Follow-up on Monitored Stocks


Don't give up on Manitowoc, LabCorp
Manitowoc ($10; MTW) completed the sale of its shipbuilding segment, with the proceeds of $120 million slated for debt reduction. The maker of cranes and food-service equipment took on about $2.5 billion of debt in its October acquisition of Enodis, and investors worry about Manitowoc’s ability to service its debt load in a weakening environment for crane sales. Demand for heavy cranes held up well in the September quarter, but weakness in commercial construction could crimp results in 2009 and 2010.

The consensus estimate for 2009 per-share earnings is $2.78, down from the $3.23 expected for 2008. But the lowest estimate for 2009 is $1.80, reflecting uncertainty regarding how badly Manitowoc will be hurt by the global economic downturn. Even based on the low estimate, which seems unduly pessimistic, Manitowoc is cheap at less than six times expected earnings. While we intend to keep a close eye on Manitowoc, the stock seems capable of a rebound to at least $13 or $14. On that basis, the stock remains a Focus List Buy and a Long-Term Buy.

Citing consumers delaying or cutting back on medical purchases, Laboratory Corp. of America ($61; LH) lowered sales and profit expectations for 2009. Still, LabCorp reaffirmed 2008 guidance, projecting at least 9% profit growth and a 6% to 9% rise in operating cash flow.

While the 2009 targets are disappointing, LabCorp has a history of providing conservative guidance, and the roughly 6% profit growth forecast for 2009 is likely to compare favorably to the average U.S. company. The forecast does not include stock repurchases, and LabCorp has been buying back shares aggressively, with the share count shrinking nearly 8% in the 12 months ended September. With cash flow climbing, buybacks should continue. The stock sells at 13 times the low end 2009 estimate, well below the five-year norm of 16. The stock could be choppy, but a rebound to $71 to $74 still seems attainable in the next six to 12 months. LabCorp is a Buy and a Long-Term Buy.

Financial review
In an effort to keep mortgage rates low, the Federal Reserve plans to buy up to $500 billion of bonds guaranteed by government-sponsored entities Fannie Mae ($1; FNM), Freddie Mac ($1; FRE), and Ginnie Mae. Stabilizing the housing sector is one key to turning around the economy.

Credit-rating agency Standard & Poor’s expects loan losses to rise this year and into 2010. S&P also expects the number of bank failures to increase. At this time, the Forecasts is avoiding most financials, no matter how cheap they look. The only financial stock we recommend is insurer Aflac ($46; AFL), a Long-Term Buy.

Fifth Third Bancorp ($8; FITB) is the latest bank to dip into the $700 billion coffer provided by the Troubled Asset Relief Program. The U.S. Treasury will give Fifth Third $3.4 billion in exchange for preferred stock and a 10-year warrant that lets the government buy up to 43.6 million shares (nearly 8% of common shares outstanding) at $11.72 per share. Fifth Third is rated Neutral.

Bank of America ($14; BAC) completed a $19.4 billion all-stock acquisition of Merrill Lynch to form the largest U.S. bank, with assets of $2.7 trillion. To pay for the deal, valued at $50 billion when first announced in September, Bank of America will slash up to 35,000 jobs over the next three years as part of a plan to cut annual expenses by $7 billion. Bank of America is rated Neutral. Merrill Lynch no longer trades and is being dropped from coverage.

Wells Fargo ($28; WFC) finalized its $12.7 billion purchase of Wachovia, the prize of a bitter bidding war with Citigroup ($7; C). The deal makes Wells Fargo the country’s fourth-biggest bank as measured by assets and gives it more than 6,600 branches in 39 states. The deal will also spark a massive write-down — estimated at $71.4 billion — for toxic investments inherited from Wachovia. Wells Fargo and Citigroup are rated Neutral.

Health-care report
The Food and Drug Administration approved 24 new drugs in 2008, more than it approved in any of the three previous years. A drug review typically takes 10 months to complete, though some can be rushed through in six months. But delays in the review process have become more common, with the agency missing 20% of its deadlines in the first 10 months of 2008. By bolstering its staff, the FDA hopes to cut delays in half this year.

Johnson & Johnson ($60; JNJ) recalled a version of its Duragesic pain patches because of tears in the lining. Inside the patch is a gel that can induce respiratory problems or death if exposed directly to the skin. J&J is a Focus List Buy and a Long-Term Buy.

Walgreen’s ($27; WAG) same-store sales grew 4.9% in December, with front-end sales up 0.4% and pharmacy sales up 8.5%. Walgreen is a Neutral.

News roundup
Dow Chemical ($16; DOW) hopes to recover up to $2.5 billion in a lawsuit against Petrochemical Industries after the state-owned Kuwait company bailed on a planned $17.4 billion joint venture. The proceeds would have helped Dow finance its own $15.3 billion acquisition of Rohm & Haas ($62; ROH). The chemical giant said it still plans to buy Rohm & Haas, but not in time to meet a Jan. 10 deadline. Dow said it needs to issue equity before doing the deal, and some market watchers expect the merger to be renegotiated at a lower price. Dow is rated Neutral . . . Intel ($15; INTC) missed the December-quarter revenue target it had already lowered sharply in November. Intel posted sales of about $8.2 billion, down 23% and $500 million below the low end of the earlier guidance. As businesses and consumers delay computer upgrades, computer makers are working down inventory levels, diminishing opportunities for Intel and other component companies. Intel is rated Neutral . . . December sales fell 32% at Ford Motor ($3; F) and 31% at General Motors ($4; GM), with trucks and SUVs leading the retreat despite a decline in gas prices. Total U.S. auto sales declined more than 35% for the month. The bleak December ends the worst year for new car and truck sales since 1992. Ford and GM are rated Underperform . . . Oshkosh ($12; OSK) won a contract with the Defense Logistics Agency to supply replacement parts for military trucks. The deal is worth up to $1.12 billion over 10 years. Oshkosh is rated Neutral . . . Steve Jobs, co-founder and CEO of Apple ($93; APPL), said a hormone problem contributed to his weight loss over the past year and that he is healthy enough to continue leading the computer company. His frail appearance and decision to forego his customary keynote address at the annual Macworld conference sparked fears that Jobs, 53, suffered from a recurrence of cancer. Neutral-rated Apple has enjoyed solid growth. But concerns about a slowdown in tech spending make the stock look fully valued at 18 times projected year-ahead earnings.

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