Portfolio Review: January 2, 2017


FDA OKs Biogen drug for infants

The Food and Drug Administration approved Biogen's ($289; BIIB) Spinraza for spinal muscular atrophy, which strikes about one in 10,000 infants. The disease is caused by a protein that weakens the muscles, including those used to breathe and swallow. Spinraza marks the first drug approved to treat this illness. The new drug, which is injected into spinal fluid, could reach $2 billion in annual sales at its peak. While only about 9,000 U.S. babies suffer from spinal muscular atrophy, a treatment that lengthens lives could boost that number.

In other news, at least one Wall Street analyst expects Biogen to reduce its 2017 earnings-per-share target by $1 because of the pending spin-off of its hemophilia business as Bioverative (BIVV) in February 2017 and slowing growth in sales of Tecfidera, the multiple sclerosis drug that accounts for a third of Biogen's revenue. While Tecfidera revenue rose 10% in the September quarter from the year-earlier period, powered by a 12% gain in the U.S., revenue outside the U.S. rose just 3% year-over-year and declined slightly from the June quarter. U.S. growth stems from price increases; prescriptions fell 6% in the September quarter from the June quarter.

While some reduction in Biogen's profit target is likely because of the spin-off, we'll withhold judgment about Tecfidera trends until we hear more from the company — possibly around the time of Bioverative's investor day, scheduled for Jan. 6.

Biogen shares have fallen 11% since early November and currently trade at just 14 times the 2017 earnings estimate of $20.95 per share, a 43% discount to the industry median. At these levels, the Forecasts likes the risk-reward tradeoff and views these shares as one of the better values in the biotechnology sector. However, we could sell Biogen if its new-product pipeline suffers any disappointments. Biogen is a Buy and a Long-Term Buy.

Corporate roundup

Alphabet's ($805; GOOGL) Google unit plans to launch two new smartwatches in the first quarter of 2017. The new devices will include the Android Wear 2.0 operating system, which will then be offered as an update to owners of existing Android Wear watches. The new version of Android Wear includes apps that can work even if not paired with a phone. 

Researcher IDC expects Apple's ($117; AAPL) smartwatch to capture 52% of shipments in 2016, versus 23% for Android Wear. Alphabet hopes its new watches can help boost share in a market plagued by sluggish demand (shipments down more than 50% year-over-year in the third quarter), as consumers wait for new models with improved functionality. Alphabet is a Focus List Buy and a Long-Term Buy. Apple is rated Buy and Long-Term Buy. 

Disney's ($104; DIS) sci-fi spin-off Rogue One: A Star Wars Story has collected $318 million in its first 11 days at the U.S. box office, which includes Christmas weekend. While Rogue One hasn't lived up to the high standard set by The Force Awakens, a Star Wars movie released just before Christmas in 2015, its 11-day total is good for sixth-highest ever. Rogue One had already brought in an additional $255 million overseas before its openings in South Korea on Dec. 28 and China on Jan. 6.

For Disney, the Star Wars blockbuster is just the latest in a string of hits — including Finding Dory, Captain America: Civil War, The Jungle Book, and Zootopia — released in 2016. Disney's movie unit generated $9.44 billion in revenue in the year ended September, up 28%. Studio entertainment accounted for 17% of sales and profits last year, up from 13% to 14% in fiscal 2015.

Disney may have trouble matching last year's record results from the movie business in fiscal 2017. However, the consensus projects per-share-profit growth of just 4% next year, which seems too conservative, given Rogue One's strong performance and growth at the company's other segments. The unexpected death of Star Wars icon Carrie Fisher on Dec. 27 could complicate future movies, but we expect Disney to adjust well. Disney is a Long-Term Buy.

United Parcel Service ($115; UPS) expects to ship 1.3 million packages on Jan. 5, known as National Returns Day, the day the company expects returns to online sellers will peak. Strength in online commerce was the biggest story of the holiday shopping season, with internet sales on both Black Friday and Cyber Monday topping $3 billion, setting new single-day records, according to Adobe Digital. Just about every shopping day this holiday season has seen at least $1 billion in e-commerce sales.

While retailers scramble for the online business, FedEx ($188; FDX) and UPS stand to benefit regardless of which stores attract the most shoppers — and how many of those shoppers decide to return their purchases. FedEx, trading at 16 times trailing earnings, a 19% discount to the industry median, is a Focus List Buy and a Long-Term Buy. UPS is rated B (average).

Economic trends paint bright picture

In October, the S&P Case-Shiller home-price index rose to an all-time high, up 0.6% from September and 5.1% from a year earlier, with markets in the West posting the biggest gains. All 20 of the cities in the Case-Shiller 20-city composite have seen prices rise over the last year.

Higher home prices are good news for builders such as D.R. Horton ($28; DHI), which have stepped up construction in recent months to meet rising demand. Credit a combination of a low inventory of homes and strong consumer demand for the increase in prices. If mortgage rates rise, as many suspect, first-time homebuyers may have trouble financing homes, which could affect demand in the year ahead. However, with both wages and apartment-rental rates already on the rise, we believe demand will remain solid, as long as mortgage rates don't rise too quickly. D.R. Horton is a Buy and a Long-Term Buy.

The Conference Board Consumer Confidence Index jumped to 113.7 in December, up 4% from an upwardly revised November reading and 18% from the same period a year earlier, reaching its highest level since 2001. These numbers corroborate December gains in the University of Michigan Consumer Sentiment Index.

Consumers say they expect improvement in business conditions, a stronger labor market, and continued gains in wages. According to the Conference Board, consumer confidence has been rising since August.

While consumer confidence alone can't keep stock prices on the upswing, the latest survey found an increasing percentage of consumers expecting to purchase cars and appliances over the next year. Given that consumers account for more than two-thirds of economic activity, if they follow through on their spending plans, companies throughout the business cycle should benefit. Keep an eye on confidence readings over the next couple months to assess whether the December jump reflects a lasting gain in faith, or simply a post-election honeymoon.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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