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Dow 30 Stock Roundup: United Technologies-Raytheon Merger, Merck's Tilos Buyout

Swarup Gupta

The index traversed a volatile week, guided largely by trade-related developments. Markets received a temporary reprieve on Monday after President Trump deferred tariffs on Mexico. The Dow suffered its first back-to-back losses for the first time in June, following worrying developments on the U.S.-China trade war front. Luckily, a spike in crude prices helped indexes rebound on Thursday.

Last Week's Performance

The index gained 1% last Friday after the release of a weaker-than-expected jobs report gave rise to speculation that there might be a rate cut by the Fed in the near term. Gains for the index were broad based and supported by a rally in shares of Microsoft Corporation MSFT and Apple Inc. AAPL, which gained 2.8% and 2.7%, respectively. Meanwhile, there were some positive developments on the trade war front between the United States and Mexico.

The index has surged 4.7% over last week. This marked the Dow’s biggest weekly gain since November. Investors grew more optimistic about a possible solution to the U.S.-Mexico trade conflict.

Moreover, reports emerged that the Trump administration was likely to delay imposing tariffs on Mexico. Meanwhile, Fed Chairman Jerome Powell signaled reduction in benchmark interest rate this year.

The Dow This Week

The index increased 0.3% on Monday after President Trump announced that he was suspending plans to impose tariffs on Mexico. President Donald Trump tweeted late on Friday that he was suspending his plans to impose tariffs on Mexico “indefinitely.”

He also stated that Mexico had agreed to take strict measures to stop such immigration and work toward stemming the “tide of Migration through Mexico, and to our Southern Border.” Gains for the index were supported by a rally in shares of 3M Company MMM and Apple, which gained 1% and 1.3%, respectively.

The index lost almost 0.1% on Tuesday giving up earlier gains as China stated that it would retaliate firmly if President Trump imposes any further tariffs on Chinese goods. Meanwhile, China also announced that it would support the issuance of special-purpose bonds by the country’s local governments, in a bid to boost its economic growth.

The index declined 0.2% on Wednesday as investors keenly followed the latest developments on the Sino-U.S. trade war front. President Trump stated that he would only have a trade deal with China if the country goes back to the original terms of the deal. The Dow posted back-to-back losses for the first time in this month.

The index rebounded on Thursday, gaining 0.4%. Stocks gained following a spike in oil prices after two oil tankers were damaged following suspected attacks in the Gulf of Oman. The Trump administration was quick to accuse Iran even as WTI crude prices closed 2.2% higher at $52.22 per barrel. Shares of The Walt Disney Company DIS gained 4.4% after an analyst raised his price target for the stock.

Components Moving the Index

United Technologies Corporation UTX announced on Jun 9 that it has agreed to acquire Raytheon Company RTN and merge it with its aerospace business. The all-stock merger of equals, as it has been termed by the participating companies, will create an aerospace and defense giant.

Zacks Rank #2 (Buy) United Technologies’ board of directors approved the merger, which can be accomplished only after the company separates from its Otis and Carrier businesses (as announced in November 2018).

Raytheon will be required to reorganize its four business operations into two, namely Integrated Defense & Missile Systems; and Intelligence, Space & Airborne Systems. At the time of the merger, each share of Raytheon can be exchanged for 2.3348 shares of the new company.

Raytheon Technologies — as the combined company will be known — will comprise the aforementioned future businesses of United Technologies and Raytheon.

Pro forma sales of Raytheon Technologies are anticipated to be approximately $74 billion in 2019. Net debt will likely be $26 billion, of which $24 billion relates to United Technologies.

Apart from sophisticated technologies and products, the combined company intends to reward shareholders with $18-$20 billion in the initial 36 months. With all pre-conditions fulfilled and the receipt of required regulatory approvals, the merger is likely to be completed in the first half of 2020. (Read: United Technologies to Merge With Raytheon in All-Stock Deal)

The Boeing Company BA recently won a $194.2-million modification contract for the procurement of six renew-build and one new MH-47G rotary wing aircraft. The contract was awarded by the U.S. Special Operations Command headquarters, Tampa, FL. (Read: Boeing Wins $194M Deal for MH-47G Rotary Wing Aircraft)

In a separate development, Boeing recently won a $22.8-million modification contract to offer additional acoustics software support activity and engineering support for the P-8A Poseidon aircraft. The contract was awarded by the Naval Air Systems Command, Patuxent River, Maryland. (Read: Boeing Secures Navy Deal to Modify P-8A Jet Program)

Merck & Co., Inc. MRK announced a definitive deal to buy private biotech Tilos Therapeutics for a total potential purchase price of up to $773 million. The deal includes an undisclosed upfront payment and contingent milestone payments.

