Portfolio Review

7/20/2009


Financial Review

Seeking to end an uncomfortable union, the U.S. government wants to sell the warrants it received last year in exchange for injecting banks with billions of dollars in capital. These warrants are like long-term stock options, giving the holder the right to buy common shares at a specified price for 10 years. However, as expected, establishing a “fair” price for the warrants has been difficult.

Several banks have complained that the U.S. Treasury’s valuation is too high. J.P. Morgan Chase ($35; JPM) waived the right to buy its warrants, which will now be sold at auction. The government has already sold back warrants to 11 smaller banks at 34% below the market value established by a congressional panel that oversees the $700 billion bailout fund. The panel suggested that if the government sold all of the warrants at this discount, taxpayers would be shortchanged $2.7 billion. J.P. Morgan is rated Neutral.


Goldman Sachs ($150; GS) earned $4.93 per share in the June quarter, up 8% from the comparable quarter last year and easily ahead of the consensus estimate of $3.54. Total revenue surged 46% to $13.76 billion, as revenue from trading and investments nearly doubled. In June, Goldman repurchased the $10 billion in preferred stock it issued to the U.S. Treasury as part of the financial bailout. While the results are encouraging, Goldman’s chief financial officer said it was “very hard to know” whether the Neutral-rated company could keep up such strong performance for the rest of the year.


Bank of America ($13; BAC) says it doesn’t need to pay the U.S. government $4 billion for backstopping potential losses related to Merrill Lynch because it never signed the agreement or used the funds. But the bank trumpeted the agreement in January as it sought to calm investor fears. Bank of America is rated Neutral.

Health-care roundup

In the June quarter, Johnson & Johnson ($58; JNJ) earned $1.15 per share, down 3% but topping the consensus by $0.04. Revenue dipped 7% to $15.24 billion, hurt by a strengthening dollar and drug-patent expirations. Excluding currency losses, sales fell 1.4%. J&J also said it completed its acquisition of Cougar Biotechnology for about $1 billion in cash. J&J is a Focus List Buy and a Long-Term Buy . . . This week a Senate committee backed a bill that would grant biotechnology companies 12 years of patent protection on new drugs, almost twice the time proposed by the White House. Congress is struggling to find a way to permit cheaper biosimilar drugs without discouraging companies from taking risks to develop new treatments . . . A Finnish study found that schizophrenia patients taking cheaper, older antipsychotic drugs are less likely to die prematurely than patients on newer treatments. Older drugs, such as Novartis’ ($40; NVS) Clozaril, have serious side effects and require regular blood tests. But the study found patients taking these drugs tended to have lower suicide rates than those linked to newer medications, such as AstraZeneca’s ($44; AZN) Seroquel and J&J’s Risperdal. Reaction to the study was mixed, and is it uncertain how the study will affect sales of modern antipsychotics. AstraZeneca is a Buy and a Long-Term Buy . . . UnitedHealth Group ($25; UNH) won a contract worth up to $21.8 billion to provide health insurance for military personnel. UnitedHealth is rated Neutral. . . Merck ($27; MRK) acquired the global marketing rights for betrixaban, an experimental anticlotting drug developed by Portola. Merck initially paid $50 million for the drug, but milestone payments could push the price to $470 million, plus royalties. In other news, Merck halted a clinical trial of much-hyped cholesterol drug Zetia. Shares fell on fears that Zetia may have underperformed a treatment offered by rival Abbott Laboratories ($46; ABT).

Technology report

Sun Microsystems ($9; JAVA) warned of significantly lower sales and a larger loss than Wall Street expected in the June quarter. Nevertheless, Oracle ($21; ORCL), which plans to acquire Sun, anticipates Sun will contribute at least $1.5 billion to profits in the first full year after the acquisition, potentially boosting earnings by 20%. Oracle is a Buy and Long-Term Buy. Sun is rated Neutral.


Microsoft ($23; MSFT) said when it releases Office 2010 next year, it will also offer a free, Web-based version of the Office suite of business software. Separately, Microsoft is looking to sell its digital advertising agency Razorfish. A deal could be worth $400 million or more and include an agreement in which the successful bidder uses Microsoft’s digital services and buys advertising space across its digital properties. Microsoft is a Long-Term Buy.


In the June quarter, Intel’s ($18; INTC) earnings per share fell 36% to $0.18 excluding a European Commission antitrust fine, exceeding the consensus by $0.10. Sales fell 15% to $8.02 billion but also exceeded expectations. Intel expects revenue between $8.1 billion and $8.9 billion in the September quarter, well above the consensus, and the shares jumped on the news. Intel is rated Neutral.


Dell ($12; DELL) said the personal-computer market has bottomed, but it does not yet see signs of recovery in the near future. The computer giant is cutting prices just to maintain its market share in some niches. Dell, which fell 8% on the news, retains its Neutral rating.

Energy update

Chevron ($63; CVX) warned that lower U.S. refining margins and a weak dollar would weigh on June-quarter earnings. The company added that profits from refining and marketing operations would be “significantly lower” than March-quarter levels. Chevron plans to declare earnings July 31. Wall Street had already anticipated sharply lower earnings, but the consensus per-share-profit estimate for the quarter fell 20% in the three trading days following Chevron’s announcement. Chevron is a Long-Term Buy . . . Exxon Mobil ($66; XOM) said it found natural gas in a shale reserve located in Northwest Canada that early tests suggest is equal in quality to the richest deposits in the U.S. The oil giant also announced its first biofuel venture, a $600 million investment in transforming algae into fuel. Exxon is a Long-Term Buy.

News digest

Walgreen ($29; WAG) hiked its quarterly dividend 22% to $0.1375 per share, payable Sept. 12. Walgreen is rated Neutral.


Legislative efforts to overturn a bill providing $1.75 billion in funding for more of Lockheed Martin’s ($81; LMT) F-22 fighter jets are gaining momentum. President Obama has threatened to veto the bill. Lockheed Martin is a Long-Term Buy.


Abbott Laboratories ($46; ABT) earned $0.89 per share excluding special items, up 6% and in line with the consensus. The company also raised its quarterly dividend 11% to $0.40 per share, payable Aug. 15. Abbott is rated Neutral.

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No changes were made this week in Dow Theory Forecasts.

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