Portfolio Review

2/2/2009


Pfizer makes deal, Dow backs off
Pfizer ($16; PFE) agreed to pay $68 billion for rival Wyeth ($44; WYE) in the biggest pharmaceutical takeover since 2000. The drug giant will pay about $23 billion in stock and the rest in cash, augmenting its existing cash holdings with $22.5 billion in new borrowing. In an effort to protect its credit rating in the face of a heavier debt load, Pfizer will cut its quarterly dividend in half to $0.16 per share. Saddled with 14 patents set to expire in the next six years, Pfizer hopes the deal will both reduce costs and rejuvenate an aging pipeline. In the December quarter, Pfizer earned $0.65 per share, up 30% excluding $3.5 billion in charges and a higher tax rate. Net income fell 90% to $0.04 per share on a 4% decline in sales. Wyeth posted profits of $0.71 per share, down 5% on lighter sales of its antidepressant Effexor. Pfizer and Wyeth are rated Neutral.


Dow Chemical ($13; DOW) missed the Jan. 27 deadline for closing its $15.4 billion buyout of Rohm & Haas ($59; ROH). Dow had planned to fund most of the acquisition with proceeds from a $17.4 billion joint venture with a state-owned Kuwait company. As that deal unraveled, so did Dow’s options to finance the Rohm & Haas merger. Dow says it is still interested in the deal, but Rohm & Haas sued Dow and stands to collect about $3 million every day the deal is delayed. To preserve its investment-grade credit rating, Dow will consider cutting its dividend of $1.68 per share. Dow is rated Neutral.

Financial roundup
Aflac ($22; AFL) shares sank to their lowest point in nearly nine years after analysts warned of exposure to risky investments and Standard & Poor’s cut the insurer’s credit rating. The insurer estimates it owns about $8.1 billion in European hybrid securities, which several analysts claim have lost much of their value. The company says it maintains confidence in the integrity of its $68.6 billion investment portfolio, promising to maintain its dividend and projecting profit growth of 15% in the December quarter. Aflac was scheduled to report quarterly results Feb. 2. Brokerage upgrades have helped Aflac, a Long-Term Buy, recover some of its lost ground.

American International Group ($1; AIG) is taking bids for a minority stake in its Asian life-insurance segment, which could be worth up to $10 billion. Portions of the business have sparked interest, though AIG seems intent on selling a 49% interest in the businesses as one piece, and buyers with sufficient liquidity appear scarce. Meanwhile, AIG looks to shed additional assets. AIG is rated Neutral.

Bank of America ($7; BAC) dumped former Merrill Lynch CEO John Thain, who now joins a procession of Merrill executives who have left since the two banks merged. Bank of America is rated Neutral, and it is too early to start fishing in this pond.

Citigroup ($4; C) named as its new chairman Richard Parsons, former CEO of Time Warner ($10; TWX). Parsons plans to shake up Citi’s board — at least three board members are expected to resign before the spring annual meeting. Citigroup and Time Warner are rated Neutral.

December-quarter earnings
Microsoft ($18; MSFT) earned $0.47 per share, down 6% and $0.02 short of consensus estimates. Revenue rose 2% to $16.63 billion, but technology spending slowed more than management expected. Preparing for lower sales in the next two quarters, Microsoft plans to eliminate 5,000 jobs, the first layoffs of this scale in its 34-year history. The slowdown was not unexpected, although we expected a bit better from Microsoft. At less than 10 times projected year-ahead earnings, the shares seem very cheap — and poised for solid gains on any good news. Microsoft is a Buy and a Long-Term Buy.

St. Jude Medical’s ($35; STJ) profits climbed 11% to $0.60 per share excluding special items, beating the consensus by $0.02. Sales climbed 11% to $1.13 billion, with all four segments seeing higher revenue. St. Jude nudged its 2009 forecast upward and now projects per-share profits will grow 7% to 10%. In other news, St. Jude gained European approval to launch two systems to treat symptoms of Parkinson’s disease. St. Jude is a Focus List Buy and a Long-Term Buy.

Schlumberger ($42; SLB) earned $1.03 per share excluding special charges, down 7%. Revenue rose 10%, but costs rose even faster, squeezing profit margins. Wall Street, expecting dire results, reacted favorably to the news and drove the shares up 10% on the day of the release. Schlumberger is a Long-Term Buy.

Lockheed Martin ($82; LMT) posted per-share profits of $2.05, up 8% and $0.13 higher than the consensus. Sales rose 3% to $11.13 billion. Backlog rose in every segment. Lockheed raised its 2009 sales forecast but lowered its profit guidance be cause of unexpected pension-related expenses. Lockheed is a Long-Term Buy.

Energen ($29; EGN) earned $0.91 per share, down 17% but $0.04 better than the consensus. Operating revenue climbed 7%. Energy production rose 6%, but realized sale prices for that production declined 9%. Energen lowered 2009 profit guidance and cut its capital-spending budget by 24%. In other news, Energen raised its quarterly dividend 4% to $0.125 per share, payable March 2. Energen is a Long-Term Buy.

General Electric’s ($13; GE) profits from continuing operations fell 47% to $0.36 per share on a 5% decline in revenue. The finance, NBC Universal, and consumer & industrial units delivered lower sales and profits, offsetting solid results for energy infrastructure. The company says it has no plans to cut its dividend, but many market watchers expect a reduction if conditions do not improve. GE is rated Neutral.

Freeport-McMoRan ($26; FCX) earned $0.06 per share excluding special items, down 96%. Sharp declines in copper and molybdenum prices in the quarter drove Freeport to slash capital expenditures, take massive writedowns, and suspend its dividend. Freeport is rated Neutral.

News digest
General Motors ($3; GM) received $5.4 billion, the second installment of $13.4 billion in government loans awarded by Congress. The last $4.0 billion should arrive in February after GM submits its viability plan. GM is an Underperform.


Sprint Nextel ($2; S) will cut 8,000 jobs, about 15% of its work force. Sprint is an Underperform.


Home Depot ($22; HD) will shutter its Expo Design Centers, known for their high-end décor showrooms, as part of initiatives that will eliminate 7,000 jobs, or 2% of the work force. Home Depot is rated Neutral.


Intel ($14; INTC) said it will slash up to 6,000 manufacturing jobs. Intel is rated Neutral.


With profits declining 28% to $1.08 per share in the December quarter, Caterpillar ($32; CAT) announced plans to shed at least 7,500 jobs in addition to the 12,000 positions it had already eliminated. Caterpillar is rated Neutral.


Mylan ($12; MYL) gained approval from the Food and Drug Administration to market a generic version of AstraZeneca’s ($40; AZN Prilosec heartburn treatment. AstraZeneca is a Buy and a Long-Term Buy. Mylan is rated Neutral.


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