CIF Stock Recommendation Report (Spring 2013)

Transcription

1 Date: 3/22/13 Analyst Name: Jacob Allen CIF Stock Recommendation Report (Spring 2013) Company Name and Ticker: CareFusion Corp. (CFN) Section (A) Summary Recommendation Buy: Yes No Target Price: Stop-Loss Price: Sector: Healthcare Industry: Medical Equipment/ Supplies/ Distribution Market Cap (in Billions): $7.556 # of Shrs. O/S (in Millions): Current Price: $ WK Hi: $ WK Low: $23.77 EBO Valuation: $26.01 Morningstar (MS) Fair Value Est.: $37.00 MS FV Uncertainty: Medium MS Consider Buying: $25.90 MS Consider Selling: $49.95 EPS (TTM): 1.43 (Yahoo!) EPS (FY1): 2.16 EPS (FY2): 2.42 MS Star Rating: 3 Next Fiscal Yr. End Year : 2013 Last Fiscal Qtr. End: Less Than 8 WK: If Less Than 8 WK, next Earnings Ann. Date: Analyst Consensus Recommendation: Month : June Y N Outperform Forward P/E: Mean LT Growth: 11.42% PEG: 1.22 Beta: 0.94 % Inst. Ownership: 92.12% Inst. Ownership- Net Buy: Y N Short Interest Ratio: 1.10 Short as % of Float: 1.00 Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM) Dividend Yield N/A Total Debt/Equity (MRQ) Net Profit Margin (TTM) ROA (TTM) ROE (TTM)

2 Investment Thesis: CareFusion Corp. (CFN) is a very young company with good potential. They are a dominant player in their product market and are expected to continue this trend with the possibility of capturing even more market share. That being said, they are a slow growth company who will not see a great increase in margins very quickly. Their progress will come over the next 5-10 years. Their ratios put them as slightly undervalued but I believe their stock price is a little bit too high to purchase at the moment. If the current price was in the range of $28-30 I would advise a buy recommendation, however I believe it is too high currently. Pros: Cons: Good ratios High market share International exposure with good potential for international growth Doing very well for a new company Good history of positive earnings surprises Products are always in demand by medical facilities, demand could increase with implementation of Affordable Health Care Act. Price could be run up too high High growth in recent month means a missed window of opportunity No dividends + slow growth rate = a long time until solid returns are seen Summary Provide brief summary of your analysis in each section that follows Company Profile: CareFusion Corp. (CFN) is a medical equipment supplier that focuses on improving the safety and lowering the cost of healthcare. They are headquartered in San Diego, CA and operate primarily in the United States. They have an international presence as well. Their operations consist of two segments: Medical Systems and Procedural Solutions; these are the two segments that they spun from Cardinal Health. Fundamental Valuation: I chose a 5-year growth rate for CFN and the fundamental valuation came to be $26.01 suggesting a major overvaluation currently. However I do not agree with this evaluation because it does not incorporate market share or any other macroeconomic impact affects a stock s price. Relative Valuation: The relative valuation has CFN currently slightly overvalued at its current trading price. Forward P/E is the most prominent ratio in the health care industry which provided the valuation of $ Revenue and Earnings Estimates: Revenue estimates have been decreasing however earnings have been rising. This is due to the expected single-digit growth over the next 5-10 years. Analyst Recommendations: Analysts have become more bearing on CFN over the past three months bringing their rating from 1.87 three months ago to 2.12 currently. Their overall recommendation is a hold. Institutional Ownership: Net buyers has had a positive increase. JP Morgan Asset Management and The Vanguard Group both have > 5% ownership in CFN. The ownership combined with a net by is a bullish sign for the stock. 2

