St. Jude replaces AMG


Affiliated Managers Group ($77; NYSE: AMG) is being dropped from the Buy List, reflecting deteriorating Quadrix scores and a diminished near-term profit outlook. Profit estimates for the money-management concern have fallen over the past 60 days, reflecting a drop in assets under management. The stock appears reasonably valued at less than 12 times the 2008 consensus profit estimate. But with the stock market down sharply since management provided profit guidance in April, a reduction in full-year guidance would not be surprising when Affiliated posts June-quarter results on July 23. The stock’s Overall Quadrix score has dropped to 67, down from 90 on Dec. 31. Subscribers tracking our Buy List should sell Affiliated Managers. The stock will no longer be followed in the Forecasts.

St. Jude Medical ($47; NYSE: STJ), already a Long-Term Buy, is being added to the Buy List. June-quarter earnings per share rose 33% on a 20% sales gain, reflecting double-digit revenue gains in all four of the company’s business units. Sales of implantable defibrillators rose 24%, outpacing results from rivals seeing slower growth in that market. Profits topped consensus estimates, and St. Jude raised its 2008 per-share-profit target to $2.28 to $2.33, well above the $2.19 consensus. Despite six straight quarters of double-digit sales and profit growth, shares of the medical-device maker have traded in a narrow range over the past 18 months. While the shares jumped on the earnings news, they still trade at 22 times trailing earnings, near the low end of its historical valuation range. A return to the five-year average P/E of 29 seems unlikely in the near term, but St. Jude shares seem capable of reaching $55 to $60 over the next 12 months. St. Jude represents a good pick for both 12-month and 36-month returns.

Financial update
Wells Fargo ($27; NYSE: WFC), the only bank stock the Forecasts currently recommends, delivered better-than-expected results in the June quarter and raised its dividend by 10%. The shares jumped 33% on the news. Per-share profits fell 21% to $0.53, $0.03 higher than the consensus estimate on 16% revenue growth. While asset quality declined, average loans jumped 18% and product cross-selling reached record levels. Excluding taxes and provisions for loan losses, income rose 34%. Wells Fargo’s conservative lending practices have helped avoid the huge write-downs and profit declines seen by many other banks.

Unfortunately, Wells Fargo is one of the few financials delivering such unqualified good news. The federal government stepped in to assert it stood behind the debt of government-sponsored mortgage lenders Fannie Mae ($8; NYSE: FNM) and Freddie Mac ($6; NYSE: FRE), which combine to own or guarantee about $5 trillion in residential mortgages, roughly half of all U.S. home loans. Shares of both Fannie and Freddie are down more than 75% this year, and concerns that the companies might fail have weighed on both the stock and housing markets. Federal agencies have increased the lenders’ lines of credit and announced plans to curb short-selling in the stocks.

So far, the government’s willingness to act has not increased investor confidence in other lenders without a federal safety net. The failure of mortgage lender IndyMac reminds investors that the industry’s problems are far from over. Investors have little confidence in positive news from financial institutions.

Shares of Bank of America ($20; NYSE: BAC) have fallen 16% since CEO Ken Lewis said July 9 that the bank had plenty of capital and had no plans to cut the dividend. In other news, the U.S. Securities and Exchange Commission has subpoenaed Merrill Lynch ($26; NYSE: MER), Morgan Stanley ($33; NYSE: MS), and other firms in a probe of suspected manipulation of Lehman Brothers ($14; NYSE: LEH) and Bear Stearns shares.

Wells Fargo is a Long-Term Buy. Fannie Mae, Bank of America, Citigroup, Merrill, and Morgan are rated Neutral.

June-quarter earnings
Johnson & Johnson ($68; NYSE: JNJ) earned $1.18 per share, up 12% and $0.06 above the consensus estimate. Revenue rose 9%, fueled by 16% international growth. Overall, consumer-product sales grew 13%, while sales of medical devices and diagnostics climbed 12%. For 2008, management increased its per-share-earnings guidance by $0.05 to a range of $4.45 to $4.50. J&J is a Buy and a Long-Term Buy.

General Electric ($27; NYSE: GE) reported per-share earnings of $0.54, up $0.01. Revenue rose 11%, keyed by 5% internal growth. Management reaffirmed its full-year 2008 per-share-profit guidance of $2.20 to $2.30, versus the consensus of $2.21. Separately, GE agreed to sell its Japanese consumer-finance business and intends to spin off its lighting and appliance businesses. While GE posted a decent quarter, the stock remains a Neutral based on its murky growth outlook.

Intel ($21; NASDAQ: INTC) posted profits of $0.28 per share, up 27% and $0.03 above the consensus estimate. Sales rose 9% to $9.47 billion and also topped the consensus. During the quarter, the company repurchased 109 million shares of stock for roughly $2.5 billion. Intel is rated Neutral.

Mergers and deals
Anheuser-Busch ($67; NYSE: BUD) agreed to be acquired by Belgian brewer InBev for about $52 billion. Busch shareholders will receive $70 per share in cash. The deal, which creates the world’s largest beer maker, is expected to close by year-end. Busch is being dropped from coverage and should be sold . . . Rohm and Haas ($73; NYSE: ROH) agreed to sell itself to Dow Chemical ($32; NYSE: DOW) for $78 per share in cash. The deal is expected to close in early 2009. Rohm and Haas is being dropped from coverage and should be sold. Dow Chemical is rated Neutral . . . Yahoo ($22; NASDAQ: YHOO) rebuffed a takeover offer from Microsoft ($26; NASDAQ: MSFT), setting the stage for a potential proxy battle with activist investor Carl Icahn. Microsoft sought to buy Yahoo’s search business. Yahoo reiterated its own offer to sell the entire company to Microsoft for at least $33 per share. In other news, Microsoft is reportedly in negotiations with Time Warner ($14; NYSE: TWX) regarding its AOL unit. Microsoft is a Buy and a Long-Term Buy. Yahoo and Time Warner are rated Neutral.

News report
In an effort to build up capital and cut costs, General Motors ($11; NYSE: GM) plans to lay off thousands of salaried workers, cut truck production, suspend its dividend, and borrow at least $2 billion. GM also plans to raise another $2 billion to $4 billion through the sale of assets, including the Hummer brand. GM is rated Underperform . . . So far this month, Boeing ($64; NYSE: BA) has signed contracts with four foreign airlines and a leasing company to provide up to 190 planes with list prices of more than $21.6 billion. While the orders are good news, most planes are sold at a discount, and the magnitude of that discount affects the profitability of the deals. Boeing is rated Neutral.

Retail roundup
Wal-Mart Stores ($56; NYSE: WMT) topped consensus estimates with same-store-sales growth of 5.8% in June. The discount titan’s overall sales rose 12%. Wal-Mart now expects July-quarter per-share earnings of $0.82 to $0.84, versus the $0.82 consensus at the time of the announcement. Wal-Mart is a Long-Term Buy . . . Walgreen ($32; NYSE: WAG) said it will slow new-store openings beginning in fiscal 2010 ending August. The company now targets growth of about 6% annually over the next two years, down from earlier projections of 8%. Walgreen is a Long-Term Buy.

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