Irving Kahn is not only a value investor, but also a money manager. Currently, he is the Chairman of Kahn Brothers Group, Inc., a privately owned investment advisory and broker-dealer firm founded by him together with his sons, in 1978.
Kahn, a Chartered Financial Analyst, was among the first applicants to take the CFA exam. Furthermore, he co-founded the Financial Analysts' Journal and the New York Society of Security Analysts. Kahn was also a former director of Teleregister Corp., Hugo Stinnes Co., West Chemical, Kings County Lighting, Grand Union Stores and Willcox & Gibbs.
Kahn Brothers is one of the few firms that follow closely the value methodology of famed investor Benjamin Graham. In 1988, the Kahns bought stock in Analogic Corporation (ALOG), a CAT scanning equipment manufacturer. Then going for about $8 per share, Analogic's balance sheet exhibited almost $3.50 a share in cash and net working capital of approximately $6.00 a share.
As regards earnings, the record was positive yet erratic and the share price, as high as $31 at one time, has remained in the mid-teens in the most recent years. On account of the assets that back the shares, its positive record and good management, one could argue that the risk to the investor when buying Analogic at $8.00 was exceedingly small.
In 1996, Analogic drew interest with the successful launching of its new portable CAT scanning device. The company's association with efforts to create new airport bomb-detection equipment also garnered attention after the unexplained TWA Flight 800 July disaster. The stock price skyrocketed to nearly $30, which meant for the Kahn group an annualized return over the eight-year period of nearly 18%. All in all, it was definitely not bad for an investment carrying only a nominal risk.
I believe it is interesting to examine Kahn's holdings with a view to generate seed investment ideas for further research. I consider that, if a stock is a top holding from a prominent portfolio manager like Kahn, the company must have passed stringent research standards. Therefore, I find myself increasingly interested in investing in such a company.
Pfizer Inc. (PFE)
Pfizer Inc. is focused on developing and commercializing a wide range of products, ranging from human and animal biologic and small molecule medicines and vaccines to nutritional and consumer health care products. Currently, Pfizer operates through numerous segments like Primary Care, Oncology, Specialty Care, Established Products and Emerging Markets, Consumer Healthcare, Animal Health and Nutrition. In 2011, Pfizer posted global sales of $67.4 billion (up 1%). While sales from Biopharmaceutical reached $57.7 billion (down 1%), Animal Health reported sales of $4.2 billion (up 17%). Consumer Healthcare and Nutrition contributed also with $3.1 billion and $2.1 billion to the sales of 2011, respectively.
The Wyeth Acquisition: In October 2009, Pfizer decided to acquire Wyeth, a large pharmaceutical company, for $68 billion. With the acquisition, Pfizer has now become a rather more diversified healthcare company with a considerably stronger presence in the emerging markets. The company also improved its pipeline and developed a lower and comparatively more flexible cost base. One reason it targeted Wyeth is that it owns a large biologics platform, a very strong presence in vaccines as well as important consumer products and animal health businesses. As such, the company's Consumer Healthcare unit, which is strongly positioned in the U.S. and international markets, proved a nice addition to Pfizer's portfolio. Moreover, another reason rests in Wyeth's research, considerably focused on Alzheimer's, central nervous system (CNS) disorders and oncology. These are all areas to which Pfizer has committed a clear focus and where it sees significant opportunity for growth. I believe that Pfizer realized the synergies of over $4 billion from the Wyeth acquisition.
Deep Pipeline: Another factor to be considered here is that Pfizer intends to allocate more resources to the creation of treatments in oncology, neuroscience, metabolic disorders, cardiology, inflammation, immunology and vaccines. Those are areas where Wyeth believes it can lead and where it has a number of complementary products and some research. A further reason must be that, as the company has claimed, it intends to stop funding treatments for high risk/low productivity therapeutic areas like respiratory diseases, allergy, internal medicine, urology, and tissue repair. A further attractive factor is that, to increase its presence in the pain management market, Pfizer has also acquired King Pharma, which has a portfolio of numerous pain management products. With such acquisition, Pfizer seeks to diversify its product portfolio and bring in additional sources of revenue. Besides accessing King's pain management portfolio, Pfizer is also likely to benefit from the addition of King's EpiPen business as well as its Animal Health business. Both of them are bound to complement Pfizer's Animal Health segment.
