Valuation Dashboard: Healthcare - Update

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About: iShares Nasdaq Biotechnology ETF (IBB), XLV, Includes: AET, ALGN, BDX, BIIB, BIVV, CELG, DVA, EGRX, GILD, IQV, MCK, PAHC, SPY, SUPN, SYNH, XPH, XRAY
by: Fred Piard
Summary

Valuation metrics in the Healthcare sector.

Evolution since last month.

A list of stocks looking cheap in their industries.

Executive summary

Biotechnology looks the most attractive Healthcare industry relative to its own historical valuation averages, but profitability measured in median ROE is below the baseline. Healthcare Providers are moderately overpriced and close to their baseline in profitability. Healthcare Equipment and Pharmaceuticals are the most overpriced groups in the sector combining all valuation factors. However, the median Price to Free Cash Flow of Pharmaceuticals is better than the historical average. Life Science Tools/Services have a profitability factor significantly above the historical average, which may partly justify overpricing.

Since last month:

  • P/E, P/S and P/FCF have improved for all Healthcare industries except Pharmaceuticals (deterioration in P/E and stable in P/S).

  • ROE is mostly stable, but deteriorated a bit in Healthcare Providers and Biotechnology.

  • In 1 trailing month the Health Care Select Sect SPDR ETF (XLV), the SPDR S&P Pharmaceuticals ETF (XPH) and the iShares Nasdaq Biotechnology ETF (IBB) have lagged the SPDR S&P 500 ETF (SPY) by about 3%, 7.5% and 8.5%, respectively.

  • The five best performers among S&P 500 Healthcare stocks on this period are Aetna Inc. (AET), Align Technology Inc. (ALGN), Becton, Dickinson and Co. (BDX), Quintiles IMS Holdings Inc. (Q), DENTSPLY International Inc. (XRAY).

Some cheap stocks in their industries

The stocks listed below are in the S&P 1500 index and cheaper than their respective industry factor for Price/Earnings, Price/Sales and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection.

I update every month 8 lists like this one covering all sectors (some sectors are grouped). The 8 lists together have returned about 25% in 2016. If you want to stay informed of updates, click "Follow" at the top of this page. My Marketplace Subscribers have an early access to the stock lists before they are published in free articles. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

Biogen Inc. (BIIB)

BIOTECH

Bioverativ Inc. (BIVV)

BIOTECH

Celgene Corp. (CELG)

BIOTECH

Eagle Pharmaceuticals Inc. (EGRX)

BIOTECH

Gilead Sciences Inc. (GILD)

BIOTECH

DaVita HealthCare Partners Inc. (DVA)

HCAREPROVID

McKesson Corp. (MCK)

HCAREPROVID

INC Research Holdings Inc. (INCR)

MEDEQUIP

Phibro Animal Health Corp. (PAHC)

PHARMA

Supernus Pharmaceuticals Inc. (SUPN)

PHARMA

Detail of Valuation and Quality indicators in Healthcare on 11/6/2017

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF) and Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor, I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average (“Avg”) between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above (“D-xxx”).

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Healthcare Equipment

46.91

27.18

-72.59%

4.4

3.18

-38.36%

44.53

30.51

-45.95%

-34.9

-12.14

-22.76

Healthcare Providers

25.45

20.88

-21.89%

1.04

0.85

-22.35%

18.82

17.75

-6.03%

5.64

5.78

-0.14

Healthcare Technology*

79.18

56.13

-41.07%

3.09

3.39

8.85%

40.1

35.77

-12.11%

-21.64

-6.2

-15.44

Biotechnology

35.16

39.78

11.61%

36.47

29.01

-25.72%

28.24

43.74

35.44%

-80.14

-64.42

-15.72

Pharmaceuticals

35.48

26.26

-35.11%

19.63

8.25

-137.94%

25.13

32.55

22.80%

-67.61

-30.3

-37.31

Life Sciences Tools/Services*

38.62

29.52

-30.83%

4.11

3.39

-21.24%

32.44

27.28

-18.91%

-8.08

-18.37

10.29

* Averages since 2006

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors, the difference to average is calculated in the direction where positive is good. For valuation ratios, lower is better; for ROE, higher is better. On the charts below, higher is always better.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

Momentum:

The next chart compares the price action of XLV, XPH, IBB with SPY in 1 month.

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Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long BIIB,CELG,AMGN,GILD,IBB. 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.

Additional disclosure: My positions are based on weekly models. Some of them have been bought this week and may be sold next week.