CIF Sector Recommendation Report (Spring 2013)

Transcription

1 Date: 24 April 2013 Analyst: Garrett Lachney CIF Sector Recommendation Report (Spring 2013) Sector: Healthcare Review Period: 04/05-04/18 Section (A) Sector Performance Review Copy/paste Sector Review Spreadsheet (the entire spreadsheet) here Review sector performance relative to the broad market (SP500) and explain why; Include a two-week (for the two-week window reviewed) price chart of the SPDR sector ETF and SP500 (on the same chart) The healthcare sector was able to push higher than the S&P as the broad S&P was dragged down in its worst week of 2013, due to the commodity crunch and China s disappointing 1

2 growth numbers. With news in the beginning of April that Medicare and Medicaid reimbursements will be increased, large insurance giants such as Humana and UnitedHealth edged the XLV to outperform the S&P over the two-week review period. Highlight noteworthy headline news from the sector (company-, industry-, or sector- level news) Mark Hayes, a lobbyist for Humana, is currently under investigation for links to insider trading. Height Securities supposedly traded on insider information that Hayes had allegedly disclosed in an . Height Securities is a client of Hayes, while Hayes has also advised Rep. Charles Grassley on health policy in Congress. Furthermore, he has been involved with the CMS in the past. Height Securities may have unfairly profited on investments made in healthcare companies directly before the announcement of increased governmental reimbursements. UnitedHealth announced its Q1 revenue and earnings. The stock fell 3.8% even with slightly better-than-expected revenue results, due to a pessimistic outlook for the rest of This dragged the XLV down 1.2% with it. The federal government is making a push to accelerate and begin implementing Stage 2 of Meaningful Use. Meaningful Use is a government program intended to promote the spread of electronic health records to improve health care in the United States. The stages refer to the various requirements that are expected to be met by the subsequent hospitals, patient centers, clinics, and health IT firms regarding the electronic healthcare records. Highlight the biggest (+) and the biggest (-) movers from the sector holdings during the review period. Are there notable reasons why the stocks had big moves (e.g., earnings surprises, etc)? BIIB (Biogen) +5.87% - Biogen s CEO George Scangos has recently been praised for his driven attitude and relentless perseverance in pursuing new drugs. With a strong pipeline of drugs, including Roche, a cancer drug with sales recently forecasted to $7 billion out to 2015; and Tecfidera, the new multiple sclerosis drug that made it to market in less than a 2

3 week of being approved, Biogen is now steering a high-return biotech company. In addition, competitor Teva Pharmaceuticals is facing the loss of its own multiple-sclerosis drug patent by Biogen is well-positioned all around. ALXN (Alexion Pharmaceuticals) -2.32% - Concerns about Alexion s manufacturing facility in Rhode Island (specifically, addressing supply-chain risk and back-end loaded costs) and announcements of negative reimbursements by the UK s government in healthcare pushed Alexion shares down. Credited with the most expensive drug in the world, Soliris, this is not good news. The company has seen an overall sluggish Highlight the largest two holdings from the sector and note any headline news on the companies Johnson & Johnson (JNJ) and Pfizer (PFE) are the largest holdings in the healthcare sector. JNJ reported earnings on April 16 for Q JNJ beat Wall Street estimates and helped send the XLV to positive heights. EPS figures were beat by about 4 cents. Sales were beat by around $80 million. On April 18, JNJ announced the sale of Elan Corporation, held by its subsidiary Janssen. The after-tax gain will be approximately $213 million, which JNJ expects to reinvest in its business. On April 10, Pfizer s new experimental cancer drug was granted a breakthrough designation, sending shares up 2.6% on the day. The medicine is called Palbociclib and is expected to generate sales of around $5 billion or more if approved by the FDA. Pfizer is expected to report earnings for Q on April 30 th finance.html Comment on short-term outlook of the sector (including noteworthy upcoming events) 3