3 Affordable Health Care Act tax expected to increase expenses by up to $40 million a year in the future Will be hard to increase margin with increased taxes from AHC Act Believe it will drop a few dollars in the coming week/months while the XLV will continue upward trend Short Interest: CFN has a very good short interest ratio. Their current days to cover is 1.00 suggesting a bullish sentiment from investors. Their short interest is much better than competitors. Stock Price Chart: Great growth since incorporation in Very good growth in past few months compared to XLV, S&P 500 and competitors. Technical analysis shows no death crosses in the near future. However a very high RSI suggests a dip in the stock price will occur soon Section (B) Company Profile (two pages maximum) Company Summary CareFusion Corp. (CFN) is a medical equipment supplier that focuses on improving the safety and lowering the cost of healthcare. They are headquartered in San Diego, CA and operate primarily in the United States. They have an international presence as well. CFN employs over 15,000 people across the globe, with 6,300 employed in the U.S. CFN completed their spinoff from Cardinal Health on August 31, 2009 to become their own entity. Their operations consist of two segments: Medical Systems and Procedural Solutions; these are the two segments that they spun from Cardinal Health. Medical Systems incorporates three business units: Infusion Systems, Dispensing Technologies and Respiratory Technologies. The Medical Systems area is organized around its medical equipment business. CFN develops, manufactures and markets the equipment and related supplies needed for medical management. The Procedural Solutions segment is organized around disposable products and reusable surgical instruments. The Procedural Solutions segment consists of three business units: Infection Prevention, Medical Specialties and Special Disposables. CFN also develops, manufactures and markets these products. CFN s total revenue for FY 2012 was $3,598 million. Medical Systems accounted for $2,314 million, or 64.31%, and Procedural Solutions accounted for $1,284 million, or 35.69%. The largest source of revenue for Medical Systems was Dispensing Technologies with $1,038 million in revenues, equating to 44.86% of Medical Systems income. The largest source of revenue for Procedural Solutions was Infection Prevention with $576 million in revenues, equating to 44.86% of Procedural Solutions income. 3

4 Total revenues increased by 4.6% from FY 2011 to FY International Revenue for FY 2012 was $790 million, or 22% of total revenue. *All information from summary is taken from CFN s K Report located on their website Business Model, Competition, Environment and Strategy As mentioned, CFN operates in two segments: Medical Systems and Procedural Solutions. Because they operate in these two segments, their main competitors are Baxter International (BAX) and Becton Dickinson and Co. (BDX). These two main competitors compete directly with CFN s Medical Systems business segment. With regards to medical systems, CFN currently holds a dominate market share in infusion pumps and medication-dispensing, with 25% and 70% global market share respectively (MorningStar.com). CFN s focus is on improving the safety and reducing the costs of healthcare on a global scale. Because health care is a constant need, CFN is not a seasonal or cyclical company. They operate with stead demand throughout the entire year. With the new health care act passed, the Affordable Health Care Act, one could predict that CFN will see increased demand of their products from medical facilities in the future due to more people being insured in the U.S. The Affordable Health Care Act legislation will also add a 2.3% annual excise tax on the sales of certain medical devices in the U.S. CFN currently expects the impact of the tax to be approximately $15 million to $20 million in FY 2013, rising to approximately $30 million to $40 million annually thereafter (CFN 10-K). Revenue and Earnings History Discuss any pattern in revenue and earnings (e.g., increasing year over year; seasonal; etc.) **From Morningstar Revenue (recent four quarters, 2012): Q1: $919M Q2: $965M Q3: $837M Q4: $909M Total: $3,630M Earnings Per Share (recent four quarters, 2012): Q1: 0.14 Q2: 0.45 Q3: 0.38 Q4: 0.49 Total: 1.46 There does not seem to be any pattern between higher or lower revenues during a specific season/quarter. The only trend notable is that higher revenues lead to a higher EPS. 4

5 This is a trend that is consistent is most companies. The only outlier was in the first quarter in 2012 when the EPS was I could not find an explanation as to why the number was so low. The most recent earnings report on February 7, 2013, saw CFN just beat Wall Street s earnings estimates with an EPS of $0.48. The stock responded well to this news, continuing its climb. CFN had been rising the weeks prior to the report and has continued to climb since. 5

6 Section (C) Fundamental Valuation (EBO) Include the following here: CFN PARAMETERS FY1 FY2 Ltg EPS Fore casts % Mode l 1: 12-ye ar fore casting horiz on (T=12). Book value /share (last fye ) and a 7-ye ar growth pe riod. Discount Rate 9.57% Divide nd Payout Ratio (POR 0.00% Please download and save this template to your own storage device Ne xt Fsc Ye ar e nd 2013 You only ne e d to input value s to ce lls highlighte d in "ye llow" Curre nt Fsc Mth (1 to 12) 9 The re st of the spre adshe e t is calculate d automatically Targe t ROE (industry avg.) 10.85% Ple ase re ad "Guide line s_for_fundame ntalvaluation_profle e _Spre adshe e t" file care fully Ye ar Long-term EPS Growth Rate (Ltg) Forecasted EPS Beg. of year BV/Shr Implied ROE ROE (Beg. ROE, from EPS forecasts) Abnormal ROE (ROE-k) growth rate for B (1-POR)*(ROEt-1) Compounded growth growth*aroe required rate (k) Compound discount rate div. payout rate (k) Add to P/B PV(growth*AROE) Cum P/B Add: Perpetuity beyond current yr (Assume this yr's AROE forever) Total P/B (P/B if we stop est. this period) Implie d price Che ck: Beg. BV/Shr Implied EPS Implied EPS growth Inputs (provide below input values used in your analysis) EPS forecasts (FY1 & FY2): 2.16 & 2.42 Long-term growth rate: 11.42% Book value /share (along with book value and number of shares outstanding): Book value: $5.231 Billion # of shares outstanding: Book value / share: Dividend payout ratio: N/A Next fiscal year end: 2013 Current fiscal month: 9 Target ROE: Output Above normal growth period chosen: 5 EBO valuation (Implied price from the spreadsheet): $

