Portfolio Review


Dreamliner's liftoff has Precision flying

Precision Castparts ($90; PCP) turbulent stock performance reflects the troubled saga of a key plane, a story featuring strikes, structural flaws, and order cancelations by frustrated airlines. The latest twist struck a more upbeat chord and has revived the shares. Boeing ($49; BA) said its long-awaited 787 Dreamliner would fly this year and that deliveries would commence in the December 2010 quarter. Shares of both Boeing and Precision soared on the news.

At peak production, the 787 program could add more than $500 million, or about 8%, to Precision’s annual revenue. From engines to fasteners to parts of the airframe, Precision Castparts is expected to supply about $5 million to $6 million in components for each 787 jet.

That revenue slice should rise after Precision completes its $850 million purchase of 787 supplier Carlton Forge Works announced Aug. 26. Carlton makes seamless rolled rings used in aircraft engines and gas turbines, filling a gap in Precision’s product portfolio.

Even after the run-up, Precision’s stock trades at less than
13 times trailing earnings, a 30% discount to the three-year average P/E ratio. Precision is a Buy and a Long-Term Buy. Boeing is rated Neutral.

Health-care report

Surgery might be a better option to clear neck-artery blockages and prevent strokes than less-intrusive options such as angioplasty or the insertion of stents. A study found that patients who had received the newer treatments were three times more likely to have their arteries reclog in five years than those who underwent surgery. The researchers cautioned that more data is needed to measure the full effect of different treatments over time. The Forecasts covers three makers of carotid stents: Johnson & Johnson ($60; JNJ), Abbott Laboratories ($45; ABT), and Boston Scientific ($11; BSX). In other news, J&J strengthened the warning for its HIV drug Intelence, which can cause potentially deadly allergic reactions. J&J also halted development of a longer-acting version of the antipsychotic Risperdal. J&J is a Focus List Buy and a Long-Term Buy. Abbott and Boston Scientific are rated Neutral.

In a clinical trial, AstraZeneca’s ($46; AZN) experimental anti-clotting treatment Brilinta outperformed Plavix, a Bristol-Myers Squibb ($22; BMY) blockbuster that generated $8.6 billion in sales last year. Brilinta patients had a lower incidences of heart attacks, strokes, and death than those taking Plavix. AstraZeneca expects to apply for regulatory approval in the December quarter. In a separate study, AstraZeneca’s cholesterol drug Crestor lowered the risk of heart problems in apparently healthy elderly patients, a development that could widen the treatment’s usage. AstraZeneca is a Buy and a Long-Term Buy. Bristol-Myers is rated Neutral.

Biogen Idec ($49; BIIB) boosted research-and-development spending by $185 million, or 36%, in the first half of 2009. No other large-capitalization U.S. drug or biotech company grew its R&D budget so aggressively. Biogen is a Focus List Buy and a Long-Term Buy.

Cardinal Health ($25; CAH) spun off its medical-products division, distributing 0.5 shares of CareFusion ($20; CFN) for each outstanding share of Cardinal Health common stock. Cardinal Health is rated Neutral.

An analysis of more than 100 studies found that high doses of cholesterol-lowering pills known as statins appear to be just as effective as combined cholesterol drugs sold by Abbott Laboratories ($45: ABT) and Merck ($31; MRK). Combination treatments tend to be more costly and have more side effects than single drugs. Abbott and Merck are rated Neutral.

To settle civil and criminal allegations, Pfizer ($16; PFE) agreed to plead guilty to improperly marketing prescription drugs and pay a record $2.3 billion fine. Pfizer is a Neutral.

Telecommunications update

Following Comcast’s ($15; CMCSA) lead, Time Warner ($27; TWX) and Verizon Communications ($30; VZ) will test television shows on the Web. For its part, DirecTV ($24; DTV) is talking with the TBS and TNT cable networks about adding their shows online. Comcast and DirecTV are Focus List Buys and Long-Term Buys. Time Warner and Verizon are rated Neutral.

