Portfolio Review

6/8/2009


Hospira a new Buy
Operating results for Hospira ($36; HSP), a maker of injectable generic drugs and medical supplies, have held up fairly well in recent quarters. The company is trimming its product lineup, causing revenue to fall but profit margins to widen. Wall Street projects per-share-profit growth of 6% for 2009 and 13% for 2010, and industry trends suggest those targets may prove conservative.

The Obama administration has set a goal of lowering consumers’ health-care costs, and Hospira is poised to take advantage of such trends. A thawing in the climate for biogenerics, or copycat versions of biotechnology drugs, could also benefit Hospira. Biogenerics are on the market in Europe, and while none have been approved in the U.S., the new administration could make it easier for such drugs to gain approval.

Hospira generated half of its 2008 revenue from injectable drugs, with another 31% coming from medication-management systems (MMS), such as electronic infusion pumps and systems that track patient information to help reduce the likelihood of incorrect drugs or dosages. Demand for MMS has been strong, particularly overseas. Many hospitals have cut their spending in recent months, but we expect spending to pick up later this year. Hospira, trading at a 26% discount to its three-year average P/E ratio of 19, is being initiated as a Buy.

GM files for bankruptcy
With assets equal to less than half of its $172.81 billion in debt, General Motors became the fourth-largest company in U.S. history to declare bankruptcy. Suitors are lined up to bid on the Saturn and Saab businesses, and GM has reached a tentative agreement to divest its Hummer brand. Ownership of the restructured company is expected to look like this: U.S. government (60%), United Auto Workers (17.5%), Canadian government (12.5%), and unsecured bondholders (10%).

GM will also lose its place in the Dow Jones Industrial Average, a spot it has held for the past 83 years. Effective June 8, the Dow is dropping GM and Citigroup ($4; C) in favor of Cisco Systems ($20; CSCO) and insurer Travelers ($43; TRV). Citigroup, Cisco Systems, and Travelers are rated Neutral. GM, which now trades on the Pink Sheets under the ticker GMGMQ, is being dropped from coverage.

Technology roundup
The first three months of 2009 marked the worst quarter for server computers in at least 12 years, as factory revenue fell nearly 25% from year-earlier levels. Compared to the December quarter, IBM ($107; IBM) lost seven percentage points of the server market. Both IBM and Hewlett-Packard ($36 HPQ) now hold a 29.3% share. IBM is a Focus List Buy and a Long-Term Buy. Hewlett-Packard is a Buy and Long-Term Buy.

Microsoft ($21; MSFT) launched a revamped Internet search engine, called Bing, in an effort to expand its 8% share of the market for U.S. Internet searches. In other news, Microsoft says its new Windows 7 operating system will hit the market Oct. 22, ahead of schedule and in time for the holiday shopping season. Microsoft is rated a Long-Term Buy.

Oracle ($20; ORCL) said in the wake of its planned acquisition of Sun Microsystems ($9; JAVA), it might begin building several new devices, including netbook computers. Oracle is a Buy and Long-Term Buy. Sun is rated Neutral.

Health-care update
Billionaire investor Carl Icahn, who owns 5.6% of Biogen Idec ($52; BIIB), said his candidates won two seats on the biotech firm’s 13-member board, though the count was not official at press time. In other news, another patient using multiple sclerosis drug Tysabri contracted a deadly brain disease, progressive multifocal leukoencephalopathy (PML), the seventh case since the drug’s reintroduction in July 2006. In related news, Elan ($7; ELN), Biogen’s marketing partner for Tysabri, reportedly considered selling a minority interest to Bristol-Myers Squibb ($20; BMY) or another undisclosed company. It is uncertain whether the talks are ongoing. Such a move could be the first step in an effort to acquire all of Elan, which could in turn lead to a bid for all or part of Biogen. Biogen is a Focus List Buy and a Long-Term Buy. Bristol-Meyers is rated Neutral.


Johnson & Johnson ($56; JNJ) filed for arbitration over the rights to Remicade, an arthritis medication co-marketed with Schering-Plough ($25; SGP). J&J argues that Schering violated the terms of their deal when it agreed to be acquired by Merck ($28; MRK) for $41.1 billion. J&J is a Focus List Buy and a Long-Term Buy. Merck is rated Neutral.


Mylan Laboratories ($14; MYL) gained tentative approval to sell a generic version of Singulair, an asthma medication made by Merck. Mylan is rated Neutral.

News digest
The race is well under way for banks seeking to prove themselves capable of repaying federal loans. Bank of America ($11; BAC) has nearly closed its $33.9 billion capital shortfall, while Goldman Sachs ($143; GS) raised more than $1.9 billion by selling part of its stake in Industrial & Commercial Bank of China. J.P. Morgan Chase ($35; JPM), Morgan Stanley ($30; MS), and American Express ($25; AXP) also raised funds through the sale of stock. Bank of America, Goldman Sachs, J.P. Morgan, Morgan Stanley, and American Express are rated Neutral.

Comcast ($14; CMCSA) says it is not seeing many customers cancel their cable subscriptions to watch video exclusively on the Internet. Rival Time Warner Cable ($31; TWC) disagrees, saying more young people are exclusively using broadband service rather than traditional cable. In other news, Charles Carey is stepping down as CEO of DirecTV ($23; DTV) on July 1 to take a position at News Corp. ($11; NWSa), where he worked before taking over DirecTV. Comcast is a Buy and a Long-Term Buy. DirecTV is a Focus List Buy and a Long-Term Buy. Time Warner Cable is rated Neutral.

Ethnic violence forced Wal-Mart Stores ($50; WMT) to delay the launch of its first venture in India, a wholesale outlet called Best Price Modern Wholesale. Hoping to tap India’s retail market and its more than $300 billion in revenue, Wal-Mart plans to open 10 to 15 outlets in the next three years. Wal-Mart is a Long-Term Buy.

Lockheed Martin ($84; LMT) secured a $1.49 billion contract from the U.S. Air Force to work on a satellite capable of tracking enemy missiles. Lockheed also won a $2.11 billion modification for its contract to build F-35 Joint Strike Fighters. Lockheed Martin is a Long-Term Buy.

Walgreen’s ($32; WAG) same-store sales rose 1.0% in May, below Wall Street expectations for 2.2% growth. Walgreen is rated Neutral.

Express Scripts ($64; ESRX) plans to issue at least 23 million shares of common stocks, boosting the share count by 9% or more. Express Scripts is rated Neutral.

Procter & Gamble ($54; PG) issued disappointing profit guidance for fiscal 2010 ending June. The midpoint of the range is 5% below the consensus and reflects a 12% decline from estimated fiscal 2009 profits. Procter & Gamble is rated Neutral.

  RANK CHANGES
Hospira ($36; HSP) is being initiated as a Buy. The Buy List’s position in the Vanguard Short-Term Investment-Grade ($10.16; VFSTX) fund falls to 29.8%. General Motors is being dropped from coverage.

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