4 The short-term outlook in the healthcare sector is relatively bullish. However, this industry is perhaps one of the most volatile right now. This is not due to its nature, but rather the effects of government transformation in healthcare spending and reimbursement. Changes in government policy and the Affordable Care Act can, at almost the drop of the hat, send the whole sector skyrocketing or through the floor. With that being said, I am cautiously optimistic about the near-term success of the XLV. Section (B) Sector Holding Updates Company #1: Laboratory Corporation of America, Holdings. (LH) Date Recommended: 02/13/2013 Date Re-evaluated: 04/24/2013 Company Update Briefly update what happened to the company the last two weeks (up through your reevaluation date). This should include noteworthy headline news on the stock (e.g., earnings announcement, management s comments on company outlook and/or strategic changes, changes in analyst recommendations or estimate revisions, new product launch, management turnover, legal or regulatory issues, merger/acquisition announcement, restructure announcement, news from major competitors, etc.) The most important piece of information pertaining to LabCorp is its Q1 earnings release on April 18. LabCorp missed earnings estimates, though the stock price was fairly unimpacted as management advised stakeholders that 2013 looks brighter than previously expected with higher volume of tests and the CMS reimbursement announcement. The disappointing news was attributed to higher costs in its testing facilities. However, testing volume and revenues were up from the previous quarter, though down year-over-year. In the beginning of April, LabCorp also announced that it had become the preferred provider for Global Central Laboratory Services by Bristol-Meyers Squibb. vider_for_m/ 4

5 Relative Performance Review relative performance of each sector holding, over the two-week review period, both relative to the SP500 and to the respective SPDR sector ETF. Relate your comments on relative performance to the updates discussed above LabCorp outperformed the S&P as well as the sector ETF over the review period (which starts in April). The news discussed above is no doubt the reason for this. Becoming a preferred provider as well as a positive announcement regarding CMS reimbursements pushed LH above the performance of the XLV as well as the S&P. Price Charts Insert a price chart of the stock for the most recent three months. You should include on the same chart (1) the SPDR sector ETF, (2) and the SP500 prices for the same period 5

6 Insert a price chart of the stock for the most recent one year. You should include on the same chart (1) the SPDR sector ETF, (2) and the SP500 prices for the same period Valuations Analysis Original Analysis Copy/paste P/E (TTM), P/S (TTM), P/B (MRQ), P/CF (TTM) of the stock, the industry, and the sector from ratio analysis section of the original stock recommendation report (from CIF website, reports tab) Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM)

7 Re-evaluation Analysis Copy/paste the requested valuation multiples from Financials tab Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM) Briefly discuss the changes The fluctuations in valuation ratios have changed little from the last time this stock has been reviewed. The stock was never a cheap buy in terms of financial ratios, however, so it is not surprising that the ratios are still not stellar. However, the CIF did not buy into LH with the intention of finding a intrinsically undervalued stock, but rather, the long-term prospect of future-growth with healthcare reform. Historical Surprises Original Analysis Copy/paste Historical Surprises Table from the original stock recommendation report (from CIF website, reports tab) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Sep-12 1, , Quarter Ending Jun-12 1, , Quarter Ending Mar-12 1, , Quarter Ending Dec-11 1, , Quarter Ending Sep-11 1, , Earnings (per share) Quarter Ending Sep

8 Quarter Ending Jun Quarter Ending Mar Quarter Ending Dec Quarter Ending Sep Re-evaluation Analysis Copy/Paste the Historical Surprises Table from Analysts tab (include both revenue and earnings; make note that revenues might be in millions ) Briefly discuss the changes Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Mar-13 1, , Quarter Ending Dec-12 1, , Quarter Ending Sep-12 1, , Quarter Ending Jun-12 1, , Quarter Ending Mar-12 1, , Earnings (per share) Quarter Ending Mar Quarter Ending Dec Quarter Ending Sep Quarter Ending Jun Quarter Ending Mar The changes from the previous table to the more updated one is the two quarters of earnings that had not been announced when the stock was recommended. The results were mixed, but nothing extremely tide-changing. The causes of the most recent dip in earnings is discussed above. 8

