Portfolio Review

12/7/2009


Legal, product news to drive AstraZeneca

AstraZeneca ($46; AZN) has already spent $623 million on legal expenses to defend antipsychotic drug Seroquel. That tab could get a lot bigger if AstraZeneca ends up facing more than 14,000 lawsuits that claim it hid data linking the drug to diabetes. With sales of $3.61 billion in the first three quarters of 2009, Seroquel is AstraZeneca’s second-biggest drug, accounting for 15% of total revenue.

AstraZeneca’s broad portfolio includes seven drugs that have already topped $1 billion in sales this year. But patent expirations are a risk, and we intend to watch the company’s drug-development progress closely. This month, AstraZeneca filed for U.S. and European approval of Brilinta, a treatment that prevents blood clots. The potential blockbuster outperformed a rival treatment in a recent study and could eventually contribute billions of dollars in annual revenue.

The legal and patent risks appear to be reflected in the stock price already. Shares trade at just seven times the consensus 2009 profit estimate of $6.39 per share. At 10 times estimated 2010 earnings, (a sharp discount to the five-year average trailing P/E of 13), the stock would trade at $60 by early 2011. For now, AstraZeneca is a Buy and a Long-Term Buy.

GE deal clears static at Comcast

General Electric ($16; GE) struck a tentative agreement that, for now, clears Comcast’s ($15; CMCSA) path toward taking a majority stake in NBC Universal. GE agreed to pay about $5.8 billion for Vivendi’s 20% interest in NBC Universal. GE is expected to turn around and sell a 51% stake in NBC Universal to Comcast, which will also contribute its cable networks to the deal. As proposed, the deal will let GE clear about $9 billion in debt from its balance sheet and eventually exit the business entirely. It should also aid Comcast’s quest to push further into media content. Comcast is a Focus List Buy and a Long-Term Buy. General Electric is rated Neutral.

Retail review

Promises of deep markdowns lured 13% more shoppers to stores over Thanksgiving Day weekend. But consistent with their actions in recent months, consumers practiced restraint. Average spending declined 8% to $343 per person. Despite the higher customer count, total spending at stores and Web sites from Nov. 26 to Nov. 29 rose only about 0.5% from year-earlier levels.

The early results caused industry experts to scale back expectations for November same-store sales, though some of the spending could shift into December. The National Retail Federation expects total sales for the holiday season to fall 1%.

Corporate roundup

Shares of General Dynamics ($67; GD) and other defense stocks rose following President Obama’s decision to speed up the deployment of 30,000 additional troops to Afghanistan, boosting forces there by more than 40%. Administration officials say the early deployment is designed to stabilize the region and allow a quicker withdrawal, but many remain skeptical. A prolonged presence in Afghanistan could open up new opportunities to sell military equipment and services.

Separately, General Dynamics signed a $2.2 billion contract with the U.S. Army to deliver 724 light armored vehicles for eventual sale to foreign militaries. General Dynamics also completed the first test flight of the ultra-long-range Gulfstream G650 business jet, slated to enter service in 2012. Finally, General Dynamics authorized the repurchase of up to 10 million shares, representing about 2.6% of shares outstanding. General Dynamics is a Buy and a Long-Term Buy.

Boeing ($54; BA) completed a test of the airframe of the long-delayed 787 Dreamliner passenger jet to see if a structural flaw found in June had been fixed. Results should be released about Dec. 11, and a successful test could clear the plane for a test flight reportedly planned for Dec. 22. Boeing is rated Neutral.

Oracle ($22; ORCL) will meet with the European Union on Dec. 10 to argue for its proposed $7.4 billion acquisition of Sun Microsystems ($8; JAVA). A group of 59 U.S. senators has petitioned the EU to accelerate its decision. But Sun, reeling from the prolonged review, might be the big loser regardless of the outcome.

Losses of $677 million over the past year have driven Sun to slash 3,000 jobs, or 10% of its global work force The company’s server sales fell 32% in the September quarter — more than twice the industrywide 15.5% decline. IBM ($128; IBM), Hewlett-Packard ($50; HPQ), and Dell ($14; DELL) have used the EU’s delay to gain market share by poaching Sun’s jittery customers. IBM is a Focus List Buy and a Long-Term Buy. Oracle and H-P are rated Buy and Long-Term Buy. Dell and Sun are rated Neutral.

Stryker ($51; SYK) agreed to pay $525 million in cash for Ascent Healthcare Solutions, which reprocesses and remanufactures medical devices in the U.S. Of the $32 billion U.S. market for disposable medical devices, Stryker estimates that $3.6 billion can be reprocessed. Such recycling has been embraced by few medical-device makers, although the cost savings of up to 50% appeal to cash-strapped hospitals. Stryker is a Buy and a Long-Term Buy.

Transocean’s ($87; RIG) new ultra-deepwater semisubmersible rig will begin a seven-year drilling contract at a rate of $403,000 per day. Transocean is a Focus List Buy and a Long-Term Buy.

Financial roundup

American International Group ($31; AIG) and the Federal Reserve Bank of New York agreed to a debt-for-equity swap that cuts the troubled insurer’s debt to the bank to $17 billion from about $45 billion. AIG is rated Neutral . . . Manulife Financial ($18; MFC) completed a $2.35 billion stock offering. Manulife is rated Neutral . . . Treasury Secretary Timothy Geithner said the administration will soon wind down the $700 billion financial bailout program, with the remaining funds likely to be used to trim the country’s $12 trillion debt.

Keep playing GameStop

After initiating deep price cuts for toys, books, and movies in recent weeks, Wal-Mart Stores ($55; WMT) has set its sights on videogames. Wal-Mart said it will discount top videogames by 15% to 20% for the holidays. It will also offer a $50 gift certificate to shoppers who buy a Wii console from Dec. 5 through Dec. 12.

Wal-Mart’s decision sparked a sharp sell-off in GameStop ($22; GME) shares, but the reaction seems overdone. GameStop competes on convenience as much as price and makes 47% of its profits from used games and equipment. GameStop earns a Quadrix® Value score of 99, the highest of any retailer in the S&P 500 Index. At 10 times trailing earnings, GameStop trades 56% below its three-year average P/E ratio. On average, profitable retailers in the index trade at a 16% premium to historical norms. Considering the stock’s bargain-basement valuation, decent October-quarter results, solid cash flow, and positive earnings-estimate trends, GameStop remains a Buy. Wal-Mart Stores is a Long-Term Buy.

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