Health Care Sector
Presentation
Song Qin
Tracy Shoemaker
Chris Sloey
Spring 2011
Agenda
• Overview
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Overview
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Overview
Health Care
Facts
The U.S. health
care spending in
2010 reached
17.6% of the GPD,
which is the
highest among
developed
countries.
This ratio is
projected to
continue to grow
t0 32.7% of GDP in
2050.
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Health Care Sector Key Statistics
• Total Market Cap: 2.7 (Trillion in US$)
• P/E (TTM): 21.113
• Return on Equity (TTM): 41.95%
• Dividend Yield (Last 4 Quarters): 3.23%
• Long Term Debt/Equity: 43.765
• Price/Tangible Book (Most Recent Quarter): 820.111
• Dividend Growth Rate: 86.62%
• EPS Growth : 47.11%
As of 4/29/11
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Sector Weight
As of 4/29/11
Market Weight
SIM Weight
Consumer Discretionary
10.60%
10.61%
Consumer Staples
10.42%
8.17%
Energy
13.09%
11.04%
Financials
15.47%
13.62%
Health Care
11.27%
10.39%
Industrials
11.23%
11.10%
Information Technology
18.07%
22.74%
Materials
3.66%
3.09%
Telecommunication Services
2.98%
4.18%
Utilities
3.23%
2.26%
Sector
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Industries of Health Care Sector
Industries
1 Month
3 Month
YTD
I Year
S&P 500
2.66%
6.84%
8.43%
13.00%
Health Care
6.38%
11.46%
11.74%
12.41%
Biotechnology
6.19%
14.06%
12.99%
12.74%
Health Care Equipment &
supplies
4.68%
10.99%
12.83%
8.36%
Health Care Providers &
Services
6.29%
12.09%
20.12%
26.66%
Health Care Technology
6.18%
16.61%
21.91%
29.58%
Life Sciences Tools &
Services
9.25%
12.43%
13.60%
18.31%
Pharmaceuticals
7.07%
11.42%
9.11%
9.99%
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Business Analysis
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Health Care Sector Stocks
• Defensive stocks: historically, Health Care sector stocks are less
sensitive to macro environment and they normally have small
beta values.
• Lately, the returns on Health Care sector stocks are the lowest
among the 10 S&P 500 economic sectors.
• Most recently, especially in April, the Health Care sector stocks
outperformed S&P 500 by a significant margin.
• Signs indicate that the Health Care sector is turning around. Will
this trend continue?
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Positive Factors & Opportunities
•
•
Demographic changes
•
Aging of population
•
Increasing population size
•
Longer life span
•
Changing patterns of human diseases
New technologies
•
Biological drugs
•
New equipment
•
Information technology
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
World Population Growth
World population from
1800 to 2100, based on UN
2004 projections (red,
orange, green) and US
Census Bureau historical
estimates (black).
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Aging of Population
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Changing Patterns of Human Diseases
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Negative Factors
• Volume and pricing pressures due to continuing weak
macroeconomic conditions
• Loss of revenues and profits due to expiring patents at big
pharmaceutical companies
• Uncertainties due to legislations, regulations and lawsuits,
especially health care reform
• Investors show more interests in cyclical recovery stocks
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
U.S. Health Care Reform
• Lower revenue/income
•
Pricing and volume pressure due to government cost reduction
measures
•
Fewer new drugs get approval from FDA
• Higher costs
•
Potential penalties
•
New forms of taxes
•
Extended coverage for dependents
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Porter’s Five Forces Analysis
• Barriers to entry: high, esp. pharmaceuticals, due to high cost
of R&D and patent limitations
• Industry competition: high, advantages gained by first mover
(patents)
• Suppliers: low
• Buyers: low
• Substitutes: low (with patents) or medium (after patent expiry)
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Recent Development
Health Care sector
was lagged behind
amidst a broad postrecession cyclical
rally.
However, it
outperformed SP500
in last two months.
Does this sign tells us
the Health Care sector
is more than just
defensive?
