Portfolio Review


Tech presses into new markets

While supplies of the iPhone 5S may be improving, several retailers have slashed prices on the iPhone 5C, Apple's ($481; AAPL) cheaper device that was originally priced at $99. Wal-Mart Stores ($73; WMT) cut its price to $45, while Best Buy ($36; BBY) and Radio Shack ($3; RSH) both offered $50 gift cards. Whether the promotions represent temporary moves or permanent repricing is uncertain. Separately, published reports suggest the iPhone could make its long-awaited debut on China Mobile's ($54; CHL) network in November. China Mobile's base of 740 million wireless subscribers is the largest in the world. Apple is a Buy and a Long-Term Buy. Both Best Buy and Wal-Mart Stores are rated B (average).

Fighting for a place in Americans' living rooms, Amazon.com ($303; AMZN) reportedly plans to launch a set-top box for streaming video on TVs for the holiday shopping season. Amazon.com has not yet announced a price or release date, but the company recently registered to trademark the name "Firetube." Amazon.com is rated C (below average).

Lenovo's new Vibe Z smartphone will run on semiconductors made by Qualcomm ($66; QCOM), replacing Intel ($22; INTC), which supplied the model's predecessor. Qualcomm is a Focus List Buy and a Long-Term Buy. Intel is rated B (average).

Google ($854; GOOG) acquired Flutter, a company developing technology to let users control devices through hand gestures. Flutter already has an application on Apple Macintosh computers that recognizes gestures for controlling iTunes and other software. In related news, Google has applied for a U.S. patent for a gesture-based control system in automobiles. Google is a Buy and a Long-Term Buy.

BlackBerry ($8; BBRY) has reportedly explored selling itself piecemeal to the likes of Google, Intel, Cisco Systems ($23; CSCO), SAP ($71; SAP), and Samsung Electronics ($1,310; SSNLF). Cisco is a Focus List Buy and a Long-Term Buy. SAP is rated B (average). BlackBerry is rated C (below average).

Corporate roundup

Union Pacific ($152; UNP) warned that September-quarter results would likely miss analysts' projections. The railroad expects per-share profits of $2.45 to $2.48, implying growth of 12% to 13%, versus the consensus of $2.56 at the time of the announcement. Volumes were flat.

Union Pacific says higher prices should help boost operating revenue 4.0% to 4.5%, below the consensus growth target of 7%. The stock has slipped 2.2% since the warning, versus a 1.4% dip in the S&P 500 Index. Union Pacific, set to report full results by Oct. 17, remains a Long-Term Buy.

With the specter of an economic calamity fresh in investors' minds, U.S. regulators disclosed how major banks plan to cope with another meltdown. Part of newly installed financial regulations, these "living wills" serve as disaster plans for dismantling failing banks without a government handout.

J.P. Morgan Chase ($51; JPM) says it has a capital cushion of $147 billion, with an additional $278 billion of marketable securities and other sources of liquidity at its disposal to backstop significant losses. If that fails, J.P. Morgan proposes to sell off auxiliary businesses or wind down the bank in bankruptcy proceedings. These plans may work in isolation. But just as exits jam quickly when a fire breaks out in a crowded theater, asset prices tumble precipitously when everyone scrambles to sell. In other news, J.P. Morgan has reportedly offered to sell its physical commodities trading unit for $3.3 billion. In July the bank announced plans to exit the business. J.P. Morgan is a Focus List Buy and a Long-Term Buy.

Political pressures

Yet again, political bickering has thrown a wrench into the stock market's roll. The latest dispute centers on increasing the government's $16.7 trillion debt limit to pay the bills for spending already approved by Congress. Somewhat separate from that debate is the so-called continuing resolution in which Congress would agree to provide funds that keep the U.S. government operating.

The government shutdown stems from Republicans' hope to derail President Obama's Affordable Care Act. But the shutdown's implications are murkier and broader:

Health care: New drug and medical devices could face longer wait times before approval by the Food and Drug Administration, potentially causing headaches for Mylan Laboratories ($39; MYL).

Aerospace: Lockheed Martin ($122; LMT), the Pentagon's largest contractor, plans to furlough 2,400 workers, about 2% of its U.S. staff. Big backlogs give defense contractors some cushion, though they could face a cash-flow crunch if the government postpones invoice payments.

Economy: Thousands of furloughed workers could further dampen consumer spending. Moreover, the government has warned it cannot guarantee Social Security payments will be fully paid if the debt ceiling isn't raised. The prospect of issues with payments for about 46 million Americans could frighten consumers.

Meanwhile, the Affordable Care Act launched Oct. 1. Websites for the federal exchanges have been hobbled by heavy traffic and technical glitches, though state-run exchanges have run more smoothly. The government says hundreds of thousands of Americans have created accounts, the first step in the application process. We'll take a closer look at the new health-care law in the Oct. 28 issue. Lockheed Martin is rated B (average). Mylan is a Focus List Buy and a Long-Term Buy.

Celgene still a Buy

Celgene ($149; CELG) stock is up more than 85% this year. The price run-up begs the question — how much higher can these shares go?

Our answer: High enough to warrant holding onto the stock. Celgene is not cheap, with a Quadrix® Value score of 23 (out of a possible 100). The shares trade at more than 25 times the 2013 consensus earnings estimate of $5.97 per share and 21 times the 2014 consensus. However, conventional valuation measures don't tell the whole story when it comes to biotech stocks, whose appeal lies in their product pipelines and future earnings prospects. Fortunately, Celgene possesses what many of its peers lack — a strong growth story for today and tomorrow.

The current stable of products should power the company to profit growth of 20%-plus this year and next. And the long-term growth story looks equally impressive. Celgene has carved out growing positions in two important therapeutic areas — cancer, and immunological or inflammatory diseases. Sales of the company's primary product, Revlimid (68% of sales in 2012), rose 13% to $1.05 billion in the June quarter. Abraxane, a treatment for breast cancer and certain lung cancers, saw revenue rise 41% to $155 million in the quarter.

Future growth will stem from gains in existing products, new uses for existing products — for example, Abraxane was approved in September to treat late-stage pancreatic cancer — and new products. One late-stage drug with promise is Apremilast, a treatment for psoriasis and psoriatic arthritis. The company spent about 30 cents of every dollar in revenue in the second quarter on research and development, demonstrating its commitment to new products.

Celgene projects per-share profits of $13 to $14 by 2017. We view multiyear projections with some skepticism. But even scaling back the stock's P/E to 19 and trimming the 2017 earnings estimate to $11 yields a stock price north of $200. The consensus projects September-quarter profits of $1.53 per share, up 19%. Celgene, scheduled to report its results Oct. 24, has beaten the consensus in each of the last four quarters. Shares of Celgene and other biotech stocks have dipped over the last few days, hurt by weakness at one rival and probably some profit-taking. But Celgene's prospects remain intact, and the stock remains a Focus Buy and Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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