PFE's current net profit margin is 14.8, currently higher than its 2010 margin of 12.18. I like companies that increased profit margins in comparison with other years. It is essential to know the reason why that happened. Its current return on equity is 11.78. It is lower than the 20% standard I look for in companies I invest in, and also higher than its 2010 average return on equity of 9.29.
In terms of income and revenue growth, PFE has a 3-year average revenue growth of 11.76 and a 3-year net income average growth of 7.29. Its current revenue year-over-year growth is 0.55, lower than its 2010 revenue growth of 34.09. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year-over-year growth is 21.22, higher than its 2010 average of -4.38. I like when net income growth is higher than the past.
In terms of valuation ratios, PFE is trading at a Price/Book of 2.0x, a Price/Sales of 2.5x and a Price/Cash Flow of 8.4x in comparison to its industry averages of 2.9x book, 2.5x sales and 10.2x cash flow. It is essential to analyze the current valuation of PFE and check how it is trading in relation to its peer group.
As regards its valuation, Pfizer posted fourth-quarter earnings of $0.50 per share, 3 cents above the average consensus estimate and the year-ago earnings of $0.47. Nevertheless, revenue was reduced 4% to $16.7 billion in line with the average consensus estimate. Despite this decline in revenue, a lower share count and cost control did help earnings to rise from the year-ago period. Citing currency fluctuations, Pfizer reduced its guidance for 2012 and is now expecting earnings of $2.20 - $2.30 per share on revenues of $60.5 - $62.5 billion. Earlier, Pfizer expected to earn $2.25 - $2.35 per share on revenues of $62.2 - $64.7 billion in 2012. Revenue will also be affected by the loss of exclusivity of Lipitor in the United States in late November 2011.
Near-term earnings will most likely be propelled by cost-cutting efforts and share repurchasing. While Wyeth brings together with it an attractive biologics platform as well as some complementary products and businesses, I do not think they will be enough to sustain long-term top-of-the-line growth. I consider the merger as Pfizer's opportunity to cut down additional costs. Longer-term growth will depend on successful drug development. Currently, Pfizer is trading at 9.4x on the EPS estimate.
Pfizer needed $22.5 billion in debt to fund the Wyeth acquisition, but I believe that its strong cash flows will most likely whittle down this debt quickly in the next few years. Moreover, after the acquisition, Pfizer had more than $25 billion in cash.
Merck & Co Inc. (MRK)
New Jersey, Merck & Co., Inc. is based in Whitehouse Station and is a worldwide pharmaceutical products company driven by research. In 2009, Merck purchased Schering-Plough for $41.1 billion. Currently, the merged company has been placed behind Pfizer, which also acquired Wyeth for $68 billion. In May 2011, Merck acquired Inspire Pharmaceuticals, Inc. (a specialty pharmaceutical company) for $430 million. By means of this acquisition, Merck seeks to enlarge and fortify its ophthalmology portfolio. Merck posted 2011 sales of $48 billion. Fundamental items in Merck's portfolio include: Bone, Respiratory, Neurosciences and Ophthalmology, Cardiovascular, Diabetes and Obesity, Infectious Disease, Oncology, Vaccines, Mature Brands, Immunology and Dermatology, Women's Health and Endocrine.
Unfortunately, Merck is and will be facing important patent cliffs, while Schering has relatively little exposure to the expiration of its patents through 2013. However, I deem it is important that, through the merger, Merck will be in a position to address immediate patent cliffs as well as pipeline failures. On account of the minimal product overlap and its relative ease to combine the cholesterol business, I expect considerable synergy opportunities from combining sales, research, marketing as well as other back-office functions. A further point to bear in consideration when investing is that such deal also helped to diversify revenue sources in geographic terms. Merck managed to achieve cost savings over $2.0 billion in 2010 and now is expecting to achieve annual savings of $3.5 billion around the end of 2012. Moreover, Merck has a worldwide restructuring program in progress aimed at reducing cost structure and improving efficiency. Merck continues to explore the possibilities of reducing its cost structure and has made public the next stage of its merger restructuring program.