In related news, a federal appeals court revoked a Federal Communications Commission (FCC) regulation that prevents cable companies from capturing more than 30% of the U.S. subscription-television market. Intended to foster competition and protect consumers from price gouging, the rule has run afoul of courts before and was thrown out in 2001 before the FCC adopted it again in 2007. The court’s ruling could free up large companies such as Comcast, which already controls about 25% of the U.S. market, to use some of its $4 billion cash hoard for acquisitions.

Tech review

Headwinds persist, but recent results suggest weakness in the computer industry is moderating. Intel ($20; INTC) raised its 2009 sales expectations. The midpoint of the new guidance is $9.0 billion, versus the company’s $8.5 billion forecast in July and the consensus of $8.55 billion. In related news, Dell ($15; DELL) reported earnings of $0.24 per share in the July quarter, down 23% but $0.02 above the consensus. The news isn’t all positive. Global server sales declined 30% in the June quarter to the lowest levels in at least 13 years. However, companies can only defer the replacement of aging equipment for so long, and demand could begin to recover later this year. Intel and Dell are rated Neutral . . . CA ($22; CA) said CEO John Swainson, credited with leading the company back to respectability after an accounting scandal five years ago, will retire by the end of the year. CA is seeking a successor. The company also reaffirmed profit guidance for fiscal 2010 ending March, reflecting growth of 6% to 13%. Shares fell more than 6% following the announcement, but the stock remains attractive for its operating momentum and financial strength. CA is a Focus List Buy and a Long-Term Buy . . . While awaiting approval from European regulators to complete its $7.4 billion purchase of Sun Microsystems ($9; JAVA), Oracle ($22; ORCL) has said it plans to keep Sun’s hardware unit. However, rumors of the unit’s sale continue to swirl, with Hewlett-Packard ($44; HPQ) mentioned as a possible buyer. Sun lost $0.03 per share excluding special items in the June quarter, down from a profit of $0.35 per share in the year-earlier period. The consensus had projected a $0.09-per-share loss. Revenue plunged 31% to $2.63 billion. Both Oracle and Hewlett-Packard are rated Buy and Long-Term Buy. Sun is rated Neutral . . . Microsoft ($24; MSFT) has appealed a patent ruling that blocks future sales of popular word-processing software Word. In other news, Microsoft slashed the price of its high-end Xbox 360 video-game console in an effort to stay competitive with lower-cost rivals. Microsoft is rated a Long-Term Buy.

News roundup

Disney ($26; DIS) said it will buy Marvel Entertainment ($48; MVL) for about $4 billion in cash and stock. Disney acquires a stable of recognizable characters that it could incorporate into its theme parks and resorts. The deal also gives Disney a rich portfolio of intellectual property and new opportunities for licensing, which represents more than 40% of Marvel’s revenue. Disney is rated Neutral . . . Wells Fargo ($26; WFC) said it plans to repay its $25 billion in federal aid without issuing more stock. Wells Fargo is rated Neutral . . . Bank of America ($16; BAC) has offered to repay at least a portion of the $20 billion in federal aid it received in connection with the acquisition of Merrill Lynch. Bank of America is rated Neutral . . . Harris ($34; HRS) hiked its quarterly dividend 10% to $0.22 per share, payable Sept. 18. Harris is rated Neutral . . . Altria Group ($18; MO) raised its quarterly dividend 6% to $0.34 per share, payable Oct. 9. Altria is rated Neutral . . . Standard and Poor’s will add Airgas ($45; ARG) to the S&P 500 Index in place of Cooper Industries ($33; CBE), which is moving its headquarters to Ireland. Cooper and Airgas are rated Neutral . . . eBay ($22; EBAY) agreed to sell a 65% stake in online phone unit Skype to a group of private investors for $1.9 billion. eBay is rated Neutral.

No changes were made this week in Dow Theory Forecasts.

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