After a July 1 accusation of alleged baby formula price-fixing in China, several large foreign manufacturers cut retail prices this week, forcing Mead Johnson Nutrition Company (MJN, $68.90) to follow suit with its Enfamil product, or lose market share. The tactic seems to be a government ploy designed to support domestic manufacturers, bringing risk to near-term earnings and medium-term pricing power at Mead Johnson.
The pricing change will knock earnings growth down about 5% in 2013 & ’14, giving the company about a one percent earnings growth scenario this year.
The stock fell to support around $68 and will likely be stuck in this two-year trading range for quite a while longer. Shareholders should consider trading out around $79 and moving into a growth stock. (07/05/13)
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HP Wins Biggest Gov’t IT Contract, Again
Hewlett-Packard Co. (HPQ, $25.61) won a $3.5 billion contract to continue running the U.S. Navy’s communications network for the next five years. Revenue from the project will fall 37% from the previous contract due to competition, smaller project size, and federal budget cuts.
On May 23, we said that “A revenue turnaround is the big-picture goal at HP, but that’s more of a marathon than a sprint.” Earnings are projected to fall 12% this year, followed by two no-growth years. The PE is 7.1 and the dividend yield is 2.3%.
We think the worst is over for HP stock, and we’re changing our recommendation from sell to hold. Expect the stock to trade between $23 and $30 for a while. There’s room for traders to make money there. (07/05/13)
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Novartis May Give Shareholders a Shot in the Arm
After recent management changes at multinational healthcare company Novartis AG (NVS, $70.55), Citi Research expects the company to shore up investor confidence by resuming a $10 billion buyback plan and/or announcing a strategic review to maximize value in its Consumer division. The stock price also suffers from a heavily undervalued late-stage pharmaceutical pipeline.
Earnings are projected to fall 3% this year, then rise 6 and 10 percent the next two years. The dividend yield is 2.23%.
The stock broke out of a long-term trading range in January, rose 20%, then had a big pullback. Expect Novartis to trade between $70 and $75 for a while now. (07/05/13)
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Medicare to Lower Dialysis Reimbursement Rates in 2014
Medicare has announced that reimbursement rates for dialysis may fall significantly in 2014, alarming investors in DaVita HealthCare Partners Inc. (DVA, $116.70 midday), the largest U.S. dialysis provider. “Monday’s announced Medicare cut for dialysis services far surpasses our worst fears,” reports Citi Research. Buy-side analysts were expecting an approximate 2% cut, but the net cut proposal from Medicare came in at 9.4%.
Watch for earnings estimates to fall for DaVita towards a no-growth scenario in 2014.
Berkshire Hathaway owns 14% of DaVita stock, causing recent speculation of a buyout offer, which may provide some ongoing support for the stock price. The chart turned bearish with today’s price drop, and will likely re-establish support at $115. (07/02/13)
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Market Rotation Favors Tech Stocks
“Shares of technology companies are rallying as investors see capital spending for their products strengthening along with the economy,” reports Bloomberg.
Apple Inc. (AAPL, $419.65 midday) shares are rallying with news that the company filed with the Japan Patent Office in June to trademark the term “iWatch”. The company is believed to be developing a digital wristwatch, which could provide new growth opportunities.
Apple’s earnings estimates are holding steady; projected to fall 10% this year, then rise 10% next year. With a PE of 10.3 and a dividend yield of 2.98%, there’s limited downside at this point. The trading range is firming up between $385 and $465. (07/02/13)
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Priceline.com Becomes #26 Most Shorted Nasdaq 100 Component — Forbes
Online travel company Priceline.com Inc. (PCLN, $842.55 midday) has been seeing increased recent short action. Given its bullish chart, investors should expect any near-term breakout to be enhanced by short-covering.
Priceline recently issued $1 billion in senior notes at low interest rates, and intends to repurchase $1 billion in stock, which should contribute to the company’s financial performance. Earnings are projected to grow 21-23 percent per year over the next three years.
In February and May, we told investors to buy shares in Priceline. The stock is up 21% since our first recommendation, and appears immediately ready to break past upside resistance at $845. (07/02/13)
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