Portfolio Review

8/31/2009


GameStop can't buck industry trend

GameStop ($22; GME) earned $0.24 per share in the July quarter, down 32% and a nickel short of the consensus estimate. Same-store sales fell 14.1%, hurt by lower console sales and a weak release schedule for top software titles. Revenue slipped 4% to $1.74 billion, though sales of used video-game products rose 19%.

The company trimmed per-share-profit guidance for fiscal 2010 ending January to $2.40 to $2.64, implying 0% to 10% growth, versus the 15% consensus at the time of the announcement. Despite the disappointing results, the stock trades at just nine times trailing earnings, 62% below the three-year average, and has the potential to post strong profit comparisons over the next 12 months. In other news, co-founder and chief financial officer David Carlson plans to retire in March 2010. A replacement has already been selected.

GameStop’s struggles reflect a once robust gaming market stuck in reverse. U.S. sales of video-game equipment and software fell 29 percent in July, according to research group NPD, the fifth consecutive monthly decline. Among game consoles, only Microsoft’s ($25; MSFT) Xbox 360 has grown unit sales in the first seven months of 2009. But even the Xbox, priced at $399, faces pressure now that Sony ($27; SNE) has cut the price of its comparable Playstation 3 console to $299. New titles for popular franchises should launch later this year and could lift the entire industry. GameStop is a Buy. Microsoft is a Long-Term Buy.

Bankers bullish on economy

At a Federal Reserve retreat in Jackson Hole, Wyo., central bankers from around the globe shared a cautious optimism that global markets might soon creep toward a recovery. “The prospects for a return to growth in the near term appears good,” said Ben Bernanke, chairman of the Federal Reserve, though he emphasized that any recovery would be slow and unemployment levels could remain unusually high for another year.

In an expected move, President Obama nominated Bernanke to stay at the helm of the Federal Reserve, saying that the chairman’s aggressive actions helped avert an even worse financial collapse.

Health-care report

British drugmaker AstraZeneca ($46; AZN) is testing the nasal-spray technology for FluMist for use with a potential vaccine for the swine flu. If it works, the treatment could generate revenue of more than $2 billion for AstraZeneca over the next two years. FluMist comes from the pipeline AstraZeneca inherited through the 2007 acquisition of MedImmune. AstraZeneca has been widely criticized for paying $15.2 billion, a 21% premium, for the drugmaker. Swine flu has caused about 1,800 deaths and sickened more than 182,000 people worldwide. AstraZeneca is a Buy and a Long-Term Buy.


The Centers for Medicare & Medicaid Services asked an advisory panel to review anemia drugs produced by Johnson & Johnson ($61; JNJ) and Amgen ($60; AMGN). Studies have linked the drugs to heart complications and death when taken in high doses. J&J is a Focus List Buy and a Long-Term Buy. Amgen is rated
Neutral.


Medical-equipment maker Medtronic ($38; MDT) earned $0.79 per share excluding special items in the July quarter, rising 10% and in line with market expectations. Revenue rose 6% to $3.93 billion but would have risen 10% at constant currency. Medtronic is rated Neutral.

Technology review

Qualcomm ($47; QCOM) said it will sell a microchip for smartbooks, devices that could potentially combine many elements of the BlackBerry phone with a mobile computer featuring a full keyboard. At least 15 computer companies have agreed to use Qualcomm’s Snapdragon chip. With the move, Qualcomm enters turf long dominated by Intel ($19; INTC). Qualcomm is a Long-Term Buy. Intel is rated Neutral . . . Microsoft ($25; MSFT), Amazon.com ($84; AMZN), and Yahoo ($15; YHOO) joined a coalition challenging a settlement last October between Google ($471; GOOG) and the Authors Guild and the Association of American Publishers. Opponents argue the arrangement gave Google unfair immunity from copyright infringement for future services involving digital books. The U.S. Justice Department is also reviewing the settlement. Microsoft is a Long-Term Buy. Amazon.com, Yahoo, and Google are rated Neutral . . . Accenture ($35; ACN) trimmed its senior executive work force by 7% and will incur a restructuring charge of $247 million, or $0.24 per share, in the December quarter. Accenture is a Buy and a Long-Term Buy.

News roundup

Boeing ($48; BA) has not yet released a revised production schedule for the 787 Dreamliner, but one report says the first flight could come in late November or early December. While the 787 remains grounded, the aerospace giant has secured other contracts, including $1.16 billion in services for U.S. Air Force cargo planes and $973 million for 14 passenger jets for Canadian airline WestJet. Separately, India commenced field trials to test fighter jets as part of its plans to spend $10.4 billion upgrading its air force. Planes made by Boeing, Lockheed Martin ($74; LMT), and foreign rivals are competing in the trials, expected to last a year. Boeing and Lockheed Martin are rated Neutral . . . Procter & Gamble ($53; PG) agreed to sell its prescription-drug business to Irish drugmaker Warner Chilcott ($22; WCRX) for $3.1 billion in cash. The unit includes blockbuster osteoporosis drug Actonel and generates about $2.3 billion in annual sales, more than twice the sales of Warner Chilcott. Procter & Gamble is rated Neutral . . . A federal court, citing the plaintiff’s lack of standing to sue, dismissed a $1 billion lawsuit alleging American International Group ($34; AIG) shortchanged state workers’-compensation pools. However, the judge acknowledged that AIG had understated premiums for decades and left open the door for other plaintiffs to sue. Separately, AIG shares jumped 21% after a statement by new CEO Robert Benmosche expressing confidence that AIG will eventually be able to repay the government. AIG is rated Neutral . . . In the July quarter, Sears Holdings ($65; SHLD) lost $0.17 per share excluding special charges, down from earnings of $0.21 per-share in the year-earlier period and well below market expectations of a $0.35-per-share profit. Sales fell 10% to $10.55 billion, while U.S. same-store sales fell 8.6%. The shares plunged 12% on the news. Sears Holdings is rated Neutral . . . CareFusion, a medical-technology company to be spun off from Cardinal Health ($35; CAH), will replace Manitowoc ($7; MTW) in the S&P 500 Index at the close of trading Aug. 31. Cardinal Health and Manitowoc are rated Neutral.

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

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