Portfolio Review: January 23, 2017


Patents and prices shape drug battles

Biogen ($284; BIIB) agreed to make an up-front cash payment of $1.25 billion to Forward Pharma ($27; FWP) in a licensing pact covering multiple sclerosis drug Tecfidera. The two companies remain pitted against each other in a patent lawsuit that will determine how much Biogen must pay Forward Pharma in royalties on future Tecfidera sales. Still, the deal cleared up some uncertainty for a drug crucial to Biogen. Tecfidera accounted for 35% of the company's sales in the nine months ended September. The stock, which rose on news of the deal, is a Buy and a Long-Term Buy.

The U.S. Supreme Court agreed to hear a dispute between Amgen ($156; AMGN) and Novartis ($72; NVS) concerning the approval process for biosimilar drugs. Novartis began selling Zarxio, a biosimilar version of Amgen's Neupogen that increases white blood cells, in September 2015. Amgen seeks to halt Zarxio sales because Novartis failed to share information concerning its biosimilar application; Novartis asserts that it wasn't obligated to give Amgen any data. Amgen is a Buy and a Long-Term Buy. Novartis is rated C (below average).

CVS Health ($84; CVS) slashed the price of a rival generic version of Mylan's ($37; MYL) EpiPen. CVS is now selling a two-pack of the Adrenaclick generic, an emergency allergy shot made by Impax Laboratories ($12; IPXL), at about $110, down from its previous price of $200. The EpiPen two-pack has a list price of about $650. Mylan said in December it will offer its own generic version at $300 per two-pack. CVS is a Long-Term Buy. Mylan is rated A (above average).

Technology update

Global shipments of personal computers slipped 2% in the December quarter, says industry researcher IDC, bringing to a close the fifth straight year of lower shipments. PC shipments fell 6% in 2016, an improvement from the 10% decline in 2015. IDC says slower growth for smartphones and tablets is easing contraction within the PC market. Apple's ($120; AAPL) Mac shipments slumped 10% last year, according to IDC, causing its market share to slip to 7.1% from 7.4%. Apple will disclose its December-quarter results on Jan. 31.

Amid sluggish sales for many of its devices, Apple seeks to expand its portfolio of streaming-media content. Apple has reportedly entered talks to acquire original TV shows and movies that it would offer to its Apple Music subscribers. Apple Music says most of its 20 million monthly subscribers pay for the service, versus rival Spotify's 40 million paying subscribers. In other news, Apple plans to raise App Store prices up to 25% in the U.K. to combat unfavorable currency trends. In October, Apple increased prices on Macs and iPhones in the U.K. Apple is a Buy and a Long-Term Buy.

Continuing efforts to rein in costs, Alphabet ($829; GOOGL) scrapped Titan, a project that beamed the internet from drones. The company said it will keep dreaming up ways to bring the internet to remote parts of the world. Alphabet acquired Titan in 2014 for an undisclosed sum. Alphabet is a Focus List Buy and a Long-Term Buy.

Airlines score with airfare mulligan

JetBlue ($21; JBLU) raised prices $3 on one-way U.S. flights, a move quickly matched by several other U.S. airlines in overlapping markets, including Alaska Air Group ($93; ALK) and Southwest Airlines ($50; LUV). JetBlue's successful rate hike reflects strong travel demand and comes one week after Delta Air Lines' ($50; DAL) attempt to boost fares $2 to $5 on one-way domestic flights failed to gain traction. About half of the attempts to raise U.S. airfares in the past year have failed, say analysts at J.P. Morgan Chase ($84; JPM). Southwest Airlines is a Focus List Buy and a Long-Term Buy.

Separately, Alaska Air Groupsaid it plans to report an $82 million charge for the December quarter to reflect costs associated with its $2.6 billion acquisition of Virgin America. Alaska Air is a Buy and a Long-Term Buy.

Earnings reports

Big banks

The S&P 500 financials sector index has surged 15% since the U.S. presidential election on Nov. 8, well ahead of the next best sector, telecom services, up 11%. Bank stocks briefly extended their rally on solid December-quarter results, lifted by the continuation of robust loan growth, a surge in trading activity, and the promise of higher interest rates. But banks soon faltered, possibly due to fears the recent gains may have come too far, too fast.

Another factor could be the drop in bond yields, with the 10-year Treasury yield closing at 2.33% on Jan. 17, its lowest level since Nov. 29. Lower bond yields could reflect diminished expectations for higher inflation, as enthusiasm fades that the new administration can expediently lower taxes and boost spending.

J.P. Morgan Chase ($84; JPM) said December-quarter earnings per share jumped 20% to $1.58 excluding a one-time tax benefit, topping the consensus by $0.14. Revenue advanced 2%, with growth driven by J.P. Morgan's investment and commercial banks. Results benefited from higher trading activity, wider deposit spreads, and loan growth. Mortgage originations climbed 29% to $29.1 billion.

J.P. Morgan also reported lower legal costs, though it has yet to get completely clear of the legal thicket. In January the bank agreed to pay $55 million to settle claims that it discriminated against minority mortgage borrowers by charging higher fees and interest rates. J.P. Morgan is a Long-Term Buy.

Bank of America ($23; BAC) grew earnings per share 48% to $0.40 in the December quarter. Increased trading activity and cost cuts helped drive profit growth. Revenue increased 2%. A massive deposit base makes Bank of America particularly sensitive to interest rates. Management plans to increase stock buybacks in the first half of 2017. Bank of America is rated A (above average).

Wells Fargo's ($54; WFC) per-share profits slipped 4% to $0.96 in the December quarter, missing the consensus estimate of $1.00. Revenue held flat as wholesale banking (up 9%) and wealth and investment management (up 3%) offset weakness at the scandal-plagued community bank (down 5%). Wells Fargo said checking-account openings fell 40% and credit-card applications 43% in December after details emerged that bank employees opened up to 2.1 million unauthorized customer accounts. Despite fewer mortgage applications, total loans grew 6% on strong demand for commercial loans. Wells Fargo is rated B (average).

Other bellwethers

For the December quarter, CSX ($37; CSX) said per-share profits rose 2% to $0.49 excluding special items, missing the consensus by a penny. Revenue increased 9% to $3.04 billion, ahead of the consensus, on 4% higher prices and 5% volume growth. The railroad's volume growth was fairly broad, with the strongest gains coming from automotive, up 11%, and coal and fertilizers, both up 8%. CSX says business conditions are gradually improving and it expects March-quarter earnings per share to rise by the low- to mid-teens; analysts projected 13.5% growth at the time of the announcement. CSX is rated B (average).

UnitedHealth Group's ($158; UNH) December-quarter earnings per share jumped 51% to $2.11 excluding special items, topping the consensus by $0.04. Revenue, up 9% to $47.52 billion, also surpassed analyst expectations. The medical-loss ratio, which calculates the percentage of premiums paid on claims, improved to 80.8% from 82.7%. Results benefited from UnitedHealth's retreat from government-operated health exchanges, which have proved unprofitable for the insurer. Continuing its push into providing health-care services, UnitedHealth agreed to pay about $2.3 billion for Surgical Care Affiliates ($57; SCAI), which operates outpatient surgery centers, surgical hospitals, and a sleep center. UnitedHealth is rated A (above average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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