9 Consensus Estimates Original Analysis Copy/paste Consensus Estimates Analysis Table from the original stock recommendation report (from CIF website, reports tab) Current 1 Week 1 Month 2 Month 1 Year SALES (in millions) Quarter Ending Mar-13 1, , , , , Quarter Ending Jun-13 1, , , , , Year Ending Dec-13 5, , , , , Earnings (per share) Quarter Ending Mar Quarter Ending Jun Quarter Ending Dec Re-Evaluation Analysis Copy/paste the Consensus Estimates Analysis Table from Analysts tab (include both revenue and earnings) SALES (in millions) # of Estimates Mean High Low 1 Year Quarter Ending Jun , , , , Quarter Ending Sep , , , , Year Ending Dec , , , , Year Ending Dec , , , , Earnings (per share) Quarter Ending Jun Quarter Ending Sep Year Ending Dec Year Ending Dec LT Growth Rate (%)

10 Briefly discuss the changes The changes in analyst estimates concerning earnings from the time the stock was recommended has been modestly increased. This is due to the increase in CMS reimbursements announcement by the federal government. Sales and EPS have all been adjusted upward slightly across the board. Estimate Revision Analysis Original Analysis Copy/paste Estimates Revision Summary Table from the original stock recommendation report (from CIF website, reports tab) Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Mar Quarter Ending Jun Year Ending Dec Earnings Quarter Ending Mar Quarter Ending Jun Year Ending Dec

11 Re-Evaluation Analysis Copy/paste the Estimates Revisions Summary Table from Analysts tab (include both revenue and earnings) Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Jun Quarter Ending Sep Year Ending Dec Year Ending Dec Earnings Quarter Ending Jun Quarter Ending Sep Year Ending Dec Year Ending Dec Briefly discuss the changes There has been a significant amount of activity surrounding LabCorp s analysts. Many have revised their estimates recently. The majority have revised estimates upward, both within the last four weeks as well as the last week. However, there is still a significant amount of down revisions. These most likely have to do with the mixed earnings results. 11

12 Analysts Recommendations Original Analysis Copy/paste Analyst Recommendations and Revisions Table from the original stock recommendation report (from CIF website, reports tab) 1-5 Linear Scale Current 1 Month 2 Month 3 Month (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating Re-Evaluation Analysis Copy/paste the Analyst Recommendations and Revisions Table from Analysts tab (include both revenue and earnings) 1-5 Linear Scale Current 1 Month 2 Month 3 Month (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating Briefly discuss the changes The revision table has remained almost completely unchanged excluding one analyst who has changed an opinion from Underperform to Hold. Company #2: Express Scripts (ESRX) Repeat the above for Company #2, and all other sector holdings in CIF. 12

13 Date Recommended: 02/27/2013 Date Re-evaluated: 04/24/2013 Company Update On April 9, TRC Capital solicited a mini-tender offer to acquire just less than 5% of Express Script s shares outstanding at a price less than its current market value (at the time). TRC offered $55.75 per share. Express Scripts urged shareholders to reject the offer, as these mini-tender offers are usually unsolicited attempts at acquiring a significant amount of company influence while simultaneously avoiding many SEC regulations that come with a 5% or greater stake in a company. The stock seemed to fall in the following days; whether this was a consequence of the TRC offer or not, I am not sure. ESRX also announced its plan to release first quarter 2013 earnings Monday, April 29 after the market-close. Relative Performance Express Scripts did not perform very well over the review period. It was outperformed by both the S&P and the XLV. The largest dip in the last half of the chart coincides with around the time that TRC Capital made the 5% bid, as well as an announcement of a 50% increase in pay to ESRX s CEO. It is interesting the stock should fall this much regarding this news, however. Zack s upgraded ESRX to a buy the previous day. 13

14 Price Charts 3 months 1 year 14

15 Valuations Analysis Original Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM) Re-Valuation Analysis Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM) The valuation multiples of ESRX has, like LabCorp, changed very little. Earnings seems to be rather expensive, but that is somewhat offset by cheaper sales valuations. The stock price has had very small fluctuations since it has been added to the CIF, so interpreting the small differences too much between these two chart multiples would probably be overspeculation. 15

