full year after closing. Oracle is a Buy and Long-Term Buy. IBM is a Focus List Buy and a Long-Term Buy. Sun is rated Neutral.

Financial foibles
In February, lending by the top 20 banks to receive federal bailout funds did not rise from January levels, but it still remains 9% higher than December. In recent weeks, the industry has given somewhat encouraging signs, as several banks topped Wall Street’s modest expectations for the March quarter.

General Electric’s ($12; GE) profits fell 40% to $0.26 per share from continuing operations, topping the consensus by a nickel. Revenue declined 9% to $38.41 billion on a 20% decline from financial services. Citigroup ($3; C) lost $0.18 per share from continuing operations, 83% less than the $1.06 loss recorded in the March 2008 quarter and $0.16 better than the consensus estimate. Citigroup also accepted bids for its Japanese retail brokerage business, valued at roughly $6 billion. J.P. Morgan Chase ($33; JPM) earned $0.40 per share, down 40% but $0.08 better than the consensus. J.P. Morgan also announced it has sufficient funds to repay the $25 billion it owes the government.

However, Bank of America’s ($9; BAC) earnings announcement revived investors’ fears. Bank of America earned $0.44 per share in the March quarter, up 91%. But without the Merrill Lynch acquisition, profits would have fallen by more than 50%. In addition, credit-card, mortgage, and retail and commercial banking operations remain weak.

Morgan Stanley ($25; MS) added to the worry, losing $0.57 per share compared to a $1.26 profit in last year’s comparable quarter, $0.48 below the consensus estimate. Revenue fell 62% to $3.04 billion. Morgan Stanley also lopped 81% off its quarterly dividend. The new payout will be $0.05 per share, although the May 15 payment will include an extra $0.0167 per share to reflect a change in the company’s fiscal year.

Banks are bracing for another wave of credit losses, charging off huge allowances against earnings. Bank of America has set aside $13.38 billion for losses, up 123% from year-ago levels, while J.P. Morgan nearly doubled last year’s provisions to $10.06 billion. The future should look a bit clearer — though not necessarily brighter — after the government releases results of bank stress tests on May 4. General Electric, Bank of America, Citigroup, J.P. Morgan, and Morgan Stanley are rated Neutral.

Mergers and deals
Hoping to gain more control of its distribution network, PepsiCo ($49; PEP) offered a total of $9.45 billion in cash and stock to acquire the remaining stakes in Pepsi Bottling Group ($30; PBG) and PepsiAmericas ($25; PAS), its two largest bottlers. The bids represent 17% premiums to both bottlers’ prices at the time of the offer, and both stocks trade above the offer prices, suggesting Wall Street expects PepsiCo to sweeten the deal. Separately, PepsiCo purchased Karinto, a snack business in Peru.

In other news, PepsiCo earned $0.71 per share excluding restructuring charges and gains on commodity hedges in the March quarter, up 1% and $0.04 better than the consensus. Net revenue, weighed down by lower volumes in the U.S. and Latin America, fell 1% to $8.26 billion. Excluding currency losses, PepsiCo generated 6% revenue growth and 8% growth in per-share profits. PepsiCo is rated Neutral.


Harris ($29; HRS) agreed to pay $675 million in cash to acquire Tyco Electronics’ ($16; TEL) wireless-systems unit, which offers secure communications networks to local fire and police departments, the federal government, and other users. Generating annual revenue of $463 million, the new business should be “a significant contributor to earnings” in fiscal 2011 ending June. Harris is a Focus List Buy and a Long-Term Buy.


American International Group ($1; AIG) agreed to sell its U.S. personal auto-insurance business to Farmers Group for $1.9 billion. In recent months, AIG has sold 12 businesses for more than $4 billion as part of its quest to repay a bailout package of more than $150 billion. AIG is rated Neutral.


Racing to restructure by a June 1 deadline, General Motors ($2; GM) may drop its Pontiac and GMC brands in addition to divesting its Saab unit, now courted by 27 potential suitors. GM expects to need another $4.6 billion in U.S. loans for the June quarter, and CEO Fritz Henderson cautioned that bankruptcy is still “probable.” GM is rated Underperform.

March-quarter earnings
Biogen Idec ($48; BIIB) grew profits 27% to $1.05 per share excluding special items, topping consensus estimates by $0.05. Sales rose 10% to $1.04 billion as multiple sclerosis drugs Avonex and Tysabri managed revenue growth of 4% and 44%, respectively. In related news, the company said a sixth Tysabri patient had contracted a deadly brain infection. As of March, 40,000 patients were taking Tysabri. Biogen is a Focus List Buy and a Long-Term Buy.


IBM’s ($102; IBM) profits rose 4% to $1.70 per share, topping the consensus by $0.04. Revenue fell 11% to $21.71 billion, with lower sales across all business segments. Revenue fell 4% in constant currency. Management reiterated above-market 2009 guidance of $9.20 per share, adding that it is “ahead of pace for our 2010 roadmap of $10 to $11 per share.” IBM is a Focus List Buy and a Long-Term Buy.


Stryker ($37; SYK) posted earnings of $0.71 per share, up 1%. Sales dipped 2% to $1.60 billion, hurt by the strong dollar. Excluding currency losses, revenue rose 3%, with foreign sales up more than 7%. The company lowered its 2009 profit guidance range by $0.12 to $2.90 to $3.10, implying 2% to 10% growth. Stryker is rated a Buy and a Long-Term Buy.


United Technologies ($48; UTX) earned $0.87 per share excluding restructuring costs and one-time tax benefits, down 17% but $0.09 better than the consensus. Sales fell 12% to $12.25 billion. Order trends were weak for the quarter, but orders began to stabilize in March. United Technologies, a Buy and a Long-Term Buy, reiterated 2009 guidance and rose 5% on the profit news.


St. Jude Medical ($34; STJ) earned $0.58 per share excluding special items, up 16%. Sales rose 12% to $1.13 billion, with strong growth across all four business units. Separately, federal regulators sent a warning letter to St. Jude about faulty manufacturing procedures at a plant that makes a surgical device that accounts for about 0.5% of annual sales. St. Jude Medical is a Focus List Buy and a Long-Term Buy.


Energen’s ($31; EGN) profits fell 15% to $1.33 per share excluding special items, topping Wall Street expectations by a nickel. Production growth of 9% and a 65% hedge position kept profits from falling further despite weak energy prices. Operating revenue slipped 7% to $484 million, with utility sales down 1% and sales at the energy business down 14%. Energen is a Long-Term Buy.

Drug update
Wyeth’s ($43; WYE) right to market the antidepressant Pristiq may be challenged by Sepracor ($14; SEPR), which claims it invented the drug first. Wyeth is rated Neutral.


AstraZeneca ($34; AZN) won a court approval to suspend Apotex from introducing a generic version of its Pulmicort Respules asthma medication. AstraZeneca is a Buy and a Long-Term Buy.

  RANK CHANGES
No changes were made this week in Dow Theory Forecasts.

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