The acquisition will add Tilos’ portfolio of investigational antibodies targeting a protein called TGFβ, which is believed to play an important role in the development of cancer and fibrotic diseases. Tilos is developing TGFβ inhibiting antibodies in preclinical studies for various forms of cancer, fibrosis and autoimmune disease. (Read: Merck to Buy Private Biotech Tilos for Up to $773M)

In another development, Merck announced that the FDA has granted approval to its blockbuster PD-L1 inhibitor, Keytruda for first-line treatment of recurrent or metastatic head and neck squamous cell cancer (HNSCC).

With the latest approval, Keytruda can be prescribed to previously untreated patients with metastatic or with unresectable, recurrent HNSCC as monotherapy in patients whose tumors express PD-L1 [CPS (combined proportion score )≥1) or in combination with chemotherapy regardless of PD-L1 expression. The stock has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Intel Corporation INTC recently inked a deal to acquire Barefoot Networks, a startup chipmaker company, which specializes in providing Ethernet-based customized networking technology. Intel has a Zacks Rank #3.

However, the financial terms of the deal have been kept under wraps. Notably, per Crunch base data, Barefoot Networks raised $155.4 million as a private entity. Moreover, Barefoot Networks has garnered financial support from bellwethers like Alibaba, Google and Tencent Holdings, to mention a few.

Santa Clara, CA-based Barefoot Networks’ robust programming functionalities, which enable hyperscalers to address high-performance needs, compelled Intel to pursue the deal. It offers high-speed Ethernet-based switch chips and software required to empower chips with flexibility.

The transaction is anticipated to close in the third quarter of 2019. (Read: Intel to Buy Barefoot Networks, Gain Ethernet Chip-Making Tech)

Pfizer, Inc. PFE announced positive data from a study, which was conducted to demonstrate the efficacy of its Janus kinase inhibitor (JAK) Xeljanz extended release as a monotherapy after withdrawing use of methotrexate (MTX) in adults with moderately-to-severely active rheumatoid arthritis (RA). Pfizer has a Zacks Rank #2.

The phase III/IV ORAL Shift study was conducted to evaluate the efficacy and safety of Xeljanz XR 11 mg once daily (QD) as monotherapy after MTX withdrawal compared with Xeljanz XR with continued MTX in RA patients who achieved low disease activity after combination therapy.

Data from the study showed that at week 48, Xeljanz XR after MTX withdrawal was non-inferior compared with Xeljanz XR with continued MTX as measured by the primary endpoint. The primary endpoint of the study was to measure the change in the Disease Activity Score from randomization at week 24 to the end of the double-blind MTX withdrawal phase at week 48. (Read: Pfizer's Xeljanz Effective As Monotherapy in RA Study)

Visa Inc. V  has launched a network called Visa B2B Connect based on blockchain architecture to facilitate secure and transparent transactions for businesses across the globe.

The business-to-business (B2B) payments space offers a vast market for Zacks Rank #3 Visa as businesses are recognizing the advantages of digitizing payments, which involve more data, control and automation.

According to Deloitte, B2B digital payments are forecast to reach $23.1 trillion in 2020, as most of the companies transact purchases online and pay their receivables through digital channels. (Read: Visa Launches Blockchain Powered Technology for B2B Payments)

Performance of the Top 10 Dow Companies

The table given below shows the price movements of the 10 largest components of the Dow, which is a price-weighted index, over the last five days and during the past six months. Over the last five trading days, the Dow has lost 0.2%.

Next Week’s Outlook

Markets are continuing to endure troubled times as trade tensions refuse to subside. Both the Trump administration and the Chinese government seem to be in mood to back down from their currently stated positions. But it is heartening to see that the U.S President has refrained from stepping up trade tensions with Mexico. Investors will continue to hope for a quick resolution to trade disputes in the days ahead.

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The Walt Disney Company (DIS) : Free Stock Analysis Report
 
Merck & Co., Inc. (MRK) : Free Stock Analysis Report
 
Pfizer Inc. (PFE) : Free Stock Analysis Report
 
The Boeing Company (BA) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
United Technologies Corporation (UTX) : Free Stock Analysis Report
 
3M Company (MMM) : Free Stock Analysis Report
 
Raytheon Company (RTN) : Free Stock Analysis Report
 
Intel Corporation (INTC) : Free Stock Analysis Report
 
Visa Inc. (V) : Free Stock Analysis Report
 
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