Portfolio Review

8/3/2009


Health-care roundup

Hospira’s ($37; HSP) per-share profits surged 28% to $0.73 excluding special charges, topping the consensus by $0.13. Sales climbed 6% to $957 million. The company raised its 2009 per-share-profit target and now expects growth of 7% to 9%, versus the 7% consensus. Focus List Buy Hospira, which seems capable of consistent double-digit profit growth over the next several years, is being added to the Long-Term Buy List . . . Biogen Idec ($49; BIIB) reported that another patient (the 11th) taking the multiple sclerosis drug Tysabri has contracted a potentially deadly brain disease. About one in every 4,000 patients currently using Tysabri has fallen ill with the brain infection, well below the one-in-1,000 warning on the drug’s label. The company said it will no longer post new cases on its Web site, but will instead disclose the information directly to doctors. Biogen is a Focus List Buy and a Long-Term Buy . . . Laboratory Corp. of America’s ($66; LH) per-share profits rose 5% to $1.30 excluding special charges in the June quarter, $0.03 above the consensus estimate. Driven by higher testing volume, sales advanced 4% to $1.19 billion. For the year, management raised the floor of its profit-guidance range to $4.85 per share, implying at least 5% growth. LabCorp is a Buy and a Long-Term Buy.

Microsoft, Yahoo hook up

After months of discussion, Microsoft ($23; MSFT) and Yahoo ($15; YHOO) announced a 10-year revenue-sharing deal, combining the Internet-search efforts of the No. 2 and No. 3 players in the U.S. market. Under the agreement, Yahoo sites will use Microsoft’s Bing search engine while Yahoo sells premium search ads for both companies. Microsoft will pay Yahoo 88% of search revenue generated from Yahoo’s sites for the first five years.

In related news, Microsoft earned $0.36 per share excluding special charges in the June quarter, down 22%. Sales fell 17% to $13.10 billion. Separately, European Union regulators said Microsoft has attempted to satisfy antitrust rules by making it easier for consumers to select a Web browser other than Internet Explorer. Regulators will review the plan and have not said whether it is enough to avoid sanctions. Microsoft is a Long-Term Buy. Yahoo is rated Neutral.

June-quarter earnings

Schlumberger ($55; SLB) earned $0.68 per share excluding special charges, down 41% but $0.04 above the consensus. Hurt by the postponement or cancelation of energy-production projects, revenue fell 18% to $5.53 billion, including a decline of about 40% in North America. Schlumberger is a Long-Term Buy . . . Sigma-Aldrich’s ($50; SIAL) profits dipped 3% to $0.68 per share, in line with the consensus. Sales declined 10% to $522 million. Excluding currency fluctuations, per-share profits rose 13% and sales fell 2%. Sigma-Aldrich is a Long-Term Buy . . . Questar’s ($35; STR) per-share earnings fell 41% to $0.54 per share excluding mark-to-market gains and losses. Energy production rose 7%, but revenue slid 26% to $613 million on lower prices. Hedges on natural gas and oil increased revenue by $168 million. Questar, which raised the low end of its 2009 profit-guidance range, is a Long-Term Buy . . . Ford Motor ($7; F) posted a per-share loss of $0.21 excluding special items, compared to a loss of $0.63 in the June 2008 quarter and Wall Street’s projected loss of $0.50. Revenue excluding special items fell 29% to $27.2 billion. Ford is an Underperform.

Deal roundup

IBM ($117; IBM) agreed to buy SPSS ($49; SPSS) for $1.2 billion in cash to expand its portfolio of business-analytics software. IBM is a Focus List Buy and a Long-Term Buy.

South Korean regulators ordered Qualcomm ($46; QCOM) to pay $207 million for “unfair” business practices. Regulators found Qualcomm charged higher royalties to clients who bought modem microchips from competitors and gave rebates that encouraged exclusive contracts. Qualcomm plans to appeal the fine. The company also received an antitrust complaint from Japan’s Fair Trade Commission. Qualcomm, no stranger to legal challenges, remains a Long-Term Buy.

Citigroup ($3; C) has exchanged more than $57 billion in preferred stock for common stock and derivatives. The deal could eventually quadruple the number of common shares outstanding and will give the U.S. government a 34% stake in the troubled bank. Citigroup is rated Neutral.

Agilent Technologies ($23; A) agreed to buy Varian ($51; VARI), a maker of bioanalysis devices, for $1.5 billion in cash. Agilent is rated Neutral.

Aerospace giants grounded

These are confusing times for the aerospace/defense sector. The group as a whole enjoys decent fundamentals and high Quadrix® scores, but its business outlook has dimmed in recent months. Large defense contractors seem particularly threatened, as the Obama administration has shifted its focus to counterterrorism and logistical improvements at the expense of such traditional programs as aircraft, warships, and missile defense.

Plans for substantial increases in domestic spending, coupled with the pricey and protracted war in Afghanistan, will increase pressure on the president and Congress to cut defense spending. General Dynamics ($54; GD) is better off than most, as its largest programs are not coming under the knife. But Lockheed Martin ($75; LMT) and United Technologies ($52; UTX) face substantially greater risk.

Both Lockheed and United Technologies have seen their Quadrix Overall scores decline in recent weeks, hurt by poor operating momentum and falling earnings estimates. While both companies seem fairly cheap, both also warned of weaker-than-expected results in coming quarters. In contrast, General Dynamics posted a strong June quarter and raised its profit guidance. The company earned $1.61 per share, up 7% on 11% revenue growth. Backlog jumped 22% to $67.6 billion.

With the aerospace/defense industry one of the few to disappoint Wall Street with its June-quarter results, the potential for negative surprises appears to have increased. Facing a deteriorating industry outlook, the Forecasts is no longer willing to give defense companies with weakening fundamentals much slack.

General Dynamics looks like a solid value in the defense sector, but we no longer want to own Lockheed or United Technologies. Lockheed and United Technologies are being downgraded to Neutral. General Dynamics is rated Buy and Long-Term Buy.

  RANK CHANGES
United Technologies ($52; UTX) and Lockheed Martin ($75; LMT) are being downgraded to Neutral. Hospira ($37; HSP) is being added to the Long-Term Buy List. The Vanguard Short-Term Investment-Grade ($10.31; VFSTX) fund now represents 32.5% of the Buy List and 31.8% of the Long-Term Buy List.

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