Buckingham's Bets: Two Values in Healthcare

05/10/2019 5:00 am EST


John Buckingham

Principal, Portfolio Manager, and Editor, The Prudent Speculator

First quarter corporate report cards generally have been good, with 75% or so of S&P 500 companies beating earnings estimates, observes John Buckingham, value investing expert and editor of The Prudent Speculator.

Looking ahead, Standard & Poor’s projects that bottom-up operating EPS for the S&P 500 will rise to $165.07 this year and $185.77 next year, up from $151.60 in 2018. With dividend yields also very competitive vs. fixed income instruments, we see no reason not to retain our long-term enthusiasm toward equities.

Pfizer (PFE) is a global pharmaceutical titan. While it is difficult to predict how the political winds will blow, even as one has to suspect that the drug-makers will be punching bags in the 2020 Presidential Campaign.

PFE shares have given back some of 2018’s strong showing on concerns about developments in DC potentially leading to lower or pressured product pricing.

That possibility already arguably “in” the stock price, the company reported a strong Q1 with both its top- and bottom-line results outpacing analyst estimates. Adjusted EPS was $0.85 with revenue of $13.1 billion (vs. est. of $0.76 and $13 billion).

The quarter was aided by strong growth from the majority of its new drugs, which offset flattish performance for its more mature products.

While many remain concerned about generic competition for some of Pfizer’s older drugs, we believe that the market under-appreciates the company’s emerging pipeline of products and management’s increasing confidence in its organic growth potential.

We like the strong balance sheet and capital return programs. PFE yields 3.5% and trades for 14 times NTM earnings.

Zimmer Biomet (ZBH) is a global leader in orthopedic implants (hips, knees, spine, trauma and dental) as well as related orthopedic surgical products.

The company is by far the king in hip and knee implants and we believe favorable demographics, which include aging Baby Boomers and increasing obesity rates, will drive solid demand for large-joint replacement.

ZBH had a decent Q1 in which it earned $1.87 per share, a penny ahead of estimates, while revenue was $1.98 billion. Shares have mostly recovered since the broad-market sell-off at the end of last year, and we think the company’s turnaround effort puts it on a sustainable path to growth.

With a slew of new product launches scheduled for 2019 and the rollout of the ROSA robotics platform, we are bullish on the company’s prospects.

Zimmer expects to generate free cash flow of $1.1 billion to $1.3 billion and earn $7.70 to $7.90 per share this year, while the forward P/E ratio is near 16, materially lower than the average of its key competitors.

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