Portfolio Review

1/4/2010


Retail sales decent, helped by late rush

U.S. retail sales rose an estimated 3.6% excluding automobiles and gasoline from Nov. 1 to Dec. 24, as reported by SpendingPulse, although the growth was a more modest 1% excluding an extra shopping day this year. The National Retail Federation had predicted a 1% decline in sales in the period, though other prognosticators expected numbers roughly in line with those reported.

For the same period last year, sales fell 2.3%, SpendingPulse said. Electronics was one of the strongest areas this year, while jewelry and luxury items also performed well. Online sales jumped about 18% between Nov. 27 and Dec. 24.

Retailers, carrying less inventory than they did last year, were reluctant to mark down their merchandise early in the season. That stance softened in the days leading up to Christmas, with stores offering deeper discounts and extended hours. And by many accounts, shoppers waited until the last minute, driving U.S. sales up about 2.3% during Christmas week.

Many retailers count on holiday sales for 25% to 40% of their annual revenue, with nearly half of those holiday sales coming in the final 10 days before Christmas. So the timing couldn’t have been worse when a snowstorm buried the East Coast on the last weekend before Christmas. We’ll get a better idea of how the weather affected shoppers when retailers begin releasing December sales data later this week. The International Council of Shopping Centers is slated to release chain-store sales Jan. 8, while the U.S. Census Bureau’s broader retail-sales report should hit the market Jan. 14.

The week following Christmas is also crucial for retailers. Consistent with its aggressive holiday pricing strategy, Wal-Mart Stores ($54; WMT) launched new discounts on electronics and toys. Retailers hope to entice consumers bearing gift cards, which are booked as revenue only after shoppers spend the money. Dollars loaded onto store-issued gift cards were projected to rise 1.9% to $38 billion in 2009. Wal-Mart is a Long-Term Buy.

Broadcasting review

DirecTV ($34; DTV) will raise rates by about 4% in February. Investors should take that move as a sign of DirecTV’s confidence that subscribers will pay up for specialized content. It is also indicative of upward pressure on programming costs industrywide, which is causing friction between free and pay TV providers.

Tradional broadcast networks are getting squeezed by two trends: weak advertising revenue, hurt by the recession; and an audience splintered by the plethora of choices on cable, satellite TV, and online media. As a result, some are trying to adopt the business model that has served cable channels and networks so well, deriving revenue from both ad sales and fees charged to service providers for the right to retransmit their content.

Most recently, News Corp. ($14; NWSa) threatened to pull its Fox stations from Time Warner Cable ($42; TWC) unless Time Warner pays retransmission fees of roughly $1 a month for every subscriber, well above rates charged by competitor CBS ($14; CBS). Time Warner’s retransmission agreement expired Dec. 31, but no deal had been reached at press time on Dec. 30.

By taking a 51% stake in NBC Universal, Comcast ($17; CMCSA) is hedging against higher programming costs and could eventually find itself on both sides of retransmission negotiations (see page 8 for more on Comcast’s acquisition). Both Comcast and DirecTV are Focus List Buys and Long-Term Buys. Time Warner Cable and CBS are rated Neutral.

Tech update

In the September quarter, Microsoft’s ($31; MSFT) market share for applications used in mobile devices fell to 7.9% from 11.1%, partly due to greater competition from Apple ($209; AAPL) and Google ($619; GOOG). Microsoft is a Long-Term Buy. Apple and Google are rated Neutral . . . Qualcomm ($47; QCOM) Chief Operating Officer Len Lauer resigned to become CEO of another company. For now, Qualcomm plans to expand other executives’ responsibilities rather than hire a new COO. Qualcomm is a Long Term Buy.

News digest

Citigroup ($3; C) and Wells Fargo ($27; WFC) repaid federal loans of $20 billion and $25 billion, primarily with funds raised by issuing new common stock. Citigroup and Wells Fargo are rated Neutral.


Citing “unreliable or unverifiable” trial data, U.S. regulators declined to approve Johnson & Johnson’s ($65; JNJ) antibiotic ceftobiprole, advising the company to conduct two more studies. J&J is a Long-Term Buy. 


Boeing ($55; BA) won a $750 million contract with the U.S. Air Force to upgrade and maintain the B-52 bomber’s weapons system. Boeing is rated Neutral.


Bristol-Myers Squibb ($26; BMY) reduced its 2009 earnings outlook by $0.25 per share to $1.75 to $1.80, reflecting the Mead Johnson Nutrition ($45; MJN) spin-off. Bristol-Myers is rated Neutral.


CVS Caremark ($33; CVS) plans to stock the swine-flu vaccine in more of its pharmacies, coinciding with government efforts to encourage more Americans to get inoculated. CVS is a Focus List Buy and a Long-Term Buy.


Pfizer ($19; PFE) halted a late-stage study that combined older lung-cancer therapies with the experimental drug figitumumab, two months after the company closed patient enrollment due to safety concerns. Pfizer is rated Neutral.

Senate passes health-reform bill

The U.S. Senate passed a 10-year, $871 billion health-care reform bill that looks like a trimmed-down version of the U.S. House’s $1.1 trillion version approved in November. The Senate legislation is projected to insure more than 30 million additional Americans and promises to be the biggest expansion of health coverage since Medicare was formed in 1965. The Senate and House must now draft a compromise, and President Obama could sign the final bill this month.

Health-care companies stand to gain millions of new customers, but the measure also subjects them to new taxes and other fees. The drug industry agreed to pay $80 billion in taxes over the next 10 years, though it could be forced to renegotiate its share of the burden, possibly paying up to $20 billion more.

The Senate version includes a provision to delay taxes on insurers and device makers by one year. Taxes for insurers amount to about $70 billion. Both bills propose to prevent insurers from allocating more than 15% or 20% of revenue to administrative costs and profits.

The bill provides a framework for implementing biosimilar drugs, though the patent shelter of 12 years extends much longer than the range of five to seven years proposed by the Obama Administration. Overall, the bill looks like good news for Focus List Buy Hospira ($51; HSP), a producer of copycat versions of biotech medications in Europe. But for most generic drugmakers looking for provisions that would boost the use of traditional generics, the bills offer little balm.

The effect on traditional drugmakers is difficult to determine. Will the costs of extra taxes and possible price caps offset the increase in customers? Only time will tell. The biggest issue for health insurers revolves around the creation of a public insurance plan. The Senate bill does not include a public option, but the House bill does, and nobody knows how the compromise bill will shake up. For now, investors should feel comfortable buying Hospira and our other recommended health-care stocks. It is too early to either rejoice or panic, as the final legislation could wind up drastically different than either current bill.

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

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