Portfolio Review

7/6/2009


AmerisourceBergen added as L-T Buy
AmerisourceBergen ($18; ABC) distributes pharmaceuticals and other medical products to both the retail market (32% of fiscal 2008 revenue) and institutional market (68%). Pharmacy-benefit manager Medco Health Solutions ($46; MHS) accounts for about 17% of sales.

In the first half of fiscal 2009 ending September, per-share profits climbed 18%. Growth seems poised to continue, with Wall Street anticipating per-share profits up 12% in fiscal 2009 and 10% in fiscal 2010.

Amerisource trades at less than 11 times estimated year-ahead earnings, well off its five-year average forward P/E ratio of 16. The stock earns a Quadrix® Overall score of 89 and 80 or more in Value and the two sector-specific scores for health care. Amerisource, which split its stock 2-for-1 in June and plans to raise its September-quarter dividend 20%, is being added to the Long-Term Buy List.

Hospira on Focus List, St. Jude Medical off
We are adding Hospira ($39; HSP), a maker of generic drugs and drug-delivery systems, to the Focus List. Hospira, initiated as a Buy in the June 8 issue, has managed excellent growth despite the economic slowdown. Over the last 12 months, both per-share earnings and per-share free cash flow jumped 19%. Wall Street expects per-share-profit growth of 7% this year and 13% in 2010, targets Hospira may be able to exceed.

Hospira shares have jumped 82% from March lows but still trade at 14 times expected year-ahead earnings, 21% below the company’s five-year average P/E ratio and 16% below the average for health-care equipment makers. Hospira is a Focus List Buy.


St. Jude Medical ($41; STJ) shares have risen 24% since the start of May, well above the 10% gain of the S&P 1500 Health Care Equipment & Supplies Industry Index. The manufacturer of implantable defibrillators and other equipment and supplies for cardiac care has delivered double-digit sales growth for nine consecutive quarters. That streak is likely to end in the June quarter, but the consensus projects sales growth of 9% for the year.

While we remain confident that St. Jude will continue its solid growth, the stock is no longer exceptionally cheap at 16 times projected year-ahead earnings. The Quadrix Value score is 37, and the Overall score has dipped to 76. We still like St. Jude for both year-ahead and long-term gains, but the stock is no longer among our very top selections. St. Jude is being removed from the Focus List but remains a Buy and a Long-Term Buy.

Health-care roundup
Johnson & Johnson ($57; JNJ) won $1.67 billion in damages from Abbott Laboratories ($47; ABT) in a patent lawsuit. J&J argued that Abbott’s blockbuster drug Humira — a treatment for rheumatoid arthritis, psoriasis, and Crohn’s disease — infringed on its own drug, Remicade. Abbott appealed the decision. J&J is a Focus List Buy and a Long-Term Buy. Abbott is rated Neutral . . . A European advisory panel backed AstraZeneca’s ($44; AZN) Onglyza as a treatment for type 2 diabetes. The European Commission usually follows panel recommendations. AstraZeneca is a Buy and a Long-Term Buy.

Financial update
Ten U.S. financial institutions — including J.P. Morgan Chase ($34; JPM), Morgan Stanley ($29; MS), Goldman Sachs ($147; GS), and American Express ($23; AXP) — have been cleared to repay $68 billion of federal bailout loans. But the government also holds warrants entitling it to purchase stock in these companies in the future at a specified price. Companies can repurchase the warrants, and the government has developed complicated procedures for establishing their value to the satisfaction of both parties. The government plans to auction off any warrants the banks decline to repurchase, reiterating the Obama administration’s statement that it does not intend to hold the warrants until expiration. J.P. Morgan, Morgan Stanley, Goldman Sachs, and Amex are rated Neutral.


Bank of America ($13; BAC) said it has raised more capital than the federally mandated target of $33.9 billion. Separately, Federal Reserve Chairman Ben Bernanke told a Congressional committee that he did not threaten to fire Bank of America’s management if the company failed to purchase Merrill Lynch and did not instruct executives to withhold details of Merrill Lynch’s mounting losses. Bernanke and other federal officials have come under fire for allegedly bullying Bank of America and other companies in efforts to deal with the financial crisis. Bank of America is rated Neutral.

Technology review
Accenture ($33; ACN) reported per-share profits of $0.68 in the May quarter, down 8% but $0.04 above the consensus estimate. Revenue slipped 16% to $5.15 billion on weakness across all operating segments, though sales were down just 4% at constant currency. Accenture saw some improvement toward the end of the quarter and raised its profit target for the year ending August. Accenture is a Buy and a Long-Term Buy . . . Microsoft ($24; MSFT) plans to charge retail customers $10 less for the Windows 7 operating system, slated for release in October, than it charges for a comparable version of Windows Vista. Microsoft will also offer free upgrades for older Windows operating systems on new computers in an effort to prevent consumers from delaying computer purchases until Windows 7 hits the market. In other news, the company plans to sell its digital-advertising agency, Razorfish, which generated about $400 million in revenue last year and could be worth more than $600 million. Microsoft is a Long-Term Buy . . . The Justice Department extended its review period for Oracle’s ($21; ORCL) proposed $7.4 billion takeover of Sun Microsystems ($9; JAVA). Oracle still expects to close the deal this summer. Oracle is a Buy and Long-Term Buy. Sun is rated Neutral.

News digest
Energen ($40; EGN) increased its hedge position for natural gas in 2009 and has locked in prices for 75% of its estimated gas production at an average price more than double current spot prices. Energen is a Long-Term Buy.


American International Group ($19; AIG) enacted a 1-for-20 reverse stock split. AIG is rated Neutral.


About 8% of orders for Boeing’s ($43; BA) oft-delayed 787 Dreamliners have been canceled this year. Boeing is rated Neutral.

  RANK CHANGES
AmerisourceBergen ($18; ABC) is being initiated as a Long-Term Buy this week. Hospira ($39; HSP) is being added to the Focus List, while St. Jude Medical ($41; STJ) is being removed from the Focus List but remains a Buy and a Long-Term Buy. The Long-Term Buy List now holds a 29.6% position in Vanguard Short-Term Investment-Grade ($10.23; VFSTX).

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