As Americans, we live in a country where expertise has been pooh-poohed and resented for so long that people don’t see or value the difference anymore between Charles Schwab and Morgan Stanley, birthing coaches and ob-gyns, mass produced and organic foods, or experienced, educated presidential candidates and Chicago-style community organizers. I for one prefer quality and expertise, and I will pay more money to get it. I don’t want junk food, generic drugs, illegal immigrants touching my landscape, or meth addicts transporting my household to a new location.
Citi Investment Research and Analysis published a 34-page review of pharmaceutical stocks on November 12, 2011: U.S. Pharmaceuticals: The Pharmaceutical Valuation Weekly & Catalyst Calendar. Talk about having an entire investment industry handed to you on a silver platter! For people who like to read intricate analyses of everything from products to cash flow, I highly suggest gaining access to exceptional Wall Street research.
“The U.S. Major Pharmaceutical group is trading at 10.6x 2012E earnings, representing a 14% discount to the S&P 500 on consensus EPS….” says Citi. Let’s look deeper for investment opportunities.
Starting with large-cap U.S. pharmaceutical companies, Citi projects Johnson & Johnson’s (JNJ, $65.25) earnings (EPS) to grow 9.0% from FY2010 through FY2012, and Merck & Co. Inc.’s (MRK, $35.97) EPS to grow 16.1%. These are the best numbers within their industry sub-sector. Those numbers are a problem, because a growth stock investor wouldn’t look twice at such growth, and that would explain why Merck and its peers are trading at a discount to the S&P 500.
Other companies within the comparison are Abbott Laboratories (ABT), Bristol-Myers Squibb (BMY), Eli Lilly (LLY) and Pfizer Inc. (PFE). (I wrote articles about BMY & PFE and MRK, earlier this year.)
European pharmaceutical companies in the article with the best earnings (EPS) growth rates are GlaxoSmithKline (GSK, $44.81) and Novo Nordisk (NVO, $111.05).
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GSK’s stock chart looks strong, with the next resistance levels at approximately $49 and $54. GSK also pays a 4.9% dividend.
NVO pays a dividend of about 2.0%, has strong projected consensus EPS growth — 63% from FY 2010 through FY 2013, a 2011 PE of 20, and the chart is recovering from its fall with the market in August and September of this year. Novo Nordisk is a stock which could appeal to growth stock investors.
Other stocks covered within the European pharmaceutical sub-sector include AstraZeneca, Bayer, Novartis, Roche, Sanofi-Aventis and UCB.
The biotechnology stock with the strongest projected earnings growth by Citi is Celgene (CELG, $64.57), growing significantly faster than the other five stocks in its peer group. Celgene works on therapies to treat cancer and immune-inflammatory diseases. Projected consensus earnings growth is 93% from FY2010 through FY2013. The stock is breaking out of a recent trading range. I will look for it to trade between $62 and $75. This stock could appeal to a trader or a long-term growth investor.
Amongst specialty pharmaceuticals, Valeant (VRX, $43.17) and Endo (ENDP, $33.01) are each projected for big earnings growth. Valeant experienced a significant price run-up since the 2008 Financial Meltdown. Look for lots of price volatility in the $34 to $56 area.
Endo completely recovered from its fall in 2008, then fell quite a bit this past August/September. If it recovers quickly again, I’d look to purchase Endo stock during future market dips due to the large price swings and quick recoveries.
Honorable mentions on good earnings growth in this sub-sector go to Shire and Allergan. Specialty pharmaceuticals have performed best in the stock market this year vs. other pharmaceuticals, up 19% YTD.
In the Generic/Hybrid Pharmaceutical category, Watson Pharmaceuticals (WPI, $65.73) easily surpasses its peers with projected earnings growth of 36% and 26% in fiscal years 2011 and 2012. The stock had a huge run-up in 2009 and 2010, and is currently digesting that move via a sideways trading pattern of roughly $60 to $72.
There are quite a few companies here for readers to explore. Stock investing is not for the faint of heart. There is as much to master on the emotional side as there is on the numerical side of financial decision-making. Readers should consult their investment and tax advisors to determine suitability, risk and taxation.
Crista Huff, Goodfellow, LLC
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