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Stock Analyst Update

The Week in Stocks: Wal-Mart Shakes the Drugstore Industry

Plus, Tribune eyes a breakup, FedEx delivers strong quarter, and more.

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Wal-Mart (WMT) shook the drugstore industry Thursday when it announced that it would soon lower the prices of nearly 300 generic drugs to $4 for employees and consumers in the state of Florida. While the initial test is limited to about 15% of the available generic drugs, Morningstar analyst Mitchell Corwin thinks it's likely that Wal-Mart will eventually broaden the program to cover more generics and nationalize it. In Corwin's view, the impact of Wal-Mart undercutting drugstores on the prices of generic drugs could be severe. The large drugstore chains, such as Walgreen (WAG) and CVS (CVS), derive well over 60% of sales from prescription drugs, and generics are poised to climb to two thirds of the prescription mix in the next few years. What's more, generics are generally more profitable for the chains. Thus, the mix change was expected to drive increased profitability. If Wal-Mart succeeds, Corwin believes it will change the dynamics of the industry and seriously damage the retail drugstore business model. As such, Corwin is hiking Walgreen's risk-rating and will likely adjust his fair value estimates as more information comes to light regarding Wal-Mart's long-term plan and how the drugstore chains intend to defend themselves against the threat it poses. 
 Full Analyst Report: Wal-Mart
 Full Analyst Report: Walgreen
 Full Analyst Report: CVS
 Full Analyst Report: Rite Aid

Tribune Weighs Its Strategic Alternatives
Morningstar analyst James Walden weighs in on Tribune (TRB) management's recent move to explore strategic alternatives for the media company. Those alternatives range from selling off the company's broadcasting assets or even pursuing a management-led buyout. While no outcome is certain, Walden anticipates that some meaningful transaction will take place. He views this as a net-positive, as a transaction could unlock tremendous value for shareholders. Though Walden is leaving his fair value estimate unchanged, he'll make any necessary revisions as developments warrant.   
 Full Analyst Report: Tribune 

FedEx Reports Good First-Quarter Results
FedEx's (FDX) fiscal first-quarter results, reported Thursday, were slightly stronger than Morningstar analyst Peter Smith had anticipated. Total revenue jumped 11% year-over-year behind strong performance in the company's Express and Ground segments. Though average daily package volume was down slightly from the year-ago quarter, Smith attributes this more to management's efforts to weed out less-profitable business than a slowdown in the economy (a notion buttressed by CEO Fred Smith's statement that he believed that the economy was growing at a "moderate, sustainable rate"). In addition, revenue per package jumped 11%, a trend that's not indicative of a broader slowdown. Nevertheless, since these results more or less square with Smith's long-term outlook, he's leaving his fair value estimate unchanged.
 Full Analyst Report: FedEx

Marsh & McLennan Puts Putnam Investments on the Block
On Tuesday, Marsh & McLennan (MMC) said it is soliciting bids for investment-management unit Putnam. While Marsh has not definitively committed to sell the unit, management has been under intense pressure to begin realizing the value of Putnam's business, which has languished in recent years. As of June 30, Putnam had about $185 billion of assets under management, and Morningstar analyst Justin Fuller believes the unit could fetch as much as $3.7 billion for Marsh. Fuller thinks this price is somewhat low, because of Putnam's continued struggles and, thus, would rather see management hang on and work to repair Putnam before jettisoning the business. For now, he's leaving his fair value estimate unchanged.
 Full Analyst Report: Marsh & McLennan

CarMax Reports Strong Second-Quarter Profits
CarMax (KMX) reported strong quarterly results and boosted its outlook for the remainder of its fiscal year on Wednesday. Total sales rose 18% from the year-ago quarter on a 7% jump in same-store sales. Operating margins expanded 100 basis points thanks to operating leverage and higher income at CarMax Auto Finance. CarMax now expects same-store sales to increase about 6%-8% for this fiscal year, near the upper end of its previous forecast, and management boosted its profit forecast to $1.55-$1.65 per share from $1.25-$1.47. Nevertheless, Morningstar analyst John Novak is maintaining his fair value estimate, since the revised forecast is broadly consistent with our long-term expectations.
 Full Analyst Report: CarMax

Auto-Parts Suppliers Feel the Pain
Auto-parts makers Lear (LEA) and BorgWarner (BWA) slashed their outlook for 2006 (see Lear's release here and BorgWarner's here) amid a slump induced by production cuts at Detroit's automakers and higher-than-expected commodity costs. Yet, Morningstar analyst John Novak is leaving his fair value estimates and risk ratings for both companies unchanged. In BorgWarner's case, Novak thinks the company's focus on niche emission and powertrain technologies leaves it among the best-positioned global auto suppliers. In addition, the company should generate around $400 million in operating cash flow this year, and its balance sheet appears healthy enough to allow it to withstand the industry's downturn. With respect to Lear, while Novak doesn't expect the company's troubles to disappear overnight, he thinks moderating commodity costs and aggressive restructuring plans should enable the company to return to profitability.
 Full Analyst Report: BorgWarner
 Full Analyst Report: Lear

BioMarin Pipeline on Track
Morningstar analyst Karen Andersen recently returned from a visit with BioMarin's (BMRN) management at its Novato, Calif., headquarters. The visit reaffirmed Andersen's positive view of the company's unique niche in rare diseases. Although Andersen is maintaining her fair value estimate, she believes the biotech firm's solid base of competition-free marketed products should damp the stock's volatility relative to peers. What's more, the company boasts a strong development pipeline, including Phenoptin (which recently entered a Phase II trial to treat poorly controlled hypertension) and Phenylase (which could enter clinical trials for treatment of severe phenylketonuria in 2008). Thus, if Biomarin succeeded in broadening the market for these two key products and also made headway in selling mucopolysaccharidosis VI drug Naglazyme into the Brazilian market, our fair value estimate would have a bit of upside.
 Full Analyst Report: BioMarin

Jeffrey Ptak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.