Portfolio Review

3/22/2010


Comcast, DirecTV get with the program

Pay-TV providers Comcast ($17; CMCSa) and DirecTV ($35; DTV) both grew sales, per-share earnings, and free cash flow in a tough 2009 environment. But their stories diverge when the topic turns to programming.

DirecTV is considering a move into production, so it can create its own original content and reduce its spending on other companies’ programming. For now, DirecTV separates itself from rivals by offering the NFL Sunday Ticket and airing Hollywood movies ahead of the DVD release. In March, a U.S. court ensured that satellite providers like DirecTV can gain access to movie channels, sports networks, and other programs transmitted by cable companies. Comcast and Cablevision Systems ($24; CVC) had challenged Federal Communications Commission regulations that prevent cable companies from making exclusive programming deals. DirecTV is a Focus List Buy and a Long-Term Buy.


Comcast is poised to pluck a majority share of NBC Universal from General Electric ($18; GE), and pending regulatory approval it will straddle the warring worlds of cable and broadcast. In search of new revenue streams, more broadcasters are looking to charge cable companies fees for retransmitting their programs. Early negotiations have been acerbic, with some spats resulting in temporary blackouts. This has led many cable companies to petition a change in retransmission rules. Comcast has been conspicuously silent on the matter. Comcast is a Focus List Buy and a Long-Term Buy.

Two wins, one loss in Abbott clinical trials

Abbott Laboratories ($55; ABT) received a dose of mostly good news from the results of a trio of trials.

Abbott’s MitraClip was found to be safer, though slightly less effective, than open-heart surgery for treating mitral regurgitation, a condition in which weak blood flow can lead to heart failure. Already approved in Europe, the MitraClip could eventually reach sales of $1 billion.

A government study determined that cholesterol drug TriCor failed to significantly lower the risk of heart attacks and strokes in diabetics. Abbott said the findings shouldn’t leave a lasting scar on sales, as only one-third of the trial patients would have been treated with TriCor under current guidelines. The drug also showed promise in treating diabetes patients with low levels of good cholesterol and high amounts of triglycerides.

Abbott reported positive 30-day results for a bioresorbable scaffold designed to clear clogged blood vessels. Bioresorbable devices dissolve into the body after performing their task. Abbott is a Buy and a Long-Term Buy.

Health-care review

A Danish study found that Johnson & Johnson’s ($65; JNJ) drug-eluting stent, Cypher, was safer than a newer model sold by Medtronic ($45; MDT). Nearly 10% of patients fitted with Medtronic’s Endeavor stent suffered cardiac death, heart attacks or related complications within 18 months of the procedure, compared to 5% of patients with the Cypher stent. Both companies helped fund the study, though Medtronic now disputes the findings. The researchers also discovered that patients who received drug-coated stents immediately after a severe heart attack were more likely to die from heart problems than were patients with older, bare-metal models, although patients with the older stents were more likely to have problems with the stents. J&J is a Long-Term Buy. Medtronic is rated A (above average) . . . U.S. researchers found that intensive radiation treatment appears to help control the size of tumors in patients suffering from inoperable lung cancer. Beams of radiation far stronger than conventional radiation treatments managed to control tumor growth in 98% of patients over three years. Demand for oncology software and equipment produced by Varian Medical ($53; VAR) could increase if doctors embrace the experimental treatment. Varian is a Buy and a Long-Term Buy . . . Baxter International ($58; BAX) said experimental flu vaccine Preflucel protected 71% of inoculated patients against all flu strains. Preflucel, in the late stages of clinical trials, had a 78% protection rate for the strains it was intended to prevent, including swine flu, influenza B, and Hong Kong flu. Baxter is a Long-Term Buy . . . Boston Scientific ($7; BSX) recalled all of its implantable cardiac defibrillators (ICDs) after uncovering a mistake in its regulatory filings. The company said it failed to submit manufacturing changes to the U.S. Food and Drug Administration, and if the problem drags on, it could significantly reduce 2010 sales and profits. ICDs generated 22% of Boston Scientific’s revenue last year. The recall should help rival device makers, such as Medtronic and St. Jude Medical ($40; STJ). Shares of both companies soared on the news, while Boston Scientific sank 13%. St. Jude Medical is rated A (above average) . . . U.S. regulators will apply their strongest warning label to Bristol-Myers Squibb’s ($26; BMY) Plavix, highlighting the fact that some patients who cannot metabolize the blockbuster blood thinner face higher risks of stroke and heart attack. Bristol-Myers is rated B (average).

Dominion selling energy business

Dominion Resources ($40; D) agreed to sell its natural-gas exploration and production business to CONSOL Energy ($49; CNX) for $3.48 billion. Shares of Dominion, which has been shopping the business since last year, did not move much on the news.

After the sale, regulated utilities will provide about 75% of Dominion’s profits, which in turn should smooth out the profit stream. The deal could boost profits slightly over the next several years, but it also removes the company’s strongest growth catalyst. Dominion provides electricity or natural gas to 4.1 million customers and controls 27,500 megawatts of power generation. The stock earns an A rating in our Utility Update and is a component of the Top 15 Utilities portfolio.

News roundup

Although February video-game sales dipped 15% marketwide, Microsoft’s ($29; MSFT) Xbox 360 outsold both Nintendo’s Wii and Sony’s ($39; SNY) PlayStation 3 for the first time in two years. Microsoft also gained momentum in the Internet-search market last month. Bing’s U.S. share grew to 11.5%, while marketing partner Yahoo’s slice shrank to 16.8%, according to comScore ($17; SCOR). Microsoft is rated a Long-Term Buy. Apple is rated A (above average) . . . General Electric ($18; GE), hammered in recent years by the global recession and bad loans created from its financing arm, said it expects to resume profit and dividend growth in 2011. General Electric is rated B (average) . . . Shares of Intel ($22; INTC) jumped on chatter that strong sales from Asia and corporate accounts will help the chipmaker beat March-quarter earnings estimates. Intel is rated A (above average) . . . PepsiCo ($66; PEP) raised its quarterly dividend 7% to $0.48 per share and pledged to repurchase up to $15 billion of its stock through June 2013. PepsiCo is rated A (above average).

  RANK CHANGES

Research In Motion ($75; RIMM) is being added to the Long-Term Buy List.

The target weightings for our portfolios have changed. The Vanguard Short-Term Investment-Grade ($10.71; VFSTX) fund’s position falls to 13.2% for the Buy List and 15.0% for the Long-Term Buy List. For details, check out the linked table.


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