Al Gore thought we would all be drinking water from Antarctica and the Mayans thought we would've been gone a few years back. Congrats everyone, fate is in our favor and 2014 is here. It's time to analyze our portfolios and see where we can improve in order to have a more profitable 2014 fiscal year.
The technology and healthcare sectors have been growing at a very fast pace during the past few years. Two companies in particular have been playing a large role in this growth: Hewlett-Packard Co. (HPQ) and Incyte Corp. (INCY). Both companies more than doubling their market capital this past year and continuing to demonstrate a consistent growth pattern was more than enough to draw my attention. I believe it is important to take a closer look at what's responsible for this trend and how we as investors can benefit tremendously from these companies.
HPQ a $54 billion company currently being traded around a 52 week high, recently had some issues in management. These issues left the company with a decent share price, but massively in debt. Meg Whitman replaced Mark Hurd as CEO in September of 2011. During the transition, share prices were dropping. Whitman has been working tirelessly during the past three years strengthening the company's balance sheet. Hard work has paid off.
Meg Whitman's Innovations
Whitman rid the company of unnecessary spending, re-organized management, stabilized free cash flow, and committed to returning 50% of free cash flow to shareholders; which can be seen by the consistent increase in dividend payments from $0.08/ share to $0.13/ share. We are also seeing that the tough parts of settling into the new firm have already been taken care of. The share prices are back on track and should be steadily increasing in 2014. My prediction based on trends, EMA, upcoming hurdles and promising projects dictates that HPQ will have anywhere from a 50% to 100% increase in share price this year.
An Equation Not Taught By Einstein:
Estimates + Media = Fluctuation
Many analysts, including HPQ analysts, are predicting that revenue might decline around $10 billion within the next four years. With this being said, company analysts playing a conservative role tends to be a positive experience for shareholders.
Analysts over-estimating earnings tend to result in a share price drop. A conservative estimate can actually prevent this from occurring. Over 25 analysts predicted that Microsoft (MSFT) would have first quarter 2014 earnings of $0.54/ share. On October 24, 2013, MSFT reported actual earnings of $0.62/share. Shareholders benefited tremendously from this conservative estimate of 15%. Estimates were released well before October, and share prices have increased roughly $5/ share since then.
Market outlooks combined with appropriate media coverage can have a tremendous impact on the equity's performance. Unfortunately, many times, balance sheets and raw data don't have as much impact on fluctuation in consumer shares as do statements from expert financial journalists, such as Matt Drudge and Ben Schachter relaying negative views on Twitter (TWTR). Good thing TWTR has enough believers in the growth potential of the company's beautiful platform. During the past week, TWTR has already recovered its $10+/ share loss since negative press on December 27, 2013.
As demonstrated with TWTR, the impact of media on market fluctuation is tremendous. If HPQ releases reliable conservative estimates below actual earnings, HPQ can benefit just like MSFT; and like many other companies have in the past.
Bulls Are Trapped In A Moat
HPQ makes most of its profits from enterprise hardware, printers, and PCs. One might think all these platforms have intense competition from companies such as Cisco (CSCO), Dell, and even Oracle (ORCL); and they would not be wrong to do so. However, given that HPQ is already a big player in all these services, they have a sense of security in the upcoming years. The last thing an IT manager wants to do is to pay millions to change his network and operating systems for his or her company. Business Printing is usually a lock-in client market. With HPQ playing a huge role in business printing, contracts will keep them whole for a while. All this places the company in a protective narrow economic moat.
The Competitive Bear
Are there hurdles? Yes. There will be huge competition in the upcoming years. Everything is moving to cloud. Traditional markets are no longer going to be tradition. There is a reason why the technology sector is the fastest growing sector in 2013.
HPQ is not on par in R&D expenditure with other competitors such as Cisco. Let's also not forget HPQ's old CEO, Mark Hurd, now works for one of HPQ's biggest competitors, ORCL. For ORCL, Mark Hurd is not only an asset due to his education from Baylor, but also because he knows the enemy from inside and out.
The big emphasis for the technology industry during the next 5 years will be cloud technology. The cloud market is expected to grow more than 50% by 2015.