I think that Merck invested in Schering because he aims to strengthen its presence in the emerging markets. In order to fulfill its objective, the company seeks to present new products, market successfully its current portfolio of vaccines and drugs and leverage the market for branded generics. I am sure that Merck's analysis takes into consideration that China has been performing rather well, with sales increasing about 30% during the fourth quarter of 2011. Merck's portfolio can play a lead role in facing some of the most important challenges in cardiovascular disease, diabetes and women's health in emerging markets. Merck must have been attracted by the fact that the diabetes franchise already generates more than $200 million in sales from emerging markets. Moreover, I find it essential that they are the second largest brands in India and Korea among oral diabetes medicines. Furthermore, Merck also looks toward biosimilars to secure long-term growth, a market that presents an enormous commercial opportunity, with more than $60 billion of biologic sales scheduled to lose patent protection through 2017.
MRK's current net profit margin is 13.02, currently higher than its 2010 margin of 1.87. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its current return on equity is 11.49. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of 1.51.
In terms of income and revenue growth, MRK has a 3-year average revenue growth of 26.30 and a 3-year net income average growth of -7.04. Its current revenue year-over-year growth is 4.48, lower than its 2010 revenue growth of 67.66. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year-over-year growth is 628.46, higher than its 2010 average of -93.33. I like when net income growth is higher than the past.
In terms of valuation ratios, MRK is trading at a Price/Book of 2.1x, a Price/Sales of 2.4x and a Price/Cash Flow of 9.4x in comparison to its industry averages of 2.9x book, 2.5x sales and 10.2x cash flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
Valuation is at the heart of any investment decision, whether to buy, sell or hold. Currently, Merck is facing the patent expiration of the key drug Singulair as well as U.S. healthcare reform, EU pricing pressure, the Remicade/Simponi transition and, finally, pipeline setbacks. I think that the company will still resort to cost-cutting efforts to manage to drive the bottom line. In the meantime, some of the company's recent launches will start contributing in a significant manner to the top line in the upcoming quarters.
Merck's current trailing 12-month earnings multiple is 10.2, in comparison with the industry average of 12.9 and 14.4 for the S&P 500. During the past five years, Merck's shares have traded from 7.1x to 20.4x trailing 12-month earnings.
Merck now preserves his strong financial health, even considering the additional $8.5 billion in debt that are necessary for the acquisition of Schering. I expect that the combined company will manage to generate a free cash flow of nearly $12 billion in 2011. Merck's stable and strong cash flows are likely to whittle away the debt relatively quickly.
New York Community Bancorp Inc (NYB)
New York Community Bancorp Inc is one of the leading providers of multi-family loans in the New York City area and is focused on apartment buildings featuring rents that are below market. It has two banking subsidiaries: the New York Community Bank and the New York Commercial Bank. Evidencing its growth through a number of acquisitions, the Community Bank operates with five local divisions: Roosevelt Savings Bank in Brooklyn, Roslyn Savings Bank on Long Island, Richmond County Savings Bank on Staten Island, Queens County Savings Bank in Queens, and Garden State Community Bank in New Jersey. Analogously, the Commercial Bank engages in the operation of 17 of its branches under the designation Atlantic Bank.
I think that one of the most important reasons for this investment is that the bank has an excellent underwriting record of practically zero loan losses in its main business on account of its focus on multifamily mortgages for rent-regulated buildings, which are among the most desired apartments in high-cost New York. The owners of rent-controlled apartments cannot increase rents too much unless they enhance their properties. And one important reason to ponder is that, for such upgrades, they borrow from banks like NYB, which provides very profitable loans, not only because they have considerably low delinquency rates, but also because they are normally refinanced early (thus incurring a prepayment penalty) by landlords who seek to upgrade their properties further to obtain even higher rents. What is attractive for an investor is that such cycle ends up benefiting NYB, since it enables the bank to know its clients and their cash flows considerably well. Furthermore, loans are collateralized by rent-regulated buildings, which are usually stable as well as fully occupied. The average loan/value ratio is 60%, so NYB is well cushioned against losses. The bank has avoided loan losses in its multifamily niche for approximately 30 years.
