Portfolio Review


Baxter, TJX in, St. Jude out

Baxter International ($57; BAX) produces medical products, equipment, and a few drugs, with a focus on blood and the circulatory system. The proliferation of the swine flu created a new market for Baxter this year. In October, the European Commission approved Baxter’s Celvapan vaccine for the illness.

Despite 2% lower sales in the six months ended June, per-share earnings rose more than 12%, helped by stringent cost controls. Next year, Wall Street expects 8% sales growth and 13% per-share-profit growth. The stock trades at 16 times trailing earnings, 18% below the three-year average P/E ratio. Baxter is being upgraded to a Long-Term Buy.

TJX ($38; TJX) operates more than 2,500 discount apparel and home-fashion stores, including T.J. Maxx, Marshalls, and HomeGoods. The company has a proven track record (it is on pace for its 15th consecutive year of higher per-share profits) and strong operating momentum (per-share profit growth of at least 17% in the last two quarters). TJX grew same-store sales at least 4% in May, June, July, and August, a period when many rivals saw declines or weaker growth. The consensus projects per-share profits will jump 20% to $2.41 in the year ending January, and estimates are rising.

Trading at 15 times estimated year-ahead earnings, the stock is not exceptionally cheap. But given its growth potential, TJX seems capable of reaching $46 over the next 24 months. TJX earns a Quadrix® Overall score of 96 and is being upgraded to a Long-Term Buy.

St. Jude Medical ($33; STJ) warned that disappointing sales would cause it to fall short of profit expectations for the September quarter. The company reported preliminary per-share earnings of $0.57 to $0.58 excluding special charges, below its previously anticipated $0.61 to $0.63 and the $0.62 consensus. The company expects to release final results Oct. 21.

St. Jude and other medical-device makers face several headwinds, including cutbacks in hospitals’ spending on equipment and a proposed $40 billion tax over the next decade to help fund U.S. health-care reform. Lawmakers have balked at the $15 billion counteroffer made by an industry trade group. St. Jude’s warning calls into question its ability to cope with the pressures, and we are no longer confident the stock can outperform the market. St. Jude is being dropped from the Long-Term Buy List and downgraded to Neutral.

Comcast working on deal with NBC

Comcast ($15; CMCSA) and General Electric ($16; GE) are reportedly discussing a deal to spin off GE’s NBC Universal subsidiary, which includes several cable networks, a movie studio, and theme parks. Under the proposed terms, Comcast would contribute at least $4 billion in cash and its cable-network assets, while GE would transfer its 80% stake in NBC Universal. Comcast would take a 51% stake in the new entity, with GE controlling the balance. A wrinkle in the deal is Vivendi SA, a music company based in France that holds a 20% stake in NBC Universal.

In other news, a regulatory panel estimated the costs for U.S. broadband expansion could reach at least $20 billion, and possibly as much as $350 billion depending on transmission speeds. Even the low end of that estimate dwarfs the $7.2 billion reserved in the government stimulus package. Upgrades to the nation’s telecommunications infrastructure are required as Comcast and DirecTV ($28; DTV), along with big wireless providers, introduce new mobile devices and applications that demand more bandwith. Comcast and DirecTV are Focus List Buys and Long-Term Buys. GE is rated Neutral.

Corporate roundup

AstraZeneca ($44; AZN) and Bristol-Myers Squibb ($22; BMY) won approval from the European Commission to market diabetes drug Onglyza, which is already sold in the U.S. The partners plan to launch Onglyza in Europe in the December quarter. Onglyza will compete with Merck’s ($33; MRK) Januvia. AstraZeneca is a Buy and a Long-Term Buy. Bristol-Meyers and Merck are rated Neutral . . . After reviewing the bid process for the Centers for Medicare and Medicaid Services, CVS Caremark ($35; CVS) expects its pharmacy-benefit management business will get 30% to 35% fewer members for the subsidized Medicare Part D program next year. That reduction should lower 2010 per-share profits by $0.03 to $0.04. Based on the consensus profit estimate at the time of the announcement, the lowered guidance still represents 13% growth in per-share profits next year. CVS Caremark is a Focus List Buy and a Long-Term Buy . . . General Dynamics ($66; GD) won a five-year contract worth up to $430 million to work on tank research for the U.S. Army. The company also earned a $320 million addition to a contract for designing U.S. nuclear submarines. General Dynamics is a Buy and a Long-Term Buy . . . Exxon Mobil ($69; XOM) agreed to buy a $4 billion stake in an oilfield off the coast of Ghana that is expected to begin producing in 2010. The deal would mark Exxon’s first major acquisition in a decade. Exxon Mobil is a Long-Term Buy . . . Ousted from his position as chairman earlier this year, Bank of America ($17; BAC) CEO Ken Lewis will retire at the end of the 2009. As a contingency plan, the troubled bank is selecting an emergency chief in case Lewis, under investigation for his role in allegedly failing to disclose details about Merrill Lynch bonuses, must resign before year-end. Bank of America is rated Neutral . . . A joint venture between Boeing ($52; BA) and Lockheed Martin ($76; LMT) received a $928 million rocket contract from the U.S. Air Force. Boeing and Lockheed are rated Neutral . . . The National Retail Federation said it expects U.S. holiday sales will decline 1% to $437.6 billion, following a 3% decline last year . . . In the September quarter, Alcoa ($14; AA) earned $0.04 per share from continuing operations excluding one-time gains and restructuring charges, down sharply from last year’s levels but well above the consensus, which called for a $0.09 loss. Revenue fell 34% to $4.62 billion. Alcoa is an Underperform.

Technology report

In the August quarter, Accenture’s ($38; ACN) per-share profits fell 6% to $0.63 excluding a restructuring charge, in line with the consensus. Net revenue fell 14%. The annual dividend, now split into two payments rather than a single distribution, was raised 50%. The semiannual payments of $0.375 per share equate to a 2.0% yield. Looking ahead, Accenture anticipates per-share earnings between $2.64 and $2.72 in fiscal 2010 ending August, below the consensus of $2.75. The midpoint of Accenture’s guidance is flat with fiscal 2009 earnings. While the lower profit target is disappointing, it seems overly conservative, and the shares rose on the news. Accenture remains a Buy and a Long-Term Buy.

Hewlett-Packard ($47; HPQ) is reportedly interested in purchasing all or part of Brocade Communication Systems ($9; BRCD), which has put itself up for sale. With a market capitalization of $3.72 billion, Brocade sells routers, switches, and networking software, businesses that could plug holes in H-P’s product portfolio. H-P has not made an official bid for Brocade. Juniper Networks ($27; JNPR) may also be interested in the company. H-P is a Buy and a Long-Term Buy.

IBM ($121; IBM) said it will offer iNotes, an e-mail service that lets users choose their domain name, in an effort to undercut services offered by Google ($499; GOOG) and Microsoft ($25; MSFT). IBM is a Focus List Buy and a Long-Term Buy. Microsoft is a Long-Term Buy. Google is rated Neutral.

Cisco Systems ($23; CSCO) agreed to acquire Tandberg, a Norwegian videoconferencing company, for $3 billion in cash in a move that could trigger rivals to pursue more deals. Cisco is rated Neutral.

St. Jude ($33; STJ) is being downgraded to Neutral. Baxter International ($57; BAX) and TJX ($38; TJX) are being added to the Long-Term Buy List. The Long-Term Buy List’s position in Vanguard Short-Term Investment-Grade ($10.56; VFSTX) falls to 27.4%.

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