Portfolio Review: September 26, 2016


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Pipelines pay off for drugmakers

Amgen ($174; AMGN) and Novartis ($82; NVS) reported encouraging results for an experimental migraine treatment in a midstage study. Roughly 40% of patients with chronic migraines who took the drug saw the number of days they suffered a migraine cut at least in half. Upon regulatory approval, Amgen would have the right to sell the drug in the U.S., Canada, and Japan. In a separate trial, Amgen said Repatha met its primary and secondary goals for reducing plaque buildup in the coronary arteries of patients already treated with statin therapy. U.S. regulators approved cardiovascular drug Repatha in July. In other news, Amgen said an advisory committee recommended that European regulators approve its treatment for chronic kidney disease. Amgen is a Buy and a Long-Term Buy.  Novartis is rated C (below average).

Biogen ($312; BIIB) plans to launch a new trial for experimental multiple sclerosis drug opicinumab. The drugmaker reported disappointing results for the potential treatment in June. The new study will focus on younger patients who have lived with multiple sclerosis for a shorter period of time. Biogen is a Buy and a Long-Term Buy.

Shire ($204; SHPG) won U.S. approval to sell Cuvitru, which treats primary immunodeficiency, a genetic disorder that impairs patients' immune systems. Cuvitru is already approved in 17 European countries. In other news, a U.S. court rejected Shire's bid to block a generic version of Lialda, a drug for ulcerative colitis that represented 9% of the company's sales in the first half of 2016. Shire vowed to appeal the ruling. Shire is a Long-Term Buy.

Technology update

Apple ($114; AAPL) shares rallied in the week leading up to the launch of the iPhone 7 on Sept 16. AT&T ($41; T), Sprint ($6; S), and T-Mobile US ($46; TMUS) said iPhone preorders grew from last year; Verizon Communications ($52; VZ) reported orders similar to 2015 levels. Aggressive promotions offered by wireless carriers likely helped drive the iPhone upgrades. Before the devices hit store shelves, Apple had already sold out of its iPhone 7 Plus model. Apple is a Buy and a Long-Term Buy. AT&T is rated A (above average). Sprint and Verizon are rated B (average).

Questions about tax strategies continue to dog multinational technology companies like Apple and Alphabet ($805; GOOGL). Apple's iTunes unit reportedly paid an additional $118 million in taxes to Japan after allegedly underreporting its profits. In August, the European Union ordered Apple to pay $14.5 billion in back taxes to Ireland. Separately, Indonesia said it would seek five years of back taxes from Alphabet after it found the internet giant paid less than 0.001% of the taxes it owed in 2015. Alphabet is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Comcast ($67; CMCSa) CEO Brian Roberts announced plans to launch a wireless service by the middle of 2017. The hybrid service will utilize both Verizon Communications' ($52; VZ) network and Comcast's 15 million Wi-Fi hotspots. A 2011 deal with Verizon gives Comcast the option of leasing the telecom's airwaves, presenting the cable giant with a relatively inexpensive path toward entering the wireless business. Comcast plans to bundle the wireless service with its cable and home-internet services. In other news, Comcast's NBCUniversal slashed 200 jobs at DreamWorks Animation, acquired in August for $3.8 billion. Comcast is a Focus List Buy and a Long-Term Buy.

Disney ($92; DIS) eliminated 250 jobs in its consumer-products and interactive-media unit. Many of the cuts stemmed from Disney's decision to license its movie characters to video-game makers rather than design the games itself. Consumer products and interactive media was the sole Disney unit to post lower sales (down 1%) and operating income (down 7%) in the June quarter. Disney is a Long-Term Buy.

Kroger ($31; KR) approved an additional $500 million in stock buybacks, bringing its authorized repurchase program to $892 million, or 3% of its share count. Stock repurchases have reduced Kroger's share count 20% over the past five years. Kroger, earning a Quadrix Value rank of 86, is a Buy and a Long-Term Buy.

U.S. lawmakers grilled Wells Fargo ($46; WFC) CEO John Stumpf, who appeared before the U.S. Senate Banking Committee on Sept. 20. Earlier this month, Wells Fargo agreed to pay $190 million to end a probe into allegations it opened accounts without client approval in order to meet sales goals. The bank also fired 5,300 workers, though no senior executives have lost their jobs. Up to 2 million customers may have been affected.

Some lawmakers called for the resignation of Stumpf, who admitted learning of the fraudulent practices in 2013. Stumpf refused to promise that he would take measures to claw back the pay of executives who benefited from the fraudulent accounts. The head of Wells Fargo's retail-banking operation, Carrie Tolstedt, received more than $20 million in bonuses over the past five years; she announced her retirement earlier this year and is due to receive a payout approaching $125 million. The odious affair seems unlikely to affect the bank's dividend. Wells Fargo, yielding 3.3%, is rated B (average).

Earnings updates

Intel ($37; INTC) raised its September-quarter revenue guidance, with the midpoint of its new outlook calling for $15.6 billion, or 8% growth. The consensus stood at $14.90 billion at the time of the announcement. Intel says it sees stronger personal-computer demand, while also noting that PC makers are restocking inventories. Intel shares rallied on the news. Intel is rated A (above average).

FedEx ($174; FDX) earned $2.90 per share excluding special items in the August quarter, up 20% and $0.09 above the consensus. Revenue also surpassed analyst expectations, growing 20%. Management raised its profit outlook for fiscal 2017 ending May, adding that it expects growth of U.S. gross domestic product to accelerate in 2017. The stock rose on the report. FedEx is rated A (above average).

Oracle ($40; ORCL) said August-quarter earnings per share rose 4% to $0.55 excluding special items, missing the consensus by $0.03. Revenue crept 2% higher to $8.60 billion, also below analyst expectations. Sales of new software licenses slipped 11% to $1.03 billion, but cloud-computing sales rose 59% to $969 million.

Hoping to build on that momentum, Oracle unveiled new cloud-based technology, aimed at undercutting similar services provided by Amazon.com ($790; AMZN). Analysts remain skeptical that Oracle can take on Amazon's web-services unit, which generated an estimated $7.9 billion in revenue last year, reported The Wall Street Journal. Oracle's guidance for the November quarter fell short of the consensus. Both Oracle and Amazon.com are rated B (average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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