NYB's profitability was historically hampered by its low yields on loans and high borrowing costs, which managed to compress net interest income. I deem it essential, however, that the AmTrust acquisition will help to reduce the bank's funding costs and to increase margins slightly, as it raised deposits (considered the cheapest funding source) more than 50% overnight. While I expect a portion of these purchased deposits to continue to flee to different institutions, the rest has reduced noticeably the firm's reliance on rather more expensive debt.
NYB's current net profit margin is 33.43, currently lower than its 2010 margin of 35.64. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its current return on equity is 8.66. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of 9.93.
In terms of income and revenue growth, NYB has a 3-year average revenue growth of 27.60 and a 3-year net income average growth of 83.35. Its current revenue year-over-year growth is -5.41, lower than its 2010 revenue growth of 42.80. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year-over-year growth is -11.27, lower than its 2010 average of 35.71. I do not like when current net income growth is less than the past year. I look for Companies that increases both profits and revenue.
In terms of valuation ratios, NYB is trading at a Price/Book of 1.0x, a Price/Sales of 3.9x and a Price/Cash Flow of 6.8x in comparison with its industry averages of 0.9x book, 3.1x sales and 6.5x cash flow.
As regards financial health, I think that NYB's capital position is now rather strong. With healthy tangible equity/assets and even Tier 1 capital ratios exceeding 7% and 13%, respectively, the bank does have enough capital to absorb loan losses and continue its acquisition efforts.
Bristol-Myers Squibb Company (BMY)
The Bristol-Myers Squibb Company is recognized as one of the major producers and distributors of pharmaceuticals and other healthcare related products. The company manufactures and sells branded pharmaceutical drugs such as Sustiva for HIV, Baraclude for hepatitis B virus (HBV), Erbitux for cancer and blood thinner Plavix. In late 2009, Bristol-Myers decided to sell its interest (a 83.1% stake) in Mead Johnson, the infant formula maker. Such divestiture has allowed Bristol-Myers to operate as a completely independent biopharmaceutical company that focuses only on pharmaceuticals.
One reason that investment was directed to Bristol-Myers is that the company is looking to strengthen its portfolio of products by launching new drugs to compensate the revenue loss to occur with the genericization of important drugs, especially Plavix. The company has succeeded in this regard in 2011, as many new products were launched or approved during that year. Key product approvals encompass: the EU approval of Eliquis (apixaban) for preventing venous thromboembolic events in adults who underwent elective knee or hip replacement surgery; the US approval of Erbitux in combination with the platinum-based chemotherapy and 5-fluorouracil as first-line therapy in patients who suffer from recurrent locoregional as well as metastatic head and neck cancer; the US and EU approval of Yervoy to treat patients who suffer from metastatic melanoma, the most severe form of skin-cancer; the US approval of a subcutaneous formulation of Orencia to treat adults who suffer from moderate to severe rheumatoid arthritis (RA); the EU approval of Onglyza in combination with insulin (either with or without metformin) for type II diabetes; and the US and EU approval of Nulojix (belatacept) for preventing the rejection of transplanted kidneys in adult patients.
A second reason to consider investing in Bristol-Myers is that it boasts a rather robust pipeline and that one of its most interesting candidates is Eliquis, which was co-developed with Pfizer. In a promising development, a late-stage study (AVERROES) of Eliquis in patients who suffer from atrial fibrillation was terminated early based on clear evidence of reduction in stroke and embolism in those patients treated with apixaban in comparison to aspirin. Furthermore, in August 2011, Bristol-Myers and Pfizer presented together encouraging data on another late-stage (ARISTOTLE) evaluating Eliquis for the prevention of strokes in patients who suffer from atrial fibrillation (AF). As such, Eliquis is under priority review in the U.S. (with March 28, 2012, as target date) and under review in Europe for AF indication. Considering that Eliquis offers multi-billion dollar sales potential, a further reason to invest lies in this approval for AF indication, which would be a strong boost for Bristol-Myers. I am also positive regarding the company's focus on the rather lucrative HCV market.
BMY's current net profit margin is 17.46, currently higher than its 2010 margin of 15.92. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its Current Return on Equity is 23.42. It is higher than the 20% standard I look for in companies I invest in, and also higher than its 2010 average return on equity of 20.30.
