Portfolio Review


AIG's finances far from fixed

Even as American International Group ($14; AIG) continues to sell off assets, CEO Edward Liddy cannot say when the troubled insurer might be able to start repaying more than $170 billion in bailout funds from the federal government, which holds a 79.9% stake in the company.

At the annual meeting in late June, AIG warned that its derivatives portfolio could pile up more losses in coming quarters. AIG now says it could be on the hook for billions of dollars of credit-default swaps for European banks, despite assuring investors otherwise last year. AIG does not know the extent of its liability, and given that many of the swaps have durations of more than five years, it may be years until the company can quantify its exposure.

These new concerns have contributed to the shares plunging 41% since the company enacted a 1-for-20 reverse stock split July 1. The split was designed to prevent the New York Stock Exchange from delisting AIG. In yet another setback, AIG lost its $4.3 billion lawsuit against former CEO Maurice Greenberg, hindering the insurer’s attempt to regain control of tens of millions of shares held by Greenberg’s firm. AIG is rated Neutral.

Health-care update

Johnson & Johnson ($56; JNJ) agreed to spend $1.5 billion to acquire an 18.4% stake in Elan ($7; ELN) and gain access to the company’s promising Alzheimer’s portfolio. For $1 billion, J&J will land the Elan stake and transfer the rights to Elan’s Alzheimer’s program into a new company 51.1%-owned by J&J. The remaining $500 million will fund continued development of bapineuzumab, an experimental drug that may be able to stall the spread of Alzheimer’s. In exchange for the investment, J&J will receive slightly more than 25% of profits from the bapineuzumab collaboration. J&J is a Focus List Buy and a Long-Term Buy.

In a break with Bush administration policy, the U.S. Justice Department now says pharmaceutical companies’ “pay for delay” tactics violate antitrust law. Branded drugmakers will sometimes pay generic firms not to challenge patents in court, thus delaying the introduction of cheaper generic drugs to the market. A law banning the tactic could pressure profits at branded drug companies but benefit firms such as CVS Caremark ($31; CVS), which generate higher profit margins on generic drugs. CVS Caremark is a Focus List Buy and a Long-Term Buy.

Biogen Idec ($44; BIIB) said U.S. regulators will offer an expedited review of the experimental multiple sclerosis drug BIIB017. Biogen is currently enrolling patients in a global Phase III study for the injectable drug. Biogen Idec is a Focus List Buy and a Long-Term Buy.

A study found that Amgen’s ($60; AMGN) experimental osteoporosis drug denosumab helped prevent bone injuries in breast-cancer patients. The company anticipates the Food and Drug Administration will rule on the potential blockbuster by October. Shares jumped on the news. Amgen is rated Neutral.

Eli Lilly ($33; LLY) gained U.S. regulatory approval to market Alimta for treating advanced lung cancer. Eli Lilly is rated Neutral.

Industrial report

Lockheed Martin ($78; LMT) won a $442 million extension to a previously awarded contract for F-35 Joint Strike Fighter jets. The new contract calls for an additional 17 planes. Lockheed also said the Air Force’s $23 million order for 12 missiles gives the company confidence that its $6 billion program for radar-evading missiles won’t be canceled. Lockheed is a Long-Term Buy . . . Boeing ($39; BA) plans to spend $27 billion in Russia over the next 30 years, including $18 billion for titanium purchases. Boeing also said it will spend $580 million in cash and forgive $422 million in debt to acquire the plant of a 787 Dreamliner supplier in an effort to gain more control over production. Boeing is rated Neutral . . . Industrial bellwether FedEx ($54; FDX) says it has seen indications of a recovery in the second half of 2009. The company said internationally transported volumes stabilized in June. In another sign of stabilization, global semiconductor sales rose sequentially in May, though they were down from the year-earlier period. Semiconductors are used in the early stages of the manufacturing process for products ranging from mobile phones to computers to industrial and electronic equipment. While one month does not a trend make, a sustained rise in demand for semiconductors could precede a broader economic recovery. FedEx is rated Neutral.

Corporate roundup

Large U.S. telecommunications companies, such as AT&T ($24; T) and Verizon Communications ($30; VZ), face scrutiny from the Justice Department for allegedly abusing their market power. The department is taking the first steps to review possibly discriminatory deals, such as AT&T’s exclusive service agreement with Apple’s ($135; AAPL) iPhone. AT&T, Apple, and Verizon are rated Neutral . . . Microsoft ($23; MSFT), which has already paid $2.34 billion in fines for European Union antitrust cases in recent years, is reportedly in talks to settle two more EU probes. The investigations relate to Microsoft’s Internet browser, word processing, and spreadsheet software. On a separate front, Microsoft faces new challenges from Google’s ($397; GOOG) attempt to develop a computer operating system that would rival Windows. Google plans to introduce the new operating system on inexpensive netbook laptops in the second half of 2010 and eventually offer it on full-featured computers. Google is rated Neutral . . . Excluding restructuring charges, Alcoa ($9; AA) recorded a loss of $0.26 per share from continuing operations in the June quarter, compared to a $0.66 gain in the prior-year period. Sales plunged 42% to $4.2 billion. Alcoa is an Underperform . . . Family Dollar Stores ($28; FDO) earned $0.62 per share in the May quarter, up 35% and $0.03 above the consensus estimate. Same-store-sales grew 6.2%. The company raised profit guidance for the year ending August. Family Dollar is rated Neutral.

News digest

Chevron ($63; CVX) struck oil off the shore of Angola. Chevron is a Long-Term Buy.

Bank of America ($12; BAC) will pay roughly $713 million in preferred dividends to the U.S. government on Aug. 17. Bank of America is a Neutral.

PepsiCo ($56; PEP) and Pepsi Bottling Group ($34; PBG) plan to invest $1 billion in Russia over the next three years as part of an effort to expand manufacturing and distribution capacity. PepsiCo is rated Neutral.

Data Domain ($34; DDUP) accepted a takeover offer from EMC ($12; EMC) after EMC sweetened its cash bid to $33.50 per share. EMC is rated Neutral.

Teck Cominco ($16; TCK) agreed to sell a 17.2% equity stake to state-owned China Investment Corp. for about $1.5 billion. Teck is a Neutral.

Wells Fargo ($23; WFC) plans to expand the securities operations it inherited from acquisition of Wachovia last year. Wells Fargo is rated Neutral.

No changes were made this week in Dow Theory Forecasts.

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