Jump to content

Parallel's between banking and healthcare -- Healthcare has been dead money.


schin
 Share

Recommended Posts

I've been following the thread on the bank warrants and enjoying the great analysis. On paper, 8 years looks like an eternity for the banks to go back to book. Yet, I see a position in my portofolio (namely, PFE) -- which I've held since 2006. It's still below water.  :'(  I know there's the whole pipeline discussion in the industry, but looking at the cashflow, valuations and ROI of these healthcare companies (AMGN, MRK, JNJ, etc.), would have you accepted it would be dead money for this long?

 

I know they were overvalued before. 

 

Why would banks not fall into this dead money category?  Given a 8 year time frame and warrants, would you make the same bet with home builders as a category? There were some survivers?

 

Some consumer retailers fall into this same category of dead money for 5 years -- WMT and PG. Thoughts?

Link to comment
Share on other sites

Healthcare is a tough place to make money when the government is going to set your prices.  I would rather own Google or Apple.

 

I have always stated if I were to invest pharma, I would go with a JNJ or ABT b/c of the consumer products pieces.

 

Pfizer is a dog, with fleas. 

 

Banks are interesting - maybe they are in trouble now but what will a BAC or JPM be worth 10, 20 years from now.  How about Goldman Sachs?  That is cheap.  Problem with GS is I have a tough time investing in an employees/managers first, shareholders second organization.

 

In the U.S., no matter what party you like, we will inflate our way out of this.  Sooner, later, who knows?  So maybe buy companies that can participate in this trend. 

Link to comment
Share on other sites

The main difference is valuation. JNJ, PFE, MRK, etc are all being valued at PE ratios in the mid 30's. At an earnings yield of less than 3%, poor returns are baked in at those prices. Even using conservative normalized earnings, some of the bank stocks are at PE of about 6. At an earnings yield of greater than 15%, unless you run into some really severe economic/company specific issues you should have a satisfactory return.

 

Vinod 

Link to comment
Share on other sites

Although the voices in my head always try to convince me otherwise, I think it makes sense to focus on good/great businesses.  There are enough to go around, and many at good prices.

 

This is a value investing board - but there are different ways to look at this. 

 

I would rather buy the dollar bill at 80 cents (50 is better) than buy a piece of sh-- that I might be able to sell as fertilizer.

 

I don't view most of the pharmas as good businesses.  They will get squeezed - generics are the future.  The U.S. subsidizes the rest of the world - this is well known.  How long can that continue?  I have been in the business on the finance side and while margins are MONSTEROUS, R&D costs are killer and lawsuits a pain.  Competition is tough.  Pfizer for example can only grow through monster acquisitions.

 

Something like BAC is intriguing to me, just very complicated.  Blackrock, MER - some real assets tucked in there. 

Link to comment
Share on other sites

The main difference is valuation. JNJ, PFE, MRK, etc are all being valued at PE ratios in the mid 30's.

 

Vinod 

 

Vinod - do you mean "were being valued"?  As far as I can tell, the three companies you mentioned all have low-mid teens PEs.

Unless I'm missing something...

 

-M

Link to comment
Share on other sites

The main difference is valuation. JNJ, PFE, MRK, etc are all being valued at PE ratios in the mid 30's. At an earnings yield of less than 3%, poor returns are baked in at those prices. Even using conservative normalized earnings, some of the bank stocks are at PE of about 6. At an earnings yield of greater than 15%, unless you run into some really severe economic/company specific issues you should have a satisfactory return.

 

Vinod 

 

 

Not really.

 

JNJ forward earnings yield = 7.7%

PFE = 13%

MRK = 10%

 

You cannot just break down a case for investing in a bank because of its P/E ratio, it's far too simplistic. That's the kind of mentality that got people killed when they were investing in seemingly cheap banks on backwards looking metrics during the financial crisis.

