Portfolio Review


Global economic engine sputters
The World Bank predicts the global economy will contract 2.9% this year, down from its March forecast of a 1.7% decline. The bank sees gross domestic product (GDP) falling 4.2% for high-income countries, including a 3.0% decline in the U.S.

The grim forecast increases pressure on the industrial sector. U.S. industrial production has declined in four consecutive quarters, each plunge steeper than the last. Production is not expected to turn positive before the December quarter.

Bellwether Caterpillar ($33; CAT) said retail sales of machines slumped 43% in the three months ended May, including a 57% swoon in North America. Government stimulus spending will help, but it funds long-term projects, too long perhaps for investors expecting a quick turnaround. And the sector is not known for its swift recoveries. During the last recession, manufacturing inventories contracted for 22 straight months before re-establishing growth. Caterpillar is rated Neutral.

Aerospace update
A U.S. House committee voted to boost funding for radar-evading F-22 fighter jets by $369 million, keeping the production lines running with the intention of eventually purchasing 20 more of the Lockheed Martin ($81; LMT) planes. The decision goes against recommendations made by Defense Secretary Robert Gates, who wants to move away from older planes in favor of newer programs. Congressional rivals hope to block the funding.

A key subcontractor on the F-22, Boeing ($44; BA) also won Congressional approval to build eight more C-17 cargo planes for about $2.2 billion. However, troubles continued for the company’s new 787 Dreamliner, already two years behind schedule. The discovery of structural weakness in the passenger plane’s body will delay the test flight, planned for June 30. Boeing, already facing the threat of massive order cancellations and under fire for delays with the 787, did not announce a new date for the first flight or plane delivery. The F-22 issue is far from decided, but Long-Term Buy Lockheed stands to benefit if Congress extends the F-22 program. Neutral-rated Boeing seems to take a step backward for every two steps forward.

Health-care report
A U.S. court found that Hospira’s ($36; HSP) generic version of cancer drug Eloxatin does not infringe on the patent held by Sanofi-Aventis ($33; SNY). Hospira has already gained tentative approval to market its version of the drug, which generated sales of $1.8 billion for Sanofi last year. Hospira’s stock surged 6% on the news. Hospira is a Buy . . . Biogen Idec ($49; BIIB) reported that a ninth multiple sclerosis patient has contracted a rare brain disease while taking Tysabri. Although this marks the second case discovered in June, the number of incidents remains well below risk levels printed on the warning label. Biogen is a Focus List Buy and a Long-Term Buy . . . The drug industry agreed to offer senior citizens and the government discounts worth about $80 billion. Drugmakers will cut prices by 50% on prescriptions that fall into a gap in Medicare coverage. The plan could slow migration to generic drugs and drive some older Americans to continue filling prescriptions that in the past were too expensive. However, one study estimated that the plans will probably reduce profits at many of the largest drugmakers. Bristol-Myers Squibb ($20; BMY) and Pfizer ($15; PFE) generate 30% to 35% of revenue from Medicare, while Eli Lilly ($34; LLY), AstraZeneca ($44; AZN), and Merck ($25; MRK) rely on Medicare for about 25% of sales. AstraZeneca is a Buy and a Long-Term Buy. Eli Lilly, Bristol-Meyers, Merck, and Pfizer are rated Neutral . . . Medtronic ($33; MDT) raised its quarterly dividend 9% to $0.205 per share, payable July 31, and authorized the repurchase of up to 60 million shares, or more than 5% of shares outstanding. Medtronic is rated Neutral . . . Johnson & Johnson ($55; JNJ) won approval from antitrust regulators to proceed with its $970 million acquisition of Cougar Biotechnology ($43; CGRB). J&J is a Focus List Buy and a Long-Term Buy.

Technology roundup
Oracle ($20; ORCL) earned $0.46 per share excluding special items in the May quarter, down 2% but $0.02 ahead of the consensus. Excluding currency fluctuations, per-share profits would have risen 9%. Sales fell 5% to $6.86 billion, though they climbed 4% at constant currency. Oracle said it took market share from its chief rival, SAP ($40; SAP), in every geographic region. Oracle is a Buy and Long-Term Buy.

According to a published report, South Korea’s antitrust regulators have charged Qualcomm ($44; QCOM) with unfair licensing terms for its patents, violations broader than those announced by the company in March. Regulators are expected to announce their decision in July. South Korea is Qualcomm’s largest market, accounting for about 35% of company sales. Qualcomm is a Long-Term Buy.

Apple ($134; AAPL) sold more than a million units of the new iPhone in the first weekend after its release. In other news, CEO Steve Jobs received a liver transplant in April. Jobs has been on medical leave, but the company said he would be back on the job by the end of June. Apple is rated Neutral.

DirecTV speeds up buybacks
DirecTV ($24; DTV) provided some additional details about its
$2 billion share-repurchase plan, which faces an interruption because of the pending merger with Liberty Media Entertainment Group ($26; LMDIA). Federal regulations prohibit DirecTV from repurchasing shares between the time a merger proxy is sent to investors and the vote, which is planned for later this year. In the weeks leading up to that blackout, DirecTV said it will accelerate weekly share buybacks from roughly 1 million shares to 4 million to 6 million shares. DirecTV has about a billion shares outstanding and has lowered that share count by 25% over the last three years. DirecTV is a Focus List Buy and a Long-Term Buy.

News digest
American Express ($23; AXP) repaid the $3.39 billion it borrowed last fall under the U.S. Treasury’s Troubled Asset Relief Program. Amex is rated Neutral.

Harris ($28; HRS) completed its purchase of the air-traffic-control business of SolaCom Technologies. Harris is rated Neutral.

Comcast ($14; CMCSA) bought Hearst’s 50% interest in New England Cable News to take full control of the regional 24-hour news network. Comcast is a Buy and a Long-Term Buy.

Walgreen ($30; WAG) earned $0.53 per share excluding special items in the May quarter, down 9% and $0.03 short of the consensus on 2.8% growth in same-store sales. Walgreen is rated Neutral.

Monsanto’s ($79; MON) per-share profits from continuing operations fell 14% to $1.25 in the May quarter but topped the consensus. Monsanto is rated Neutral.

No changes were made this week in Dow Theory Forecasts.

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