In terms of income and revenue growth, BMY has a 3-year average revenue growth of 6.24 and a 3-year net income average growth of -10.92. Its current revenue year-over-year growth is 9.03, higher than its 2010 revenue growth of 3.59. The fact that revenue increased from last year shows me that the business is performing well. The current net income year-over-year growth is 19.57, lower than its 2010 average of -70.77. I do not like it when current net income growth is less than the past year. I look for Companies that increases both profits and revenues.
In terms of valuation ratios, BMY is trading at a Price/Book of 3.5x, a Price/Sales of 2.6x and a Price/Cash Flow of 11.6x in comparison to its industry averages of 2.9x book, 2.5x sales and 10.2x cash flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
As far as valuation goes, Bristol-Myers has reported lower-than-expected earnings and revenues in the last quarter of 2011. Although higher than expected expenses caused the earnings miss, the revenue miss was to be attributed mainly to lower sales of Plavix and Avapro/Avalide. I expect 2012 to be a rather challenging year for Bristol-Myers, as its blockbuster drug, Plavix, is scheduled to lose its patent in the United States in May.
The company seeks to combat the generic threat by means of partnering deals and acquisitions. It is launching new products to increase its product portfolio. I believe that Bristol-Myers will definitely continue to pursue acquisitions and deals during 2012: in January 2012, it announced a $2.5 billion deal to acquire Inhibitex to target the profitable HCV market. That having been said, I see a limited upside from the current levels and I still retain my neutral view on the stock.
Based on 2012 earnings estimates, the stock trades at 16.5x in comparison to the industry average of 12.5x.
Regarding its financial health, Bristol generates a considerable free cash flow and will have no trouble fulfilling its obligations. Furthermore, during the last few years, the proceeds from the ConvaTec, ImClone and medical imaging sales have strengthened its cash position, which has been offset, at least in part, through tuck-in acquisitions.
MBIA Inc. (MBI)
MBIA Inc. engages in underwriting municipal bond insurance and municipal as well as structured finance obligations. Moreover, this company provides asset, investment and treasury management services together with the reinsurance of guaranteed investment contracts. After Cutwater's reorganization, MBIA Inc. modified Investment Management Services (its reporting segment) to Advisory Services. Furthermore, it added another segment called Wind-down Operations. Therefore, it now reports in four segments in comparison to the previous three: the Structured Finance and International Insurance (49%), the U.S. Public Finance Insurance segment (41% of first quarter 2010 revenues), Advisory Services (1.5%) and Wind-down Operations (8.5%).
Why was it viable to invest in MBI? To separate its riskier business of insuring structured financial obligations from the conventional bond insurance, the company started an important restructuring effort to capitalize National Financial Guarantee Corp. with $5.0 billion in February 2008. Nonetheless, financial institutions holding MBI Insurance policies decided to sue MBIA over the restructuring, which was approved by New York's insurance department in 2009, with the claim that such move would render MBI Insurance unable to disburse payments for future claims. In the past year, however, 14 banks reached an agreement with MBI. So I am basically attracted by the manner in which MBIA handled the cases thus far: it allures the investor in with the positivism that it will easily solve the remaining cases and thus allow National Public to attain better ratings and so write new business.
A second important reason under analysis is that, during November 2011, MBI's BBB ratings on its municipal bond insurance unit were affirmed by Standard and Poor's, which views that the company's business and financial risk profile in a strong light. I am attracted by its statement that the stable and strong stream of premiums and investment income contributions will help to support National while inactive, not to mention that its strong distribution and management team may help to position it well in the market once such litigation is settled.
Its current return on equity is 58.21. It is higher than the 20% standard I look for in companies I invest in, and also higher than its 2010 average return on equity of 1.94.
In terms of valuation ratios, MBI is trading at a Price/Book of 1.1x, a Price/Sales of -1.2x and a Price/Cash Flow of -0.6x in comparison to its industry averages of 1.0x Book, 1.0x Sales and 11.3x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
As regards valuation, with a beta of 2.5, shares of MBI are considerably volatile. Some sensitive issues revolve around the shares, including the outcome of lawsuits related to National and lawsuits to put back recoveries, all of which continue to be comparatively uncertain. Moreover, its exposure to commercial real estate through its structured CMBS pools, CMBS and CRE CDO does make it considerably vulnerable to potential losses.