 

Link to comment
Share on other sites

Don't forget the dividends:

 

http://www.dividendgrowthinvestor.com/2008/07/is-pfizer-pfe-value-trap-for-investors.html

 

(Yes, this write up is from 2008 and before the dividend cut to finance the Wyeth acquisition but the analysis regarding dividends is mostly intact...)

 

Annual dividend payments have increased over the past 10 years by an average of 17.70% annually, which is significantly above the growth in EPS. An 18 % growth in dividends translates into the dividend payment

doubling almost every four years. If we look at historical data, going as far back as 1982, PFE has actually managed to double its dividend payment every five years on average.

Future dividend increases in dividends in the rate of 17% annually will be harder to obtain however, unless the company finds new drugs that it could use to generate more revenues.

Link to comment
Share on other sites

The main difference is valuation. JNJ, PFE, MRK, etc are all being valued at PE ratios in the mid 30's. At an earnings yield of less than 3%, poor returns are baked in at those prices. Even using conservative normalized earnings, some of the bank stocks are at PE of about 6. At an earnings yield of greater than 15%, unless you run into some really severe economic/company specific issues you should have a satisfactory return.

 

Vinod 

 

 

Not really.

 

JNJ forward earnings yield = 7.7%

PFE = 13%

MRK = 10%

 

You cannot just break down a case for investing in a bank because of its P/E ratio, it's far too simplistic. That's the kind of mentality that got people killed when they were investing in seemingly cheap banks on backwards looking metrics during the financial crisis.

 

 

I am talking about valuations of healthcare back in early 2000-2002 time frame (8 years back).

 

I do not disagree with you, just pointing out that while 8 years is a long time period, for healthcare stocks the past 8 year period started with very high valuations as opposed to Banks at the current time.

 

Vinod

Link to comment
Share on other sites

The main difference is valuation. JNJ, PFE, MRK, etc are all being valued at PE ratios in the mid 30's.

 

Vinod 

 

Vinod - do you mean "were being valued"?  As far as I can tell, the three companies you mentioned all have low-mid teens PEs.

Unless I'm missing something...

 

-M

 

I was not clear. I took the orginal poster to mean, "why are banks currently an investment candidate if healthcare was deadmoney the last 8 years. Can banks suffer something similar?"

 

I am referring to valuations about 8 years back in healthcare. They are priced to perfection at that time so it is not surprising that they did not provide good returns. Right now the valuations of Banks is vastly different compared to the situation with healthcare in 2002.

 

Banks have their share of risks, but valuations are such that, on a risk adjusted basis (fully incorporating say a complete wipeout probability of say 10%), they are starting to look attractive.

 

Vinod

Link to comment
Share on other sites

Although the voices in my head always try to convince me otherwise, I think it makes sense to focus on good/great businesses.  There are enough to go around, and many at good prices.

 

This is a value investing board - but there are different ways to look at this. 

 

I would rather buy the dollar bill at 80 cents (50 is better) than buy a piece of sh-- that I might be able to sell as fertilizer.

 

I don't view most of the pharmas as good businesses.  They will get squeezed - generics are the future.  The U.S. subsidizes the rest of the world - this is well known.  How long can that continue?  I have been in the business on the finance side and while margins are MONSTEROUS, R&D costs are killer and lawsuits a pain.  Competition is tough.  Pfizer for example can only grow through monster acquisitions.

 

Something like BAC is intriguing to me, just very complicated.  Blackrock, MER - some real assets tucked in there. 

 

I am "Inevitables" at 80 cents kind of guy. Vast majority of my portfolio - heck pretty much all - is invested in such businesses. However, I made a first foray into BAC this week. I am afraid that a great calamity is about to fall on US Banking system given my investment :)

 

Vinod

Link to comment
Share on other sites

My final comments on this thread (just a dig at the host maybe).

 

Skate to where the puck is going, unless you are a Vancouver Canuck, whereby you are probably getting crushed by a Flyer.

 

In the case of investments, pharmas are not where the puck is headed.  You may do ok, but even the aforementioned Pfizer reported revenue drops, even in its main product.  

 

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...