Long-Term Buy List

4/14/2008


Our 33 Long-Term Buys are mostly large, well-known companies. Such companies tend to be widely followed, and thus less likely to provide the type of surprises that cause stock prices to move sharply.

Sometimes, that’s a good thing.

In volatile, downward-trending markets, we expect larger, safer stocks to do well. And so far this year, the Long-Term Buy List has held up relatively well, declining 4.4% on a fully invested basis versus a decline of 7.0% in the S&P 500 Index.

While many of our recommendations qualify as both Buys and Long-Term Buys, the Long-Term Buy List is more exposed to large blue chips. Since 2000, a period that includes both up and down years, the Long-Term Buy List has gained 38.5% excluding dividends and transaction costs, comparable to the performance of the Focus List, and well above the S&P 500’s 7.1% decline.

Among Long-Term Buys in the news, Microsoft ($29; NASDAQ: MSFT) gave Yahoo ($28; NASDAQ: YHOO) a three-week deadline to begin negotiations regarding the company’s takeover offer. Microsoft threatened to take a lower offer to shareholders if Yahoo doesn’t accept a deal. In response, Yahoo said the offer was already too low.

The pairing would give Microsoft a huge leg up in its Internet battle with Google ($468; NASDAQ: GOOG). But concerns about the size and complexity of the deal and Microsoft’s proposed use of stock and possibly debt to finance it have investors worried. However, Microsoft seems unlikely to overpay for Yahoo, and over the next few quarters the market should reward Microsoft for its operating momentum. Microsoft is a Buy and a Long-Term Buy. Yahoo and Google are rated Neutral.

St. Jude Medical ($45; NYSE: STJ) has set a lofty goal for itself over the next five years, targeting 15% annualized growth in sales. By 2012, St. Jude expects to earn $4.80 per share, representing annualized growth of nearly 22% from 2007 levels.

Aging populaces in the U.S. and Western Europe, coupled with increased use of medical devices in emerging markets, should support solid growth of the global cardiac rhythm management market, and St. Jude expects to increase its share of that market from a quarter to a third by 2012.

The company believes its most dramatic growth will come from atrial fibrillation and neuromodulation, both of which should deliver revenue growth of at least 20% annualized over the next five years. St. Jude also expects its expansion into treatment for Parkinson’s, migraines, and depression to augment sales growth. St Jude is a Long-Term Buy.


Transocean ($144; NYSE: RIG) signed a five-year, $928 million contract for one of its ultra-deepwater drillships with India-based Reliance Industries. The ship is currently under construction and will begin work in 2010. Separately, Transocean’s president says current offshore projects should keep most of the world’s deepwater rigs busy through at least 2010 without factoring in any new discoveries. Transocean is a Focus List Buy and a Long-Term Buy.


In exchange for dropping its protest after losing an $84 million contract with the U.S. Environmental Protection Agency, IBM ($116; NYSE: IBM) is now able to compete for federal contracts following a weeklong ban. IBM is a Buy and a Long-Term Buy.

A tale of two tobacconists
The spin-off of Philip Morris International ($51; NYSE: PM) from Altria ($21; NYSE: MO) was completed March 28. Shareholders of Altria received one share of Philip Morris International for every share of Altria. Here is how the companies look after the spin-off:

Cost basis: Altria shareholders must compute a cost basis for their “new” Altria shares as well as the Philip Morris shares. The company said 30.5% of the cost basis on the “old” Altria shares goes to the “new” Altria shares and the rest goes to the Philip Morris International shares.

Dividends: Altria expects to pay an annual dividend of $1.16 per share, yielding 5.5%. Philip Morris International is expected to pay an annual dividend of $1.84 per share, for a yield of 3.6%. Combined, the two companies’ payouts will match the $3.00-per-share dividend of the old Altria.

Growth and valuation: Altria expects 2008 full-year earnings per share from continuing operations to grow 9% to 11% from an adjusted base of $1.50 per share, excluding Philip Morris International. Based on the company’s low-end earnings estimate of $1.64 per share, Altria shares trade at 13 times expected 2008 earnings. Philip Morris International expects 2008 earnings to grow at a rate of 12% to 14% from 2007’s pro forma adjusted base of $2.78 per share. Based on the low end of company guidance, the stock sports a P/E ratio of 16.

DRIP plans: Members of the Altria dividend-reinvestment plan will be enrolled automatically in the new Philip Morris International dividend-reinvestment plan.

Not surprisingly, Philip Morris International has a lower yield and a higher P/E ratio than Altria, reflecting expectations of greater growth for the overseas tobacco business relative to Altria’s U.S. business. While investors may find the yield attractive, the Forecasts is not overly excited about the appreciation potential of Neutral-rated Altria. As of yet there is not enough historical data on Philip Morris to generate Quadrix scores, and for now the stock is being initiated as a Neutral.

Energy roundup
BP ($64; NYSE: BP) and ConocoPhillips ($79; NYSE: COP) will jointly build a gas pipeline from Alaska’s North Slope to Alberta, possibly extending into the U.S. The pipeline, expected to cost $25 billion to $42 billion, would be the largest private-sector construction project ever attempted in North America. In other news, Conoco said March-quarter production would fall 2% because of an unplanned plant shutdown, and a drop in refining margins would cost the company $200 million. BP and ConocoPhillips are rated Neutral . . . Valero Energy ($50; NYSE: VLO) plans to sell its San Nicolas refinery in Aruba by the middle of this year. Valero Energy is rated Neutral.

News update
Strong aluminum prices helped boost Alcoa’s ($37; NYSE: AA) results. Excluding one-time restructuring and tax items, per-share earnings rose 22% to $0.44 on 6% revenue growth. But energy and materials prices were higher than expected, and profits fell short of consensus estimates. Alcoa is rated Neutral . . . Washington Mutual ($12; NYSE: WM), which has taken huge losses on its subprime mortgage portfolio, will receive a $7 billion cash infusion from private-equity group TPG and other investors. WaMu expects a $1.1 billion loss in the March quarter. For the second time this year, WaMu cut its quarterly per-share dividend, this time to $0.01. WaMu is rated Neutral . . . Shares of Garmin ($48; NASDAQ: GRMN), a maker of navigation devices, fell after a company executive said March-quarter revenue would fall 40% to 50% from December-quarter results, below market expectations. A few days later, the stock fell again after European rival TomTom issued a profit warning. Garmin is rated Neutral . . . Boeing ($75; NYSE: BA) delayed its troubled 787 Dreamliner jet another six months, pushing the plane’s first flight into the fourth quarter of this year and deliveries into the third quarter of 2009. The stock rose on the news, which was not as bad as some expected. Boeing is rated Neutral.

News digest
EMC ($15; NYSE: EMC) plans to buy disk-drive maker Iomega ($4; NYSE: IOM) for $213 million in cash. EMC is rated Neutral.


Citing economic weakness, United Parcel Service ($73; NYSE: UPS) lowered its March-quarter per-share-earnings guidance, projecting a decline of at least 9%. UPS is rated Neutral.


Honeywell ($57; NYSE: HON) will supply $23 billion worth of engines to Brazilian aircraft maker Embraer. Honeywell is rated Neutral.


Citigroup ($24; NYSE: C) is reportedly nearing the sale of $12 billion in leveraged loans and bonds for roughly $0.90 on the dollar. Citigroup is rated Neutral.


Shareholders of BEA Systems ($19; NASDAQ: BEAS) approved an $8.5 billion sale to Oracle ($20; NASDAQ: ORCL), which is issuing $5 billion in bonds to help pay for the acquisition. Oracle is a Buy and a Long-Term Buy.


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