7 Sensitivity Analysis EBO valuation would be (you can include more than one scenario in each of the following): $25.15 if changing above normal growth period to 3 years $26.84 if changing growth rate from mean (consensus) to the highest estimate $25.03 if changing growth rate from mean (consensus) to the lowest estimate 10.00% $32.60 if changing discount rate to 8% $26.01 if changing target ROE to 15% *Discount Rate: ( ) = 9.57% 7

8 Section (D) Relative Valuation Cougar Investment Fund Relative Valuation Template Please download and save this template to your own storage device You only need to input values to cells highlighted in "yellow" The rest of the spreadsheet is calculated automatically Please read "Stock Recommendation Guidelines" document carefully CFN Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value P/S P/CF Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio TTM TTM 1 BAX Baxter International $ 37, $ $ % % BDX Becton Dickinson & Co $ 17, $ $ % % BCR C R Bard Inc $ 8, $ $ % % CAH Cardinal Health Inc. $ 15, $ $ % % CFN CareFusion Corp. $ 7, $ $ % % Implied Price based on: P/E PEG P/B Value P/S P/CF 1 BAX Baxter International $32.16 $43.16 $ $24.85 $43.09 $ BDX Becton Dickinson & Co $35.58 $52.77 $97.78 $24.13 $37.23 $ BCR C R Bard Inc $32.11 $37.08 $ $25.65 $45.85 $ CAH Cardinal Health Inc. $26.83 $29.18 $58.82 $27.23 $2.44 $27.41 High $35.58 $52.77 $ $27.23 $45.85 $32.81 Low $26.83 $29.18 $58.82 $24.13 $2.44 $27.41 Median $32.14 $40.12 $ $25.25 $40.16 $29.91 From the top panel CFN has competitive ratios across the board with many of its ratios falling below or near the industry average. The most notable ratios to look at are forward P/E, P/B and PEG. These ratios value the company in line or possibly slightly undervalued compared to the competitors. The PEG of 1.22 is low enough to suggest that there is a good potential for future growth. The P/S and P/CF are also in line with competitors and suggest it is currently valued correctly. From the bottom panel When looking at the derived stock prices from competitors, it would seem that CFN is either valued correctly at the moment or is slightly over valued. With P/E being the most relevant ratio to the healthcare sector, the median value of $32.14 would put the stock at a very slight overvaluation currently. The median prices from the PEG and P/S have the company currently undervalued while the P/CF has the company overvalued. The P/B has some very high numbers and therefore make it irrelevant to this evaluation of derived stock prices. The current 52-week high is $ The PEG and P/s have CFN valued above this. With the forward P/E and P/CF valuing CFN under this number. CFN is currently trading at $ I Chose Baxter, Becton Dickinson, and C R Bard because they all compete directly with CareFusion in the medical equipment production and distribution. Baxter and Becton Dickinson 8

9 are larger cap companies than CareFusion but CFN still competes directly with them because of their specialized approach in their products. I chose Cardinal Health because CareFusion is a spin-off of Cardinal. They spun off in 2009 taking the Medical Systems and Procedural Solutions business segments with them. 9

10 Section (E) Revenue and Earnings Estimates Copy/Paste the Historical Surprises Table from Reuters.com, Analysts tab (include both revenue and earnings; make note that revenues might be in millions ) HISTORICAL SURPRISES Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Dec Quarter Ending Sep Quarter Ending Jun Quarter Ending Mar Quarter Ending Dec Earnings (per share) Quarter Ending Dec Quarter Ending Sep Quarter Ending Jun Quarter Ending Mar Quarter Ending Dec CFN has a pattern of positively surprising the market with higher number than expected. For the past five quarters reported in the above graph, CFN only missed estimates once in revenues. This was during the 3 rd quarter of However, in earnings, CFN has not missed estimates once in the past five reports. In all instances, the stock has responded appropriately to the positive surprises with gains that day. There were no extreme jumps or declines when these reports came out either. 10

