Portfolio Review


Three changes to Buy List

Already a Long-Term Buy, drug distributor AmerisourceBergen ($20; ABC) is being added to the Buy List. June-quarter profits exceeded expectations, jumping 20%, and consensus estimates for this year and next year are on the rise. Wall Street expects per-share-profit growth of 5% in the September quarter and 10% in the year ending September 2010, targets Amerisource seems capable of exceeding. At just 12 times trailing earnings, Amerisource trades at a 17% discount to its three-year average valuation. Amerisource, with its mix of growth, value, and defensive characteristics, seems capable of a move to $24 or $25 over the next year.

Airgas’ ($45; ARG) stock has rebounded 71% from March lows. However, sales and profits fell in the March and June quarters, and the weak economy could be setting up Airgas for continued pricing pressure and declining volumes in coming quarters. The worsening prospects are reflected in Quadrix®, as the company’s Overall, Performance, and Momentum scores have declined in recent months. Airgas is being downgraded to Neutral.

St. Jude Medical’s ($38; STJ) sales and profits slowed sharply in the June quarter as the company proved less resilient than we had hoped in the face of economic weakness. The Quadrix Overall score has dipped to 79 — not terrible, but not great, either. Although St. Jude’s long-term prospects still look solid, we prefer other health-care stocks for the next 12 months. We are dropping St. Jude from the Buy List, but it remains a Long-Term Buy.

A tale of two TV tactics

Comcast ($15; CMCSA) and DirecTV ($24; DTV) approached the June quarter with different game plans. One chose profits over subscriber growth, while the other discounted in hopes of capturing market share. Their results were as dissimilar as their strategies.

Comcast’s per-share earnings surged 57% to $0.33 per share, $0.07 above the consensus estimate, on 5% revenue growth. Average total video revenue per customer rose 7% to $118, as more viewers selected premium products. But subscriber growth sputtered, as the number of new customers fell 60% from the March quarter.

DirecTV’s net U.S. subscriber additions soared 74% to 224,000. But per-share profits were flat at $0.40 per share, $0.03 below Wall Street expectations. Heavy use of pricing promotions cut into average monthly revenue per subscriber, which rose an anemic 2%.

We still like both companies because of their strong growth potential and attractive valuations. Comcast and DirecTV are Focus List Buys and Long-Term Buys.

Financial review

American International Group ($25; AIG) earned $2.57 per share in the June quarter, including $1.01 per share in hedging gains, versus a $10.15-per-share loss a year earlier. Excluding the gains, AIG earned $1.56 per share. Wall Street had anticipated profits of $1.33 per share. At the end of June, AIG said it owed the federal government $44.8 billion and had another $42.8 billion of preferred stock outstanding. Neutral-rated AIG continues to sell off assets in an effort to pay back the government . . . Morgan Stanley ($30; MS) agreed to pay $950 million to acquire warrants issued last fall as part of a government bailout program. The government earned a profit of $1.27 billion on its $10 billion investment in Neutral-rated Morgan Stanley . . . Manulife Financial ($20; MFC) slashed its quarterly dividend in half to C$0.13 per share, payable Sept. 13. Manulife is rated Neutral.

Health-care update

Hospira ($40; HSP) won approval from the Food and Drug Administration to market a generic injectable version of chemotherapy drug Eloxatin. The branded version sold by Sanofi-Aventis ($33; SNY) generated about $1.4 billion in U.S. sales last year. Sanofi-Aventis said it will appeal the June court decision that Hospira’s drug does not infringe on the Eloxatin patent. Hospira is a Focus List Buy and a Long-Term Buy . . . Elan ($8; ELN) sued Biogen Idec ($48; BIIB) in an effort to keep its longtime partner from taking control of multiple sclerosis drug Tysabri. Biogen had previously accused Elan of a “material breach” of the Tysabri marketing agreement signed in 2000. Biogen alleges that as part of a larger deal, Elan gave Johnson & Johnson ($60; JNJ) its option to purchase Biogen’s stake in the drug should Biogen get taken over. Biogen and J&J are rated Focus List Buy and Long-Term Buy.

Technology roundup

Microsoft ($23; MSFT) agreed to sell its digital-advertising firm, Razorfish, to Publicis Groupe for $530 million in cash and stock. Microsoft will own about 3% of Publicis after the deal closes. In other news, a court ruled that Microsoft must pay $290 million in damages for infringing a Canadian software firm’s patent. The ruling could possibly prevent Microsoft from selling portions of its Office suite of business software, although the stock’s lack of reaction to the news suggests few expect the ruling to stick. Microsoft plans to appeal. Microsoft is rated a Long-Term Buy . . . Antitrust scrutiny by regulators in the U.S. and in Europe could delay Oracle’s ($21; ORCL) proposed takeover of Sun Microsystems ($9; JAVA) beyond Oracle’s target completion date of the end of August. Oracle is a Buy and Long-Term Buy. Sun Microsystems is rated Neutral . . . In the July quarter, Applied Materials ($13; AMAT) broke even excluding special items, down from a per-share profit of $0.17 in the year-earlier period. The consensus estimate projected an $0.08-per-share loss. Sales declined 39%. Applied Materials is rated Neutral . . . Hewlett-Packard ($43; HPQ) said it will collaborate with the government in Chongqing, China, to develop a second global manufacturing hub for notebook computers. This news from H-P refutes reports that H-P had partnered with a Chinese company. H-P is a Buy and Long-Term Buy . . . BMC Software ($34; BMC) acquired MQSoftware, a privately held maker of business-management software, for an undisclosed price. BMC Software is a Focus List Buy and a Long-Term Buy . . . Accenture’s ($36; ACN) shareholders approved transferring the company’s country of incorporation to Ireland from Bermuda. Accenture is a Buy and a Long-Term Buy . . . Qualcomm ($45; QCOM) says a judge dismissed a class-action antitrust lawsuit filed against the company. Qualcomm is a Long-Term Buy.

News digest

Boeing ($45; BA) says a new flight and delivery schedule for its 787 Dreamliner passenger jet, already two years behind schedule, is “just weeks away.” In June, the company pushed back a test flight to fix a structural problem. Boeing is rated Neutral.

Off the coast of Angola, Chevron ($68; CVX) says it discovered “significant” natural gas and liquid hydrocarbons. Chevron is a Long-Term Buy.

PepsiCo ($57; PEP) plans to buy Amacoco, Brazil’s largest maker of packaged coconut-water drinks, for an undisclosed amount. PepsiCo is rated Neutral.

CA ($22; CA) is being added to the Focus List. AmerisourceBergen ($20; ABC) is being added to the Buy List. St. Jude Medical ($38; STJ) and Airgas ($45; ARG) are being removed from the Buy List. Vanguard Short-Term Investment-Grade ($10.39; VFSTX) now represents 32.5% of the Buy List.

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