Portfolio Review


CVS, Walgreen make peace

After trading public barbs for nearly two weeks, the country’s biggest retail pharmacies have patched up their partnership, allowing Walgreen ($28; WAG) to remain in CVS Caremark’s ($31; CVS) prescription network. No terms were released, though one analyst suggested that CVS sweetened Walgreen’s financial incentives. Shares of both companies rose on the announcement. CVS’ pharmacy-benefit management unit collects about 10% of its revenue from customers filling their prescriptions at Walgreen. In other news, anticipating “significantly more” free cash flow in the next five years, CVS authorized a $2 billion stock repurchase program, enough to lower the share count by more than 4% at current prices. In addition, Walgreen reported May-quarter earnings of $0.54 per share excluding special items, down 8% and $0.03 below the consensus estimate on 0.7% growth in same-store sales. CVS is a Focus List Buy and a Long-Term Buy. Walgreen is rated A (above average).

Health-care roundup

Hospira ($55; HSP) received approval from European regulators to sell a treatment that boosts white blood cells, its second biosimilar drug on the market. In related news, an experimental pain drug for which Hospira owns U.S. and Canadian licensing rights met just one of two goals in a clinical trial. However, Hospira did gain U.S. approval to sell a generic version of AstraZeneca’s ($45; AZN) antibiotic Merrem, which generated sales of $200 million in the U.S. last year. Hospira is a Focus List Buy and a Long-Term Buy. AstraZeneca is rated B (average).

Johnson & Johnson ($59; JNJ) tried to avoid a public recall of pain reliever Motrin by hiring contractors to purchase potentially tainted inventory from store shelves, according to published reports. J&J defended its actions, saying the drug didn’t present a safety risk. In other news, J&J bought the licensing rights to several experimental diabetes drugs in two separate deals. J&J is a Long-Term Buy.

Medtronic ($38; MDT) said the European Union approved a new line of implantable heart defibrillators designed to reduce unnecessary shocks. Medtronic is rated A (above average).

Abbott Laboratories ($48; ABT) was cleared by the Food and Drug Administration to sell a diagnostic test intended to detect HIV in the early stages. Abbott Laboratories is a Buy and a Long-Term Buy.

Smart-phone review

U.S. antitrust regulators will review whether a change in the language of Apple’s ($274; AAPL) agreement with developers unfairly hinders Google ($486; GOOG) from advertising on the iPhone. However, the news did not cost Apple shares any of their gloss. Less than a week after the antitrust story made headlines, Apple soared to an all-time high following a report that it received more than 600,000 preorders of its latest iPhone in a single day, a record for the company.

To keep pace with Apple, Research In Motion ($59; RIMM) is testing a touch-screen smart phone with a slide-out keyboard and new operating system. RIM plans to ship a new version of its BlackBerry in the September quarter. In other news, RIM resolved a patent lawsuit by agreeing to pay royalties to Motorola ($7; MOT) for its wireless technology. Also, RIM’s stock dipped on rumblings that Verizon Communications ($29; VZ) will carry the iPhone next year. We will be watching for clues to RIM’s outlook when the company reports May-quarter earnings June 24, the day after this issue of the Forecasts went to press. Apple is a Long-Term Buy. Google is rated A (above average). Research In Motion is a Buy and a Long-Term Buy. Motorola and Verizon are rated C (below average).

Corporate digest

German conglomerate BASF has agreed to acquire Cognis, a supplier of raw materials for chemicals, for $3.8 billion in cash and assumed liabilities.Cognis reportedly rejected a higher bid from Lubrizol ($88; LZ) that would have involved some payment in stock. Lubrizol is a Focus List Buy . . . Lockheed Martin ($80; LMT) won a Pentagon contract worth up to $5 billion to support U.S. special-operations forces, reclaiming a program lost last year to L-3 Communications ($79; LLL). Lockheed Martin is rated B (average). L-3 is rated A (above average).

Oil-leak update

During a Congressional hearing, BP ($30; BP) CEO Tony Hayward distanced himself from the decisions leading up to the rig explosion that caused a massive oil leak. BP then distanced itself from Hayward by putting another executive in charge of dealing with the crisis. And Anadarko Petroleum ($42; APC), the minority owner of the leaking well, distanced itself from BP, characterizing its partner’s behavior as “willful misconduct.” In response to U.S. pressure, BP suspended its quarterly dividend, promised to divest $10 billion of assets, and agreed to place $20 billion in an independently managed fund to dole out damages.

A federal judge blocked President Obama’s six-month moratorium on deepwater drilling in the Gulf of Mexico, citing the measure as excessive. With the White House planning to appeal the ruling, energy companies are unlikely to resume operations until the legal uncertainty clears. Transocean ($52; RIG), itself critical of the drilling ban, rejected Anadarko’s claim that the moratorium triggered a provision that would cancel two rig contracts, each exceeding $500,000 per day. Transocean is a Long-Term Buy. BP is rated B (average). Anadarko is rated C (below average).

Technology and telecom wrap-up

U.S. regulators are pursuing a compromise that would prevent phone and cable companies from controlling customers’ Web site usage without imposing regulations so overbearing as to discourage those same companies from upgrading their networks. Meanwhile, Comcast’s ($18; CMCSa) proposal to acquire a majority stake in NBC Universal continues to advance through regulatory bureaucracy. The European Union said it will rule on the proposed merger by July 15. More than 200 TV stations affiliated with NBC want regulators to ensure that Comcast won’t promote its own cable channels at the expense of free broadcast stations. Comcast is a Focus List Buy and a Long-Term Buy . . . To satisfy a federal mandate for media ownership, John Malone resigned from his post as chairman of DirecTV ($37; DTV) and exchanged his super-voting shares for common stock, shrinking his voting stake to 3% from 24%. Malone then hedged some of those shares with options contracts that limit his downside in the event the shares lose value. Malone said the options do not reflect an opinion on the stock’s prospects, but instead address “financing and tax considerations.” In the wake of Malone’s resignation and loss of voting control, ratings agency Moody’s ($21; MCO) raised DirecTV’s debt rating. DirecTV is a Focus List Buy and a Long-Term Buy . . . Best Buy ($37; BBY) announced plans to let customers exchange old video games for gift cards, threatening GameStop’s ($19; GME) dominance in the attractive niche. Shares of GameStop slid on the news, but it’s worth remembering that Best Buy and other rivals have failed in previous efforts to break into the used-game business. Best Buy’s stock also slumped because the retailer posted May-quarter earnings of $0.36 per share, down 14% and well short of the consensus estimate of $0.50. GameStop is a Buy. Best Buy is rated A (above average).



No changes were made this week in Dow Theory Forecasts.

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