Portfolio Review

11/16/2009


Comcast, GE value NBC Universal at $30B

According to published reports, Comcast ($15; CMCSA) and General Electric ($16; GE) have settled on a value of about $30 billion for the planned spin-off of NBC Universal and Comcast’s cable networks. The two companies are still hammering out details of a deal that would give Comcast a 51% interest in the joint venture and provide GE a means to eventually exit the business. Comcast would contribute $4 billion to $6 billion in cash along with the cable networks. French conglomerate Vivendi SA, owner of a 20% stake in NBC Universal, has not yet agreed to the deal but is reportedly in talks with GE.

The proposed deal hasn’t done the stock price any favors, as Comcast is down 12% since the rumors first surfaced Oct. 1. But there’s plenty to like about Comcast. Shares trade at just 13 times trailing earnings, a 55% discount to the three-year average
price/earnings ratio. Comcast remains a strong player with a defensive business model, and free cash flow rose 12% in the last 12 months. Comcast is a Focus List Buy and a Long-Term Buy. General Electric is rated Neutral.

Stick with CVS Caremark

Uncertainty over CVS Caremark’s ($30; CVS) growth potential cast a shadow over the company’s otherwise favorable results in the September quarter. Profits from continuing operations rose 8% to $0.65 per share excluding special items, topping Wall Street expectations by a penny. Same-store pharmacy sales climbed 5.7% and total revenue jumped 18% to $24.64 billion, fueled by 23% higher sales at the pharmacy-benefit-management (PBM) segment.

However, CVS said the PBM unit lost $4.8 billion in 2010 contracts, more than 9% of the segment’s projected revenue for next year. Without these contracts, CVS said it will miss internal 2010 profit targets for the unit. That statement cast doubts on the 2010 consensus profit estimate, which has fallen 7% since the announcement. CVS Caremark, which trades at 11 times the lowest 2010 profit estimate in the wake of a 20% decline on the contract news, offers excellent rebound potential over the next six to 12 months. In other news, Federal Trade Commission is investigating claims by a coalition of labor unions that accused CVS of violating patient privacy and stocking expired products. The stock remains a Focus List Buy and a Long-Term Buy.

September-quarter earnings

DirecTV’s ($29; DTV) profits rose 12% to $0.37 per share but fell $0.02 short of the consensus. Free cash flow nearly doubled to $643 million. Sales growth outpaced expectations, with revenue climbing 10% to $5.47 billion. In the U.S., average monthly revenue per subscriber edged up 2% to $85, while the pace of net subscriber additions slowed by design. By cutting back on its retention programs, DirecTV shed some of its lower-end customers. DirecTV is a Focus List Buy and a Long-Term Buy.


Qualcomm ($44; QCOM) earned $0.64 per share excluding a variety of special items, including legal settlements, tax items, and a Korean regulatory fine, topping the consensus by $0.06. Revenue fell 19% to $2.68 billion. Qualcomm projects profit growth below Wall Street expectations for fiscal 2010 ending September. However, shares rallied on news that Samsung would make a $1.3 billion down payment and extend its licensing partnership with Qualcomm for 15 years. Qualcomm is a Long-Term Buy.

Mergers and deals

As expected, the European Union objected to Oracle’s ($22; ORCL) $7.4 billion proposal to acquire Sun Microsystems ($8; JAVA). At the center of the EU’s concerns was Sun’s mySQL, an open-source database. The objection implies the EU sees potential problems with the merger, a stance Oracle says “reveals a profound misunderstanding of both database competition and open-source dynamics.” Oracle is a Buy and Long-Term Buy. Sun is rated Neutral.


Refusing to sweeten its $16.2 billion bid for British confectioner Cadbury ($51; CBY), Kraft Foods ($27; KFT) extended its offer directly to shareholders. Kraft has received a $9.2 billion bridge loan to help finance the deal. Cadbury’s management called the deal “derisory” but hasn’t received any higher offers. Kraft is rated Neutral.


Motorola ($9; MOT) is reportedly exploring the sale of a unit that makes television set-top boxes and network equipment, worth an estimated $4.5 billion. Motorola is an Underperform.

Health-care review

Johnson & Johnson ($61; JNJ) received unwelcome but not entirely unexpected results from two studies. Researchers found that drug-releasing stents could cause blood clots and scar tissue. The devices also appear to break more often than previously thought, with J&J’s Cypher stent performing worse than the Taxus stent produced by Boston Scientific ($8; BSX). Both models have largely been replaced by newer versions from Abbott Laboratories ($53; ABT) and other companies. In a separate study, anemia drugs heightened the risk of developing blood clots in the lungs and legs of cancer patients. The results supported previous research that has contributed to sales declines for J&J’s Procrit and competing products made by Amgen ($54; AMGN). J&J is a Long-Term Buy. Abbott, Boston Scientific, and Amgen are rated Neutral . . . Baxter International ($57; BAX) raised its quarterly dividend 12% to $0.29, payable Jan. 5. Baxter is a Long-Term Buy . . . In the wake of its acquisition of Wyeth, Pfizer ($18; PFE) plans to close six research-and-development sites, reducing square footage devoted to R&D by 35%. Pfizer is rated Neutral.

News digest

American International Group’s ($38; AIG) core businesses are not performing well, but the insurer’s restructuring efforts received the support of Moody’s Investors Service ($24; MCO), which said the U.S. will likely recover its roughly $180 billion investment in AIG. AIG is rated Neutral.


A judge tossed out a $1.26 billion judgment against PepsiCo ($62; PEP) for failing to respond to a lawsuit accusing it of stealing the idea for bottled water. PepsiCo is rated Neutral.


ENSCO International’s ($46; ESV) board plans to move the company’s headquarters from Delaware to the United Kingdom, pending shareholder approval. ENSCO is rated Neutral.


A consortium led by Exxon Mobil ($73; XOM) won the right to develop an oilfield in Iraq, though the 20-year contract also requires approval from the Iraqi cabinet. This deal would mark the first time a U.S.-led team gained access to the Iraq market. Exxon is a Long-Term Buy.


Dish Network ($20; DISH), which does not pay a quarterly dividend, announced a one-time dividend of $2.00 per share, payable Dec. 2. Dish Network is rated Neutral.

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

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