11 Copy/paste the Consensus Estimates Analysis Table from Reuters.com, Analysts tab (include both revenue and earnings) CONSENSUS ESTIMATES ANALYSIS Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) # of Estimates Mean High Low 1 Year Ago SALES (in millions) Quarter Ending Mar Quarter Ending Jun , , , Year Ending Jun , , , , Year Ending Jun , , , , Earnings (per share) Quarter Ending Mar Quarter Ending Jun Year Ending Jun Year Ending Jun LT Growth Rate (%) The range of estimates does not seem to be too extreme. The high and low estimates are relatively close together for both revenues and earnings. The high revenue is 0.94% higher than the mean and the low revenue is 0.48% lower than the mean for FY 13. For earnings, the high estimate is 1.39% higher than the mean and the low estimate is 1.39% lower than the mean. The divergent are very similar, with neither the high or low estimate being very far from the mean. 11

12 Currently, there are only five analysts providing a LT-Growth rate. The rate rages from 10.00% to 12.60% providing a mean of 11.42%. Copy/paste the Consensus Estimates Trend Table from Reuters.com, Analysts tab (include both revenue and earnings) CONSENSUS ESTIMATES TREND Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Current 1 Week Ago 1 Month Ago 2 Month Ago 1 Year Ago SALES (in millions) Quarter Ending Mar Quarter Ending Jun-13 1, , , , Year Ending Jun-13 3, , , , , Year Ending Jun-14 3, , , , , Earnings (per share) Quarter Ending Mar Quarter Ending Jun Quarter Ending Jun Quarter Ending Jun The consensus estimates for revenue are trending down for both quarter and year ending estimates. There is no significant difference between the downward trend for FY1 or FY2 for revenues. 12

13 On the other hand, earnings estimates are trending upward as of a year ago until now. The most notable trend visible is the large jump from 2.23 EPS at FY2 one year ago to a 2.42 EPS for FY2 as the current estimate. I believe this is because analysts see the potential growth of this new company whereas one year ago there was more skepticism. Copy/paste the Estimates Revisions Summary Table from Reuters.com, Analysts tab (include both revenue and earnings) ESTIMATES REVISIONS SUMMARY Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Mar Quarter Ending Jun Year Ending Jun Year Ending Jun Earnings Quarter Ending Mar Quarter Ending Jun Year Ending Jun Year Ending Jun There are very few revisions. In the past four weeks 6 analysts total have increased their revenue estimates for revenue and earnings alike. In that same time period one analyst 13

14 decreased the revenue estimate for FY 13 and two analysts decreased their earnings estimate for the quarter ending March-13 as well as for FY 13. There is no notable trend, with so few analysts making changes to their estimates it is tough to find a pattern. If there was to be any sort of pattern, it would be trending toward upward revisions, a positive sign for the company. The financial outlook for the company is positive. Growth is expected but not at a high rate (MorningStar.com). CFN is a new company who is still growing. Their product line will not see a sharp increase in demand because the medical equipment is a relatively consistent industry with neither sharp increases nor decreases. 14

15 Section (F) Analysts Recommendations Copy/paste the Analyst Recommendations and Revisions Table from Reuters.com, Analysts tab. NOTE: Make sure you copy the entire table including the Mean Rating at the bottom of the table. ANALYST RECOMMENDATIONS AND REVISIONS 1-5 Linear Scale Current 1 Month Ago 2 Month Ago 3 Month Ago (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating The trend of analyst recommendations over the last three months has been bearish. The mean rating three months ago was 1.87 and it is currently at The most significant movement tends to be from buy to hold. The hold rating has increased from 5 analysts three months ago to 7 analysts currently. This is consistent with what I have read elsewhere about CFN. Their growth potential is starting to be seen as slow and very long term (MorningStar.com). I believe this is the main reasoning for the reduced recommendations. Currently there are no analysts who rate CFN as underperform or sell. This was true three months ago and is true today. 15

16 Revision Date The most recent revision date Upgrade or Downgrade Current Recommendation Previous Recommendation Firm Last Revision The earliest revision date in the last two months **** When searching CNBC.com I found no revisions by analysts during the past two months. 16

