Valuation Dashboard: Healthcare - Update

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Includes: AMGN, ANIP, BIIB, CRL, ENTA, EW, GILD, HSIC, IBB, ISRG, LCI, MNK, SHPG, SPY, STJ, UTHR, VAR, XLV, XPH
by: Fred Piard

Summary

4 key factors are reported across industries in the Healthcare sector.

They give a valuation status relative to history.

They give a reference for picking stocks in each industry.

This monthly series of articles provides a valuation dashboard in sectors and industries. I follow up a certain number of fundamental factors and compare them to historical averages. This article covers Healthcare. The choice of the fundamental ratios used in this study has been justified here and here. You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A list of stocks to consider is provided in the conclusion.

Methodology

  • Four industry factors are calculated: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors.
  • They are compared with their own historical averages. The difference is measured in percentage for valuation ratios and in absolute for ROE. For valuation factors it can be interpreted as a percentage in under-pricing relative to a historical baseline. It points to over-pricing when negative. In all cases, including ROE, the higher the better.

Industry valuation table on 2/20/2016

The next table reports the 4 industry factors. For each factor, the next "Avg" column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next "D-xxx" column is the difference between the historical average and the current value. So there are 3 columns relative to P/E, and also 3 for each ratio.

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

HC Equipment&Supplies

31.87

27.18

-17.26%

3.3

3.18

-3.77%

47.34

30.51

-55.16%

-29.54

-12.14

-17.4

HC Providers&Services

25.21

20.88

-20.74%

0.95

0.85

-11.76%

17.88

17.75

-0.73%

8.85

5.78

3.07

HC Technology*

44.7

56.13

20.36%

3.29

3.39

2.95%

31.07

35.77

13.14%

-11.25

-6.2

-5.05

Biotechnology

23.86

39.78

40.02%

29.73

29.01

-2.48%

36.56

43.74

16.42%

-60.38

-64.42

4.04

Pharmaceuticals

32.91

26.26

-25.32%

13.53

8.25

-64.00%

23.43

32.55

28.02%

-38.51

-30.3

-8.21

Life Sciences Tools&Services*

28.91

29.52

2.07%

2.65

3.39

21.83%

32.41

27.28

-18.80%

-11.5

-18.37

6.87

Click to enlarge

* Averages since 2006

Valuation

The following charts give an idea of the current status of industries relative to their historical average. The higher is the better.

Price/Earnings:

Price/Sales:

Price/Free Cash Flow:

Quality (ROE)

Relative Momentum

The next chart compares the price action of the SPDR Select Sector ETF (XLV) with SPY (chart from freestockcharts.com). It includes also a biotechnology ETF (IBB) and a pharmaceutical one (XPH) as industry benchmarks.

Click to enlarge

Conclusion

The return of XLV is very close to SPY in the last 3 months. XPH and IBB have underperformed by about 12% and 14% respectively. The five best performers among S&P 500 Healthcare stocks on this period are Baxalta Inc (NYSE:BXLT), Edwards Lifesciences Corp (NYSE:EW), Henry Schein Inc (NASDAQ:HSIC), Intuitive Surgical Inc (NASDAQ:ISRG), Mallinckrodt Plc (NYSE:MNK). EW and HSIC have hit an all-time high last week.

Since last month, most valuation factors have improved. Some of them show a mild deterioration, but a steeper one happened in P/FCF for Equipments & Supplies. The quality factor based on ROE is quite stable for all groups.

The only industry looking underpriced for the 3 valuation factors is HC Technology. However, the median ROE is below the historical average. The most attractive group is likely biotechnology: P/S is very close below the baseline, other valuation factors and the quality factor are above it. Life Science Tools & Services looks also good with 3 factors out of 4 above the average. Equipment and Supplies has the worst outlook for my metrics, with all factors below the baseline.

There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. The next table shows a list of stocks in the Healthcare sector. They are all cheaper than their respective industry for 3 of the most relevant valuation factors simultaneously: Price/Earnings, Price/Sales, Price/Free Cash Flow. Then they are selected for their higher Return on Equity.

This screen updated and rebalanced monthly has an annualized return about 22.34% and a drawdown about -62% for a 17-year backtest. The sector ETF XLV has an annualized return of only 7.73% on the same period. Past performance, real or simulated, is not a guarantee of future return. To avoid large drawdowns shown by historical data, this list may be considered an entry point for further due diligence, or as a portfolio after adding a few trading rules and market timing. This is not investment advice. Do your own research before buying.

AMGN

Amgen Inc

ANIP

ANI Pharmaceuticals Inc

BIIB

Biogen Inc

CRL

Charles River Laboratories Intl

ENTA

Enanta Pharmaceuticals Inc

GILD

Gilead Sciences Inc

LCI

Lannett Co Inc.

STJ

St. Jude Medical Inc.

UTHR

United Therapeutics Corp

VAR

Varian Medical Systems Inc

Click to enlarge

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Disclosure: I am/we are long GILD, UTHR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.