Visit us at our new home!

For new daily content, visit us at our new blog: http://www.acrinv.com/blog/

Monday, April 13, 2009

ESRX, WLP, CVX, GE, earnings season

S&P 500: +2.17 (+0.25%)

Express Scripts (ESRX) +15.54% and WellPoint (WLP) +8.03%
Express Scripts will purchase WellPoint’s pharmacy benefits management (PBM) business NextRx for $4.68 billion. The deal includes a 10-year contract for Express Scripts to provide PBM services to WellPoint, the biggest health insurer with 35 million members. According to the Wall Street Journal, Express Scripts is buying the business with a mixture of cash and up to $1.4 billion in stock.

NextRx is the fourth largest PBM in the U.S. with 32 million members. NextRx filled about 268 million prescriptions last year, the business represents about 6 percent to 8 percent of WellPoint’s earnings. The acquisition boosts Express Scripts’ prescription volume by about 50 percent, putting the company at comparable volumes as its rivals CVS Caremark and Medco Health Solutions. Express Scripts’ increased size should allow them to bid for contracts to manage major companies’ employee drug benefits.

Acquiring NextRx will give Express Scripts more negotiating power with drug prices, plus more room to its lucrative mail-order pharmacy business. Currently, only about 10 percent of NextRx’s prescriptions are filled by mail order instead of at retail pharmacies, compared with as much as 40 percent of all prescriptions at bigger stand-alone PBMs.

WellPoint benefits from the deal because they monetized a business that could not compete with larger stand-alone PBMs and may use the proceeds to enhance shareholder value by repurchasing shares or paying out a special dividend.


Chevron (CVX) -1.81%
Chevron said it expects first-quarter 2009 earnings to be “sharply lower” than in the fourth-quarter 2008 due to lower prices for crude oil and natural gas as well as narrower margins on the sale of refined products.

Chevron’s upstream business (exploration and production) likely faced higher costs, while the company’s downstream business (refining, marketing, and transportation) is expected to hurt earnings due to weaker international margins and negative timing effects.

A higher effective tax bracket, which ConocoPhillips and Hess Corporation have mentioned, might also weigh on Chevron’s results.


General Electric (GE) +7.06%
The Wall Street Journal reports that GE increased its stake in car-battery maker A123 to 10 percent, but the big move upwards may be more related to the fact that GE shares are trading more like a bank than an industrial company.


Earnings season on its way
Earnings have already begun to trickle in, but things are really getting started this week. Tomorrow we get our first look into the technology and healthcare sectors as bellwethers Intel (INTC) and Johnson & Johnson (JNJ) report. I should note that Goldman Sachs (not on our Approved List) will be reporting, which should have implications for the financial sector.

Intel’s results will be closely watched for clues on corporate and consumer technology spending since Intel controls more than three-fourths of the microprocessor market – microprocessing chips serve as the nervous system for computers. Revenue is expected to be lower, reflecting a supply chain correction as companies pared back inventory; however, it will be more important to hear where Intel thinks demand is trending.

Profitability margins – often considered the most important metric of semiconductor earnings – were likely pressured by rapid growth in sales of lower-cost Atom chips and lower utilization rates. Future declines could be offset by higher-margin products introduced this quarter, like Nehalem, and ULV chips for ultra-light laptops. In addition, Intel is making some of its largest investments ever for a new manufacturing process, which will allow them to build faster, smaller chips that consumer less energy and cost less to produce.

What to look for from INTC: (1) outlook for corporate and consumer IT spending, (2) profitability margins, and (3) product mix

Johnson & Johnson provides a diverse look across the healthcare sector, with leading positions in medical devices, over-the-counter medicines and several pharmaceutical markets. Despite its diverse product portfolio, the economy likely weighed on operating results. Last quarter, the company noted that consumers and patients were becoming more frugal, with hospitals chopping purchases and slowing sales on products ranging from contact lenses to diabetes test strips. Pharmaceutical sales were particularly weak due to generic drug competition as well as increasing layoffs that left more people without drug-benefit plans. I suspect these trends continued into the first quarter of 2009.

I am expecting J&J to announce an increase to their dividend, which they have increased annually at a double-digit rate over the last five years. I won’t be disappointed if the increase is less than 10 percent, but I will be disappointed if there is no increase at all. Most importantly, I will be listening for any updates on the company’s 10 potential blockbusters in late-stage development. The company faces roughly $6.3 billion (10 percent of sales) in patent exposure through 2009, but patent exposure significantly lessens going forward. Growth in J&J’s other businesses are expected offset the loss of patent protection.

What to look for from JNJ: (1) pipeline updates, (2) dividend increase



Quick Hits

Peter Lazaroff, Junior Analyst

No comments: