A Stock Buffett and Woodford Agree On
05/25/2012 10:45 am EST
It’s one thing when an investment master takes a position in a stock and it’s entirely another when two investment masters take a liking to the same stock notes the staff at Motley Fool UK.
City of London super-investor Neil Woodford has sold all his shares in Tesco this year, while US investing legend Warren Buffett has been a buyer. Woodford and Buffett may disagree about Tesco, but a company they share a passion for is French pharmaceutical giant Sanofi (SNY).
Why have these two great investors, who invest very selectively outside their own backyards—and who have a whole kaleidoscope of shares to choose from in the world beyond—ended up landing on the same drugmaker in the heart of the Eurozone?
The Sanofi Fan Club
Buffett’s Berkshire Hathaway (BRK-B) first bought shares in Sanofi in 2006, and increased its holding each year between 2007 and 2010. According to a letter of January 2011: "Berkshire believes that Sanofi…possesses a significant economic franchise and potential for continued growth in earnings and earnings per share."
Woodford joined the fan club in 2011, paying about â‚¬54 a share for his new Sanofi holding, according to Maynard Paton—a price at which the shares can still be bought today.
Like all big pharma groups, Sanofi is currently dealing with patent expirations on some of its blockbuster drugs. In fact, 2012 is set to be a trough year, as generic competition to blood-thinner Plavix and hypertension drug Avapro in the US is expected to make a 12% to 15% dent in Sanofi’s global profit.
Again, like other big pharma groups, Sanofi has been preparing for the future by overhauling its core drug operation and diversifying into areas where products are less vulnerable to patent expiry, such as consumer health care.
You might ask: "Isn’t this what GlaxoSmithKline (GSK) and everyone else is doing?" And: "Why does Buffett see a ’significant economic franchise’ in Sanofi?"
Part of the answer is that Buffett and Woodford actually do hold GSK (and several other pharma groups between them), but that Sanofi has one big standout quality: it is the leader in emerging markets. Sanofi’s 31% of sales from emerging markets is streets ahead of other big drugmakers, including the US majors, and the UK’s GSK and AstraZeneca (AZN), where emerging-market sales are running at 19%.
Trading for just over nine times forecast 2012 earnings and with a forward dividend yield of 5%, it’s not hard to see why Neil Woodford, despite already having big stakes in GSK and AstraZeneca, was tempted to pump more money into the drug sector by investing in Sanofi.