16 Historical Surprises Original Re-Evaluation Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Dec-12 27, , Quarter Ending Sep-12 27, , Quarter Ending Jun-12 26, , , Quarter Ending Mar-12 11, , Quarter Ending Dec-11 11, , Earnings (per share) Quarter Ending Dec Quarter Ending Sep Quarter Ending Jun Quarter Ending Mar Quarter Ending Dec These two charts are the same. No new earnings announcements have been made regarding ESRX. Express Scripts will announce Q1 earnings next week. 16

17 Consensus Estimates Original Re-Evaluation # of Estimates Mean High Low 1 Year SALES (in millions) Quarter Ending Jun , , , , Quarter Ending Sep , , , , Year Ending Dec , , , , Year Ending Dec , , , , Earnings (per share) Quarter Ending Jun Quarter Ending Sep Year Ending Dec Year Ending Dec LT Growth Rate (%) Estimates have changed slightly in the sales and earnings figures, as well. At first, the inconsistencies between the estimates in different fiscal quarters and years seems to make little sense. However, the number of analysts reviewing these numbers increased slightly in most categories. Therefore, these slight differences that would otherwise seem strange are more than likely due to the sample size of analysts increasing, and not a fundamental change of analyst expectations or opinions. 17

18 Estimate Revision Analysis Original - Re-Evaluation Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Jun Quarter Ending Sep Year Ending Dec Year Ending Dec Earnings Quarter Ending Jun Quarter Ending Sep Year Ending Dec Year Ending Dec Estimates revisions have significantly slowed down since this stock has been recommended. By a small margin, there has been more downward revisions than upward. This probably has to do with the stagnant growth of ESRX in recent weeks and stiffer competition. However, the revisions summaries have significantly slowed, so we can infer most have stayed the same. 18

19 Analysts Recommendations Original - Re-Evaluation 1-5 Linear Scale Current 1 Month 2 Month 3 Month (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating Like most of the other revisions tables, recommendations have stayed near unchanged. It seems that one analyst had moved from Outperform to Hold, but this movement was captured in the original analysis. 19

20 Section (C) Sector Recommendations You will make recommendations on whether CIF should continue to own its sector holdings Provide your views on the sector. Are you bullish, bearish or neutral on the sector, and why? Discuss whether you recommend CIF to (1) stay put with its current sector holdings, or (2) sell out of the sector, and why? I recommend no changes in our current holdings in the Healthcare sector. I believe we are positioned well with the XLV and our current holdings. Although ESRX has been underperforming the past weeks, the company still boasts strong cash flows, a wellpositioned business, relatively inexpensive valuations, and strong investor and analyst sentiment. Being that I was the analyst that recommended LabCorp, I still take the view that LH will outperform the XLV on a more long-term basis, as I see LabCorp well-positioned in both its industry and in terms of healthcare reform. The CIF has already marginally benefitted from LabCorp s performance in response to increased reimbursement from the CMS. I would expect more of this in the future. As far as the XLV goes, it has been one of the strongest sector performers of At least for the near future, I believe hospitals, large insurers, and successful biotech firms will continue to push the XLV higher. Section (D) Sector Holding Recommendations Based on your analysis, are there stocks CIF currently owns from your sector you would recommend to: 1. Sell and why? - No 2. Adjust target price and why? If you recommend an adjustment, you must suggest a new target price - No 3. Adjust stop-loss price and why? If you recommend an adjustment, you must suggest a new stop-loss price - No Provide your recommendations in the following table 20

21 Company Name Laboratory Corporation of America, Holdings Express Scripts, Holdings Ticker Symbol Date Recommended Date Reevaluated Sell Recommendation (Explain Why) Adjust Target Price LH 2/13 4/24 No No No ESRX 2/27 4/24 No No No Adjust Stoploss Price 21