Overview
Business Analysis
• Positive earnings surprises
• Signs of aggressive capital allocation:
spin offs, buy backs and M&A
• Improving new product release
• Less uncertainty regarding health care
reform
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Economic Analysis
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
S&P 500 Price Index – Health Care Sector
• High correlation
with the S&P 500
• 10-Year r = 0.88
•5-Year r = 0.94
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Real Gross Domestic Product – Health Care Sector
• Not very
correlated with
Real Gross
Domestic Product
• r = 0.30
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Employment – Health Care Sector
• Moderately
correlated with
Employment
• r = 0.49
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Consumer Spending – Health Care Sector
• Moderately
correlated with
Consumer
Spending
• r = 0.48
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Economic Analysis Summary
• Health Care sector is DEFENSIVE and thus generally
has weaker relationships with economic measures
• Demographics
• Health Care Reform Questions
•
Future pricing pressure
•
Expansion of coverage for unemployed/uninsured
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Financial Analysis
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Margins
• Biotechnology and
Pharmaceuticals have the
highest margins in the Health
Care sector
• S&P 500 and Health Care
sector have similar margins
• Health Care margins remained
relatively constant historically
• Health Care net
profit margin
typically above S&P
500
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Net Profit Margin Relative to S&P 500
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Return on Equity
• Industries within the Health Care sector have a
greater return on equity than the S&P 500
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Cash Flow Per Share
• Cash flow per share is below the S&P 500 for the various Health
Care industries
• Biotechnology has historically generated the highest cash flow
per share in the Health Care sector
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Growth Rates
• Health care revenue and operating earnings growth
rates remain relatively steady compared to the S&P
500
Revenue Growth Rates
2008
2009
S&P 500
4.7%
-11.1%
Healthcare
9.8%
7.4%
2010
5.3%
11.4%
Operating Earnings Growth Rates
2009
2010
2011E
S&P 500
14.9%
47.3%
17.6%
Healthcare
7.9%
9.4%
13.5%
Overview
Business Analysis
Economic Analysis
Financial Analysis
2012E
13.7%
7.4%
Valuation Analysis
Recommendation
Valuation Analysis
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Health Care Sector – Absolute Basis
Absolute Basis
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
30.1
27.2
8.7
3.9
22.9
Low
9.9
10.0
2.2
1.0
7.6
Median
18.6
17.5
4.0
1.8
13.7
Current
13.0
12.4
3.0
1.3
11.7
Over/Undervalued
-30.1%
-29.1%
-25.0%
-27.8%
-14.6%
* 10-Year Valuations
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Low
Economic Analysis
Price/Book
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Health Care Sector – Relative to S&P 500
Relative to S&P 500
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
1.4
1.2
2.5
2.4
1.9
Low
0.7
0.7
1.2
0.9
0.9
Median
1.1
1.1
1.4
1.3
1.3
Current
0.8
0.9
1.3
0.9
1.2
Over/Undervalued
-24.5%
-20.9%
-7.1%
-30.8%
-7.7%
* 10-Year Valuations
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Price/Book
Low
Economic Analysis
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Pharmaceutical Industry – Absolute Basis
Absolute Basis
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
30.1
26.4
11.3
5.8
23.2
Low
8.9
9.3
2.3
2.0
6.7
Median
16.3
15.8
4.1
3.6
12.3
Current
11.3
11.0
2.5
2.5
8.1
Over/Undervalued
-30.7%
-30.4%
-39.0%
-30.6%
-34.1%
* 10-Year Valuations
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Low
Economic Analysis
Price/Book
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Pharmaceutical Industry – Relative to S&P 500
Relative to S&P 500
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
1.4
1.1
3.3
3.9
1.9
Low
0.6
0.6
1.0
1.7
0.8
Median
1.0
1.0
1.4
2.4
1.1
Current
0.7
0.8
1.1
1.8
0.8
Over/Undervalued
-24.2%
-21.4%
-21.4%
-25.0%
-27.3%
* 10-Year Valuations
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Price/Book
Low
Economic Analysis
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Health Care Equipment – Absolute Basis
Absolute Basis
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
36.0
31.4
9.0
5.5
25.6
Low
12.1
11.7
2.3
2.0
8.7
Median
23.3
21.5
4.6
3.8
16.5
Current
16.3
15.5
3.0
2.8
12.2
Over/Undervalued
-30.0%
-27.9%
-34.8%
-26.3%
-26.1%
* 10-Year Valuations
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Low
Economic Analysis
Price/Book
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Health Care Equipment – Relative to S&P 500
Relative to S&P 500
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
1.7
1.5
2.6
3.6
2.0
Low
0.8
0.8
1.1
1.9
1.0
Median
1.4
1.3
1.7
2.6
1.6
Current
1.0
1.1
1.3
2.1
1.2
Over/Undervalued
-28.6%
-15.4%
-23.5%
-19.2%
-25.0%
* 10-Year Valuations
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Price/Book
Low
Economic Analysis
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Health Care Supplies – Absolute Basis
Absolute Basis
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
19.8
18.8
3.2
2.5
18.7
Low
2.2
2.9
0.3
0.2
1.2
Median
4.5
15.4
0.5
0.3
2.2
Current
19.8
18.8
3.0
2.4
15.8
Over/Undervalued
340.0%
22.1%
500.0%
700.0%
618.2%
* 10-Year Valuations
25.0
20.0
15.0
10.0
5.0
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Low
Economic Analysis
Price/Book
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Health Care Supplies – Relative to S&P 500
Relative to S&P 500
Price/Trailing Earnings
Price/Forward Earnings
Price/Book
Price/Sales
Price/Cash Flow
High
1.3
1.3
1.6
2.1
1.8
Low
0.1
0.2
0.1
0.1
0.1
Median
0.3
1.1
0.2
0.2
0.2
Current
1.3
1.3
1.3
1.8
1.6
Over/Undervalued
400.0%
18.2%
550.0%
800.0%
700.0%
* 10-Year Valuations
2.5
2.0
1.5
1.0
0.5
0.0
Price/Trailing Price/Forward
Earnings
Earnings
High
Overview
Business Analysis
Price/Book
Low
Economic Analysis
Median
Price/Sales
Price/Cash
Flow
Current
Financial Analysis
Valuation Analysis
Recommendation
Valuation Analysis Summary
• Health Care sector UNDERVALUED on both an
absolute basis and relative to S&P 500
• Pharmaceutical and Health Care Equipment
industries UNDERVALUED
•
Johnson & Johnson
•
Teva Pharmaceutical Industries Ltd.
•
Medtronic Inc.
• Health Care Supplies industry OVERVALUED
•
Johnson & Johnson
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Recommendations
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Valuation Analysis Summary
• Health Care sector is underweighted by 0.88%
•
S&P 500
11.27%
•
SIM
10.39%
• Recommendation:
•
Increase weight by 100 bps to 11.39%
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation
Questions?
Overview
Business Analysis
Economic Analysis
Financial Analysis
Valuation Analysis
Recommendation