Opening doors to this technology requires a lot of work including but not limited to public and private security. The security industry on this platform is already a $2 billion market and expected to be a $3 billion market by 2015.
HPQ has created a next generation Hybrid Cloud Solution which allows users to more securely and cost efficiently relay information publicly and privately. Business applications will be able to run safer and more efficiently.
HPQ has reported that 40% of cloud users have already adopted their technology. By 2016 more than 70% of IT executives will have implemented this technology for their workplace. This technology will only enhance the narrow economic moat the company already has.
HPQ's new total/debt to capital ratio and operating profits being 22.3% greater than their interest payments, will assist in a better allocation of assets; including R&D expenditure. HPQ has had a 33.99% increase in market capital during the past three months, and a 100.33% increase within the past year. Whitman has already shown us she is more than capable of handling her position as CEO.
Revenue growth from the new cloud technology, increased R&D expenditure to battle the upcoming competition, and the narrow economic moat will all make HPQ a very lucrative stock in 2014.
Stay updated with HPQ's company webcasts and events. HPQ keeps a strong connection with their investors and has many promising projects in the year to come.
INCY is an $8.2 billion pharmaceutical development company which invests heavily in its R&D department. It focuses on the production of drugs used to treat inflammation and oncological conditions. Aside from heavily investing in research and development, INCY employs bright minds like CEO Dr. Paul E. Friedman, retired professor of medicine and pharmacology at Harvard Medical School. These factors have attracted a lot of attention from much larger pharmaceutical companies such as Novartis (NVS) and Eli Lilly (LLY). The relationship they have established with these giants reminds me of the one a principal investigator has with a brilliant Ph.D. student. In this analogy NVS and LLY act as the principal investigators with INCY being the brilliant graduate student. The only flaw in this analogy is that the student is living off caviar rather than ramen noodles. The caviar was well deserved since their hard work resulted in a market capital increase of 32.71% during the past 3 months and greater than 100% within the past year.
Jakafi The Bull
Jakafi is one of INCY's major products. It is used to treat myelofibrosis. This cancer is a form of leukemia which affects blood forming tissues of your body including the spleen and bone marrow. The drug has been shown to be very effective and is the only drug approved by the FDA to treat this condition. One can 'almost' say in regards to this current monopoly; INCY has a narrow economic moat. How long will this monopoly last? Sanofi failed on their first attempt; however, Gilead and Geron might have something within this next decade.
R&D The Bear In Disguise
Although INCY lost the company $0.14/ share during the third quarter of 2013, Q4's outlook which will be reported on February 14, 2014 seems to be a lot better. Any reason for a lack of profit seen by shareholders is simply seen due to the heavy investments in INCY's R&D department. Yes this is not that great for us as investors right now, but for the long run, it's a very smart move. The company's gross margin, operating margin, and net margin, still translate a greater ratio of its revenues to profit in comparison to most other firms in the biotechnology industry.
INCY is working on getting Jakafi approved for polycythemia vera and essential thrombocythemia indications. This should also increase profits within the next year.
The company also focuses on treatment of inflammatory conditions. Rheumatoid Arthritis is a big market which still needs a lot of help in providing proper treatment to those suffering from the condition. A phase III drug, Baricitinib, for RA is in development by both INCY and LLY. INCY is only responsible for 30% of development costs, but receives a large amount of royalties from the success of the product. Two other companies were very close in competing with LLY and INCY on this compound, however failed. Xeljanz and AstraZeneca (AZN) were forced to abandon their hard work on Fostamitinib after failure to receive European approval.
This will all help allocate more profits to INCY shareholders while maintaining productivity in the R&D department. Although the treatment for RA is a $17 billion market with Baricitinib predicted to play a small role in the industry, the drug is forecasted to bring in up to $1 billion in sales.
With so much investment in INCY's R&D department, who knows what they are going to come up with in the near future? INCY will be presenting a live presentation at the 32nd Annual J. P. Morgan Healthcare Conference on Monday, January 13th at 11:30am EST in San Francisco. The webcast can be viewed live at incyte.com under Investor Relations, Events, and Webcasts. Let's see what they have to share!