Continuing my analysis of the recent purchases made by Soros Fund Management, in this article I will look at five healthcare buys made by George Soros using the latest available quarterly filings. Readers interested in his tech buys can refer to my previous article on the subject.
In addition to the stock picks, I have also calculated an initial price target for these picks and estimated the price Soros might have paid for the purchase.
- Pfizer Inc. (PFE)
Soros increased his position in Pfizer by 17% by purchasing approximately 97,000 shares at an estimated price of $18.42. The stock currently trades at $21.5. The previous 5 years have been disappointing for Pfizer's shareholders with the stock losing 18% (not adding dividends). The company is sitting on a pile of cash with $28 billion in cash and equivalents on the balance sheet. To return cash to shareholders, the company recently increased its dividend by 10% and added $10 billion to its existing share buyback program.
The company is expected to grow its earnings at an annual rate of 3% compared to the 2% growth rate of the past 5 years. Applying a P/E of 11 to 2012 EPS of 2.3, my initial 12-month price target for Pfizer is $25.3 a share. A return of 17% is possible from current levels.
- Biogen Idec (BIIB)
Biogen Idec is the world's largest maker of multiple sclerosis drugs. Soros initiated a new position in Biogen Idec by purchasing 201,000 shares at an estimated average price of $97.12. The company was in the news recently when it signed a deal with Isis Pharmaceuticals (ISIS) to develop a drug for inherited muscle-weakening disease that affects children. The deal is expected to cost about $299 million.
While I like Biogen Idec and the projected earnings growth rate of 10%, my preliminary analysis indicates that the stock is overvalued. My 12-month price target of $106 is 9% less than the current stock price of $115.5 a share. I would avoid Biogen Idec at these levels. However, I plan on adding this company to my watch list.
- Express Scripts (ESRX)
Express Scripts is in the pharmacy benefit management business. The company delivers prescription drugs through its contracted network of retail and home delivered pharmacies. The company recently made an offer to buy rival Medco Health Solutions (MHS) for $29 billion and is awaiting antitrust approval. Analysts expect the deal to close in the first half of 2012. If the deal goes through, I see significant cost savings and negotiating power for Express Scripts.
Soros build on his relatively minor existing position in Express Scripts by acquiring 202,400 shares to take his total position to 206,300 shares. I estimate an entry price of $47.7, which is slightly higher than Friday's closing price of $49.39. My 12-month price target for Express Scripts is $62 a share obtained by applying an earnings multiple of 17 to 2012 EPS estimate of $3.62. Express Scripts appears attractive at these levels.
- Sanofi SA (SNY)
Sanofi is French healthcare giant with a market cap of $96 billion. Soros initiated a new position by buying 201,400 at an estimated average price of $35.9 a share, which is the same as its current price. Although the company grew at a respectable annual rate of 12% during the last 5 years, it is expected to grow at an anemic rate of 2% in the near future. Perhaps overreaction to this dismal growth rate is responsible for the depressed stock price as I believe that the stock is grossly undervalued. My target of $47 implies a return of 30% from current levels. It should be noted that the stock has a 4.9% yield.
- Baxter International (BAX)
Baxter is diversified healthcare company operating in medical devices, pharmaceuticals, and biotechnology businesses. Soros doubled his position in Baxter by purchasing 60,300 shares at an estimated price of $55.6. The stock has since declined and trades at $50.14. The company is expected to grow its earnings at an annual rate of 10% compared to the 16% growth rate of the industry. My 12-month price target of $61 is obtained by applying a P/E of 13 to 2012 EPS estimate of 4.66. The stock trades at a 17% discount at current levels.
As always, please do not consider this list as a "buy" list, rather use this list as a starting point for your research. Based on my preliminary analysis, the healthcare sector overall looks undervalued. Of the companies listed above, I find Sanofi and Express Scripts particularly attractive based on fundamentals and/or growth prospects.
Sources: All stock specific data sourced from Morningstar and Yahoo