17 Section (G) Institutional Ownership Copy/paste the completed CIF Institutional Ownership spreadsheet here. Cougar Investment Fund Institutional Ownership Template Please download and save this template to your own storage device You only need to input values to cells highlighted in "yellow" The rest of the spreadsheet is calculated automatically Please read "Stock Recommendation Guidelines" document carefully CFN Ownership Activity # of Holders % Beg. Holders Shares % Shares Shares Outstanding 222,693, % # of Holders/Tot Shares Held % 205,145, % # New Positions % # Closed Positions % # Increased Positions % # Decreased Positions % Beg. Total Inst. Positions % 207,374, % # Net Buyers/3 Mo. Net Chg % -2,229, % Ownership Information % Outstanding Top 10 Institutions % Ownership 39.30% Mutual Fund % Ownership 1.67% Float % 99.75% > 5% Ownership Holder Name % Outstanding Report Date JP Morgan Asset 5.8 Management 12/31/2012 Vanguard Group, Inc /31/

18 On a net basis, institutions have increased their positions by 12. The interest in this stock medium, with two big name owners holding more than five percent. JP Morgan Asset Management and The Vanguard Group both hold 5.8% of CFN. This can be seen as a bullish indicator for the future. These two owners are very well known in the investment world and obviously see potential for this stock to grow in the future. The investment by JP Morgan and Vanguard combined with a positive net buy provide a bullish outlook on CFN. 18

19 Section (H) Short Interest (two pages) From (NASDAQ s website) CFN Settlement Date Short Interest Avg Daily Share Volume Days To Cover 2/28/2013 2,211,605 2,373, /15/2013 2,015,916 2,170, /31/2013 1,640,934 1,312, /15/2013 1,326,721 1,203, /31/2012 1,403,791 1,070, /14/2012 2,003, , /30/2012 2,331,245 1,180, /15/2012 2,361,665 1,533, /31/2012 2,360,133 1,173, /15/2012 2,419,591 1,003, /28/2012 2,946,669 1,729, /14/2012 2,956,375 2,446, /31/2012 2,192,355 1,436, /15/2012 2,023,013 2,893, /31/2012 2,533,318 1,332, /13/2012 2,644,994 1,101, /29/2012 2,501,589 1,396, /15/2012 3,838,202 1,576, /31/2012 4,717,890 1,911, /15/2012 4,776,331 1,976, /30/2012 4,409,139 1,654, /13/2012 3,283,373 1,934, /30/2012 2,772,818 1,267, /15/2012 2,136,751 1,310,

20 BAX 20

21 BDX 21

22 Settlement Date Short Interest Average Daily Shares Volume # of Days to cover 2/28/2013 2,211,605 2,373, From Complete the following table with information from the share statistics table. Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 1,663,940 1,537, M M Shares Short Short Ratio Short % of Float Shares Short (Most recent date) (Most recent date) (Most recent date) (2 weeks prior) 2.21M (2/28/13) 1.10 (2/28/13) 1.00% (2/28/13) 2.02M The market sentiment has become more bullish over the last year. The current days to cover for CFN is 1.00 which is very good. The highest it reached over the past year was 2.5 days suggesting that investors have been bullish on the stock almost all year long. The same cannot be said for its competitors. BAX is currently at 1.8 days to cover with a high of 4 days to cover over the past year and BDX is currently at 7.2 days to cover with a high during the year of 10.8 days to cover. When comparing these competitors against CFN, investors seem much more bullish towards CFN than they are toward either BAX or BDX. 22

23 Section (I) Stock Charts A three months price chart Copy/paste the 3 Mos. stock chart here A one year price chart Copy/paste the 1 Yr stock chart here 23

24 A five year price chart Copy/paste the 5 Yrs. stock chart here Additional price chart Technical Analysis: 6-Month 24

25 2-year The results from the 3-month, 1-year and 5-year graphs show consistent growth since their IPO in Their stock price has risen over 30% in the past year, higher than the S&P 500, the XLV, and its two main competitors, BAX and BDX. This is seen in all three price charts. More recently, CFN has started to outgrow their competitors, the S&P, and the XLV at a greater rate than before. They have also recently reached a 52-week high and are trading very near that currently. The technical analysis is promising. The technical graphs show good moving averages with no death crosses in the near future. RSI is very high at the moment suggesting that CFN will more than likely drop a few points in the very near future. This is to be expected because the price has been driven higher at a fast rate the past couple months and should be expected to drop soon before it will be able to grow at a consistent rate again. 25