Portfolio Review


General Mills in, Biogen Idec out

General Mills ($66; GIS), a market leader in food processing, has beaten consensus profit estimates by at least 6% on higher sales in the last two quarters. The U.S. retail business (69% of 12-month sales) has grown revenue more than 5% in each of the past four quarters, powered by strong gains in cereal, baking products, and yogurt.

With moderating cost inflation and a well-positioned product portfolio, General Mills is expected to increase per-share profits 13% in fiscal 2010 ending May on 1% higher sales. At 15 times projected year-ahead earnings, stock trades at a 6% discount to its three-year average valuation. General Mills seems capable of a rise to $75 or $80 over the next 12 months and is being upgraded to a Buy and a Long-Term Buy.

Biogen Idec ($48; BIIB) grew per-share profits 14% to $1.12 excluding special items for the September quarter, topping the consensus by $0.08. Sales climbed 3% to $1.12 billion. Multiple sclerosis drug Tysabri accounted for most of the growth, with sales up 21% to $207 million. However, investors were disappointed that the rate of new patients prescribed Tysabri declined 15% to 223 per week.

Safety concerns have slowed growth of the highly effective drug, and Biogen confirmed that the risk for patients developing a potentially deadly brain infection increases with the number of Tysabri treatments received. Biogen lowered 2009 guidance for revenue growth and reiterated a profit target below the consensus.Given the disappointing performance and murky outlook for Tysabri, Biogen’s chief growth driver, we are downgrading Biogen to Neutral.

September-quarter earnings

Stryker ($45; SYK) reported 5% earnings growth to $0.69 per share excluding restructuring charges, matching Wall Street projections. Sales were roughly flat at $1.65 billion but advanced 1% at constant currency. Stryker issued 2009 per-share-profit guidance of $2.90 to $3.00, in line with the consensus and implying 2% to 6% growth. Stryker, which rallied on news of a rebound in orthopedic-implant sales, is a Buy and a Long-Term Buy.

General Electric ($16; GE) earned $0.22 per share from continuing operations, down 51% but $0.02 above the consensus estimate. Sales declined 20% to $37.80 billion and orders fell 18%. Separately, GE and French telecom giant Vivendi are $500 million apart on the valuation of Vivendi’s 20% stake in NBC Universal. GE and Comcast ($15; CMCSA) hope to spin off NBC Universal but first must arrange to purchase the Vivendi stake. Comcast is a Focus List Buy and a Long-Term Buy. GE is rated Neutral.

Pfizer’s ($18; PFE) per-share profits fell 18% to $0.51 excluding special items, topping the consensus by $0.03. Sales dipped 3% to $11.62 billion. Adjusting for Pfizer’s $68 billion acquisition of Wyeth completed in mid-October, the company anticipates full-year 2009 earnings between $2.00 and $2.05, down 15% to 17%. Pfizer is rated Neutral.

The September quarter marked a sharp contrast between healthy and unhealthy financials. Goldman Sachs ($185; GS) doubled its revenue, and profits blew away consensus estimates. Wells Fargo ($30; WFC) declared record-high earnings, helped by last year’s takeover of Wachovia. After two profitable quarters, Citigroup ($4; C) swung to a loss after accounting for preferred dividends and a debt exchange that gives the government 34% of earnings. Meanwhile, Bank of America ($17; BAC) posted an operating loss, largely due to surging loan write-downs. Morgan Stanley ($33; MS) earned $0.38 per share, down from a gain-inflated $6.97 per share in the year-earlier period on a 52% decline in revenue but $0.11 above the consensus. Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, and Wells Fargo are rated Neutral.

On 25% higher sales, Apple ($199; AAPL) grew per-share profits 44% to $1.82, topping the consensus by $0.40. Apple is rated Neutral.

