When looking at the world from my 2-year-old niece's perspective, I was inspired to write an article about investing like a 2-year-old girl. My 96-year-old great-grandmother passed away recently. I challenged myself to entertain a like approach. If one were to invest in the products or businesses that are important when we are, say, 92 instead of 2, what would that portfolio contain?
Whether we like it or not, prescription medications would play a significant role in life at 92. According to the National Center for Health Statistics, 90% of those 65 and older use at least one prescription drug. The prescription is most likely for high cholesterol or high blood pressure. In 2010, 78% of prescriptions were filled with generic drugs. Simvastatin is the generic of Zocor (a cholesterol lowering drug) and is the second most prescribed drug in the U.S. behind painkillers. It is sold by Teva Pharmaceuticals (TEVA), the world's largest generic pharmaceutical distributor. So, Teva would theoretically be the most advisable investment strategy.
Teva is based in Israel, with 90% of its sales in the United States and Europe. In the United States alone, over 1,000 Teva prescriptions are written per minute. Teva is not without its challenges, however. The exclusivity of its primary MS drug Copaxone is expiring, and generic competition is increasing. Nevertheless, Teva is focusing on cutting operating costs, increasing the value of generics, driving the potential of over-the-counter products through its Procter & Gamble (PG) alliance, capitalizing on new therapeutic entities by delivering known drugs in different ways, sustaining and expanding its core competencies in neurodegenerative disorders, pain, and respiratory as well as extending its footprint geographically into emerging markets. This recent Seeking Alpha article covers the company history, status and future very well.
Teva is currently trading near its 52 week low of $36.63. It has a forward P/E of 7.42, which is about half the S&P ratio of 15.78. Teva pays a decent dividend of 2.1%. Its profit margin is over 10% but that is less than the industry average of 15.9%. Its price-to-book ratio is attractive at less than 1.5. Teva's debt-to-equity ratio is slightly higher than most investment strategies advise at nearly 60, but is much lower than the health care sector average of 88. With a forward earnings estimate of $5.09 and an industry average P/E of 11.61 making a fair value nearing $60, Teva is undervalued in the high $30 range.
Along the lines of preventative planning and responsibility, at 92, it is reasonable to have end-of-life plans defined. The average cost of an American funeral is $9000. About 70% of the deceased are buried in caskets in burial plots. However, cremations are less expensive and it is predicted by some death industry experts that by 2025, cremations will outpace traditional burials. But, if you're 92, 2025 is further away than one would need to think about. The Batesville Casket Company sells 45% of the caskets sold in the United States. The Batesville Casket Company is a branch of Hillenbrand, Inc. (HI).
Caskets are not only available from funeral homes. Online shopping is available even for caskets through Wal-Mart (WMT) and Amazon (AMZN). While casket prices from Wal-Mart and Amazon are more attractive, from an investing perspective, the fundamentals of Wal-Mart and Amazon are less attractive than Hillenbrand.
Hillenbrand is a diversified industrial goods company. Its Process Equipment Group designs, produces and sells products for the plastics, food, chemical, pharmaceutical, power generation, coal mining, paper, agriculture and forestry industries. While the Batesville portion of Hillenbrand's business is not growing, it does only represent 1/3 of Hillenbrand's revenues and its EBITDA margin is greater than 25%. The Process Equipment Group is anticipating organic growth of greater than 10%.
In 2012, Hillenbrand acquired Coperion which should be a profitable bolt-on accelerating every dimension of Hillenbrand's growth plan. Hillenbrand's net debt position decreased in 2012 despite major acquisitions in 2010, 2011 and 2012. Hillenbrand pays a 3.2% dividend and has increased it every year for the past five years. Despite being within cents of its 52 week high of $24.98, Hillenbrand appears fairly valued compared to its 2014 earnings estimate of $2.14 and sector average P/E of 12.8 for a value of $27.39.
Now, with practicality addressed, the next agenda item is bucket lists, or a last "hurrah"-- and travel is the apparent choice. Air travel and hotel services would be a reasonable investing option in this category for a younger investor. Priceline.com (PCLN), by the metrics used above, even appears undervalued. With a sector average P/E of 19.71 and 2013 earnings estimate of $37.40, fair value is $737.15 and Priceline is still hovering below $700. However, for a 92-year-old, perhaps a cruise, a more comprehensive travel solution, is a better option.
Walt Disney (DIS) offers highly-rated cruising choices. Since Disney was a top pick for a 2-year-old, it proves Disney is an attractive stock for buy-and-hold investors. For the sake of variety, Carnival Corporation (CCL) and Royal Caribbean Cruises (RCL) are the two cruise line stocks on the block for consideration. Carnival has 9 cruising brands and Royal Caribbean has 5. Carnival has 100 ships and is adding 7 more by 2016. Royal Caribbean has 41 ships and is adding 3 more.
Royal Caribbean's business was dramatically impacted by the 2008 financial crisis. While net income tripled between 2009 and 2010, numbers have leveled off. Profit margin is 5.85%. Royal Caribbean's dividend is 1.3%. The 2013 earnings estimate of $2.67 and sector average P/E of 12.8 computes to a fair value of $34.18, slightly less than the current share price.
Carnival is the world's largest cruise line as its business is double the size of Royal Caribbean's. Carnival wasn't impacted like Royal Caribbean by the financial crisis. Rather, Carnival experienced 7-9% revenue growth from 2009 to 2011. Revenue from 2011 to 2012 was flat partly as a result of the Costa Condordia tragedy in January, 2012. Carnival is forecasting 1-2% growth for 2013 in part due to the continued economic weakness in Europe. Analysts forecast revenue in 2014 will grow just over 5%. Carnival's profit margin is 8.44%. It pays a 2.6% dividend, double Royal Caribbean's rate. Its 2014 earnings estimate of $2.96 and sector average P/E of 12.8 equate to a fair value of $37.89, also slightly less than Carnival's current price. Fundamentally, a Carnival investment seems sounder than a Royal Caribbean investment.
Stock up on the meds, prepay the final arrangements, and then set sail on one of the 100+ day Grand World Voyages offered by Carnival through its Holland American Line. Invest the remainder in TEVA, HI and CCL. If one were 92, that could be the prescription for a retirement voyage.
Additional disclosure: I belong to an investment club with investments in DIS and PG.