Portfolio Review

12/14/2009


Comcast closes NBC deal, hikes dividend

A $28 billion deal between General Electric ($16; GE) and Comcast ($17; CMCSA) will form one of the country’s biggest media conglomerates. Comcast will gain a 51% stake in NBC Universal in exchange for $6.5 billion cash and $7.25 billion of assets. Comcast’s collection of cable networks, including E! Entertainment Television, Versus, The Golf Channel, and 10 regional sports networks, will fold into NBC Universal.

For its part, GE will unload about $9 billion of debt onto the new company. GE can also sell half of its stake to Comcast after three-and-a-half years and exit the business entirely in the eighth year, subject to some conditions. GE also agreed to buy at least $345 million of advertising from NBC Universal over the next five years.

The deal will face close regulatory scrutiny, a hurdle Comcast expects to clear in the next nine to 12 months. Another challenge for Comcast is to win over investors, who have generally approached the deal with skepticism. Most likely in an effort to please shareholders, Comcast raised its quarterly dividend 40% to $0.0945 per share, payable Jan. 6, and announced a $3.6 billion share-buyback program over the next 36 months. Comcast is a Focus List Buy and a Long-Term Buy. GE is rated Neutral.

Health-care review

The Food and Drug Administration approved AstraZeneca’s ($46; AZN) Seroquel XR for use when other antipsychotics prove ineffective. Patients must take periodic surveys to show they are aware of side effects that include weight gain and a movement disorder called tardive dyskinesia. In other news, AstraZeneca agreed to buy an experimental depression drug for up to $1.24 billion. AstraZeneca is a Buy and a Long-Term Buy.

Hospira ($48; HSP) acquired TheraDoc, a maker of monitoring devices that track and respond to infectious diseases. Hospira is a Focus List Buy and a Long-Term Buy.

Technology update

The European Union was slated to hold a two-day hearing starting Dec. 10 for Oracle ($22; ORCL), Sun Microsystems ($8; JAVA), customers, and competitors to discuss Oracle’s proposed $7.4 billion acquisition of Sun. Antitrust concerns raised by the European Union have delayed the deal, primarily because of Sun’s open-source database program MySQL. European Competition Commissioner Neelie Kroes said she is optimistic about reaching a satisfactory solution, though up to this point, Oracle has refused to compromise on MySQL. The EU plans to make its decision by Jan. 27. Oracle is a Buy and Long-Term Buy. Sun is rated Neutral . . . Cognizant Technology Solutions ($44; CTSH) and two Indian technology outsourcers received a $600 million order from Wal-Mart Stores ($54; WMT). Cognizant is a Focus List Buy and a Long-Term Buy. Wal-Mart is a Long-Term Buy.

A gusher of energy deals

Oil giants Exxon Mobil ($73; XOM) and Chevron ($77; CVX) signed huge, long-term deals to provide liquid natural gas (LNG) in Asia. Oil producers have made massive discoveries in recent years, and Exxon expects global demand for LNG will triple by 2030.

Exxon and its partners gave final approval for a $15 billion project in Papua New Guinea. Shipments are projected to begin in 2014, and sales from the project could exceed $100 billion over 20 years. Chevron agreed to supply LNG to Japan’s biggest electric utility for $82.5 billion over 20 years, accounting for nearly half of expected output from the Wheatstone project in Western Australia. Separately, Chevron said it will no longer supply fuel to 1,100 independent U.S. gas stations by the middle of 2010.

While our favorite energy stocks hail from the services and supplies industries, integrated producers Exxon and Chevron still have attractive positions in the market and solid finances. Despite Quadrix® Overall scores lower than we normally require, both Exxon and Chevron retain their Long-Term Buy ratings.

In other energy news, National Oilwell Varco ($41; NOV) acquired two Asian companies for about $160 million in cash, expanding its rig-technology and service-and-supplies units. Also, a storm off the coast of Malaysia damaged a Transocean ($79; RIG) jack-up rig, leaving it unable to complete a contract. Transocean found work for two other jack-ups and two midwater rigs, though at rates lower than those from previous contracts. National Oilwell is a Buy and a Long-Term Buy. Transocean is a Focus List Buy and a Long-Term Buy.

Buyback news

Stryker ($51; SYK) announced a $750 million share-repurchase program, while Amgen ($56; AMGN) authorized another $5 billion in buybacks. General Dynamics ($68; GD) approved the repurchase of 10 million shares, about 2.6% of the share count. General Dynamics and Stryker are rated Buy and Long-Term Buy. Amgen is a Neutral.

Retailers disappoint

The Thomson Reuters same-store-sales index rose 0.5% in November, well below the 2.1% consensus. Most of the retailers we cover fell short of expectations.

TJX ($37; TJX) managed solid growth, an 8% rise in November same-store sales, but missed the consensus and fell nearly 3% on the news.

McDonald’s ($61; MCD) said global same-store sales advanced 0.7% in November. However, U.S. sales dipped for only the fourth month in more than six years. TJX is a Long-Term Buy. McDonald’s is rated Neutral.

Mixed bag of guidance

Bellwether FedEx ($90; FDX) raised its outlook for November-quarter earnings, citing both strong international demand and the effect of cost cuts. But 3M ($77; MMM), another industrial company sometimes viewed as a proxy for the economy, projected December-quarter earnings below Wall Street expectations and guided 2010 earnings a bit lower than the consensus. In addition, PepsiCo ($63; PEP) trimmed the upper end of its 2009 sales and profit guidance. FedEx, 3M, and PepsiCo are rated Neutral.

Financial report

The U.S. Treasury reduced its projection of the financial bailout’s long-term costs by 59% to $141 billion. The revision reflects higher-than-expected investment returns and success in stabilizing the economy without using the entire $700 billion allotted under the Troubled Asset Relief Program (TARP). The program, originally slated to expire at the end of 2009, will be extended through Oct. 3, 2010. Many banks have repaid TARP funds, and others are eager to do so. Bank of America ($15; BAC) says it has repaid its $45 billion government loan, helped by issuing $19.29 billion in securities that can be converted into 1.29 billion common shares, potentially diluting the share base by 15% if shareholders approve the conversion. Wells Fargo ($26; WFC) and Citigroup ($4; C) are both looking to repay their loans as soon as possible but will likely need to raise more capital. Bank of America, Citigroup, and Wells Fargo are rated Neutral.

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

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