Health-care roundup

Baxter International ($55; BAX) earned $0.98 per share excluding special charges, up 11% and a penny better than the consensus. Revenue was roughly flat at $3.15 billion but rose 6% at constant currency. For the December quarter, Baxter anticipates sales growth of 8% to 10% and per-share profits of $1.02 to $1.04, up at least 12%. Baxter is a Long-Term Buy . . . AstraZeneca ($45; AZN) gained approval from the Food and Drug Administration to expand usage of cholesterol drug Crestor to some patients 10 to 17 years old when diet therapy fails to lower cholesterol levels elevated by disease. AstraZeneca is a Buy and a Long-Term Buy . . . Johnson & Johnson ($61; JNJ) received FDA approval to market a diagnostic test that detects antibodies to HIV that suggest the presence of the virus. In other news, studies found that J&J’s new rheumatoid-arthritis drug Simponi can inhibit structural joint damage when used with methotrexate, a common treatment. J&J is a Buy and a Long-Term Buy.

GameStop still a good play

U.S. sales of video-game hardware, software, and accessories rose 1% to $1.28 billion in September. A 5% increase in software sales, the first year-over-year growth in six months, offset a decline in equipment sales. However, software sales growth fell well short of Wall Street expectations of 15%, raising concerns that retailers such as GameStop ($26; GME) will be forced to discount new games during the holiday shopping season.

New rivals continue to encroach on GameStop’s niche of selling used video-game products (30% of GameStop’s revenue and 47% of gross profit in the six months ended July). But the looming threat of digital distribution could siphon some business away from both GameStop and other retailers. Anticipating the migration to digital, GameStop has launched an online store for downloading games. But the transition might be a slow one, considering federal efforts to expand the country’s broadband infrastructure appear far more costly than the $7.2 billion currently set aside in the government stimulus package. GameStop expects that even five years from now, only a small segment of the gaming market will have sufficient bandwidth to download or stream top-tier games.

At 10 times the consensus profit estimate for fiscal 2010 ending January, GameStop already reflects plenty of bad news. The company seems capable of exceeding market expectations and retains its Buy rating.

Technology report

The European Commission said Oracle ($22; ORCL) failed to provide evidence that its planned purchase of Sun Microsystems ($9; JAVA) would not reduce competition. The tussle revolves around Sun’s MySQL, a database designed to run Web sites for smaller companies. Fears that Oracle will stifle development of the mostly free program that competes against its own products threaten to derail the deal. Oracle CEO Larry Ellison has said he will not spin off MySQL. Oracle is a Buy and Long-Term Buy. Sun is rated Neutral . . . Microsoft’s ($26; MSFT) Windows 7 operating system was slated to hit shelves Oct. 22. Microsoft has received upgrade commitments from clients including Intel ($20; INTC), Ford Motor ($8; F), and Continental Airlines ($16; CAL), endorsements that could boost sales for the newest version of its flagship operating system. A survey found 24% of corporate Windows customers plan to upgrade within the first 18 months, while 67% expect to switch eventually. Microsoft is rated a Long-Term Buy . . . BMC Software ($38; BMC) agreed to purchase privately held Tideway Systems, a British maker of business software, for an undisclosed sum. BMC is a Focus List Buy and a Long-Term Buy . . . Texas Instruments ($24; TXN) raised its quarterly dividend 9% to $0.12 per share, payable Nov. 16. Texas Instruments is rated Neutral.

News digest

Transocean’s ($91; RIG) new ultra-deepwater drillship began a 10-year contract at an initial day rate of $410,000. Transocean is a Focus List Buy and a Long-Term Buy.

Freeport-McMoRan ($79; FCX) reinstated its quarterly cash dividend of $0.15 per share, with the first installment payable Feb. 1. Freeport is rated Neutral.

General Mills ($66; GIS) is being upgraded to a Buy and a Long-Term Buy. Biogen Idec ($48; BIIB) is being downgraded to Neutral. Wyeth has been acquired and is being dropped from coverage.

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