Portfolio Review: December 28, 2015


Health-care review

Shire ($204; SHPG) has reportedly submitted a new proposal to acquire Baxalta ($39; BXLT), a company that makes drugs for rare blood disorders. The new offer exceeds $30 billion and now contains a cash component. Baxalta rejected Shire's previous all-stock bid of $30.6 billion in August, but has been soliciting takeover offers, presumably to drive up its price tag. Shire is a Long-Term Buy.

Centene ($66; CNC) raised its 2015 outlook, now projecting per-share profits of $2.90 to $2.94 excluding costs related to its pending acquisition of Health Net ($68; HNT). That target implies 30% to 32% growth and exceeds the consensus of $2.88 at the time of the announcement. Centene also issued its 2016 outlook, with adjusted per-share profits projected to surge 39% to 52% on sales growth of 82% to 86%. Centene is a Buy and a Long-Term Buy.

Gilead Sciences ($103; GILD) agreed to pay at least $725 million to buy a 15% stake in Belgian drugmaker Galapagos ($62; GLPG) and gain rights to an experimental drug designed to treat inflammatory diseases, such as rheumatoid arthritis. Galapagos expects the drug to enter phase 3 trials next year. Additional milestone payments to Galapagos could reach $1.35 billion. Gilead is a Focus List Buy and a Long-Term Buy.

Enrollment for 2016 health insurance on federal exchanges topped 6 million people as of Dec. 17, ahead of last year's pace. That tally includes 2.4 million new customers but excludes current customers who will automatically re-enroll. The federal exchanges cover 37 states, and the open-enrollment period runs through Jan. 31. The White House expects enrollment to reach 10 million people by the end of 2016, lagging the original projections of 20 million people. 

Hospital stocks, including Community Health Systems ($29; CYH), rallied on the news, which calmed some of the fears that Americans have shunned health insurance because of rising premiums and deductibles. But sentiment for hospital stocks remains weak. Shares of health-care facilities stocks have slumped an average of 5% so far this year, worse than any other health-care industry. Community Health shares have returned 2% in the past month but are still down 47% for the year. Community Health, earning a Value rank of 99, remains a Buy and a Long-Term Buy.

Disney is no Jedi mind trick

The latest Star Wars installment, Disney's ($106; DIS) The Force Awakens, delivered a record debut of $529 million in global ticket sales. It also presents a new hope for a company trying to strike back against an empire of cord-cutters. No longer a phantom menace, alternatives to traditional cable have gained ground with the masses. About 46% of U.S. households subscribe to streaming-video services, such as Amazon Prime, Netflix ($118; NFLX), and Hulu, according to Nielsen.

Although the company's cable networks have shed subscribers, Walt Disney Studios has generated more than $5 billion in ticket sales in calendar 2015, breaking its previous record of $4.73 billion, set in 2013. J.P. Morgan expects The Force Awakens film alone to generate $1.1 billion in profits, putting Disney well on its way to recovering the $4.06 billion it paid for Lucasfilm. Disney is already custodian of Mickey Mouse, Spider-Man, and other cherished characters in American pop culture.

Of course, ESPN, representing 25% of revenue, remains vital to the company's success. But consider the endless opportunities to repurpose the Star Wars universe and other popular franchises through merchandizing and theme-park tie-ins. With that in mind, the likelihood of Disney's growth diminishing to a crawl exists only in a galaxy far, far away. Disney is a Long-Term Buy.

Technology update

Alphabet ($769; GOOGL), the parent company of Google, struck a deal with several big Australian banks to accept mobile payments through Android Pay. A similar deal has eluded rival Apple ($109; AAPL), which launched Apple Pay in Australia in November. Apple Pay has a pact with American Express ($70; AXP) in Australia but has yet to sign up other banks in what has become a huge market. About 60% of all Australian card transactions are contactless, versus just 4% in the U.S. Contactless payment systems let consumers make purchases by waving cards or devices with embedded chips or antennas.

Separately, initial sales for Apple's iPad Pro have been weaker than expected in China, partly due to the device's high price, reported DigiTimes. Both Alphabet and Apple are rated Focus List Buy and Long-Term Buy. American Express is rated A (above average).

M&A roundup

Not just consumers were busy shopping in the days leading up to Christmas. With about 10 days left in 2015, the global volume of announced mergers and acquisitions reached a record $4.6 billion, says Dealogic. A total of 58 deals were valued in excess of $10 billion. U.S. deals, totaling $2.3 billion, also set an all-time high.

Dow Chemical ($53; DOW) and DuPont ($66; DD) agreed to an all-stock merger valued at $130 billion that will surely draw close scrutiny from antitrust officials. The deal forges two giants founded more than a century ago under the timeless banner of improved efficiency. Upon the merger's completion, executives plan to eliminate $3 billion in costs before separating into three separate publicly traded companies (agriculture, material sciences, and specialty products) 18 months to 24 months later. Until then, Dow shareholders would own a 52% stake in the new company, poised to control about 40% of the U.S. market for soybean and corn seeds. Dow is rated B (average). DuPont is rated C (below average).

Jones Lang LaSalle ($158; JLL) resumed its takeover binge by announcing three more deals. It acquired Cresa South Florida and Trussard Property, commercial real estate agencies based in Florida and South Africa, respectively. Jones Lang also agreed to purchase Big Red Rooster, which helps clients design and manage their brands. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.

U.S. ends ban on oil exports

President Obama has signed legislation that lifts the forty-year ban on exporting crude oil. U.S. drillers, including Exxon Mobil ($80; XOM), Continental Resources ($25; CLR), ConocoPhillips ($49; COP), have pushed to end the ban so they could sell oil on the international market, where prices have historically been higher. Conversely, U.S. refiners, such as Valero Energy ($72; VLO), would likely experience higher raw-material costs. The spread between U.S. and international oil prices narrowed sharply in the days following the end of the ban. In fact, international oil prices retreated to levels last seen in July 2004 and traded at a rare discount to U.S. oil in the days before Christmas. Valero is rated A (above average). Continental, ConocoPhillips, and Exxon are rated C (below average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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