One trend in the medical real estate sector that will become more evident, which ties to trying to help lower high health care expenditures, is an increased focus on lower-cost treatments and options for patients without forgoing quality of care, as procedure volume and rates of utilization remain flat due to the U.S. macroeconomic backdrop, says Kevin Ellich, a Principal and Senior Research Analyst at Piper Jaffray & Co.
“The other side of the equation is reimbursement and the regulatory environment. And quite frankly, I don’t think many people expect reimbursement to increase meaningfully over the next couple of years. We’re in an environment where health care is 17% of GDP, and there definitely needs to be something done to reduce higher health care expenditures. It all boils down to health care reform and what can we do,” he said.
Ellich likes NxStage Medical, Inc. (NXTM), a home hemodialysis manufacturer that makes a device called System One for patients who dialyze at home, and is considered the best technology in the market. He says the overall cost to the health care system, as well as providers, should be lower because these patients are usually in better shape than in-center patients, and the cost to providers is lower due to not having as much nursing expense and overhead.
“That said, home hemodialysis is a very small percent of the overall treatments used for the patient population, only about 1% to 1.5%. Over time, I think it will grow. It’s a long-term opportunity. There are a number of things that need to be done,” Ellich said. “You’ve to get the right reimbursement in place. You have to get the right incentives for the providers in place. You need better training reimbursement and just more patient awareness and provider education.”
The broad theme that continues to be a focus in the medical device sector is the fundamental shift taking place right now in the way devices are being brought to market as the customer is being more broadly defined from surgeons or clinicians to hospitals, insurers and governments, says Raj Denhoy, a Managing Director at Jefferies & Company, Inc.
“Some of the larger device categories, things like hips, knees, spine, defibrillators, pacemakers and stents, are starting to show the effect of this changing dynamic. A lot of what’s sold in those markets could be considered commodities. There is very little clinical differentiation amongst the various products and the various companies,” he said. “And as the purchasers tend to focus on this more, it’s starting to drag down pricing. I think this trend is going to continue for a long time as a major secular headwind for this industry.”
Denhoy favors Edwards Lifesciences Corp. (EW) as he looks for innovative technologies and markets for potential growth. He says he is focused on devices, such as transcatheter heart valves, and Edwards Lifesciences, which is pioneering the use of these valves, is replacing surgical aortic valves.
“They are very early in the launch of the technology in the United States, and all indications are that the adoption and growth is going to remain strong for years to come. Edwards continues to innovate and have a technologic advantage over the companies that are coming behind them. They’re in a very nice position to continue to grow quite nicely,” Denhoy said.
A turnaround is expected in the pattern of the commodity prices and the Canadian stock market as a consequence of a high-probability scenario of sustained global economic expansion, and is one reason to favor an overweight position in Canadian equities, says Jean-Guy Desjardins, CFA, Chairman, Chief Executive Officer and Chief Investment Officer of Fiera Capital Corporation.
“And in fact, the Canadian economy, in terms of an activity point of view, is very much influenced by the behavior of the commodity prices. So if we are optimistic on the global economic outlook, then we are relatively positive on the outlook for commodity prices,” he said. “We have a view on the Canadian economy that it will do 2%, 2.5% growth, and that the Canadian dollar will be going up in line with the increase in the global commodity prices.”
Desjardins likes Dollarama Inc. (DOL.TO), a retailer that caters to the low end of the Canadian consumer segment. He says Dollarama’s segment of the Canadian retail market, contrary to the U.S., is extremely fragmented, and there is significant opportunity for that company to consolidate that market and to significantly increase its market share.
“The market opportunity is very attractive, and the management has proven in the past that they can execute on their strategy. So that’s a company that should be generating a substantial amount of free cash in the next two, three, four, five years, and it’s one that we think is a very effective buy,” Desjardins said.
The wireless telecommunications market is gradually undergoing a shift to family plan pricing within the space as more carriers eliminate the concept of voice and text as part of customers’ plans, which is a dramatic change for the industry that gets about 70% of its revenues from voice and text, says Craig E. Moffett, an Analyst at Sanford C. Bernstein & Co., LLC.
“The carriers faced the technology threat that their low-bandwidth, high-profit services, like voice and text would, be arbitraged by lower-priced data services. So they simply ripped off the Band-Aid and eliminated the concept of voice and text altogether,” he said. “The new plans don’t have voice. In fact, they don’t even acknowledge that voice and text exist. They simply charge for access and voice and text are thrown in for free.”
Moffett sees the shift to family plan pricing favoring Verizon Communications Inc. (VZ). He says the new plans also will make it easier and more affordable for customers to add additional devices to the network, and by doing that, they will make it more advantageous to put all of those devices on the same carrier.
“Verizon made the first move a few weeks ago, and AT&T is still on the sidelines, but probably by the time your article comes out, they will have announced something along the same lines. It will take awhile for those changes to work their way through the market, but that is a profound change to the way the industry works,” he said.
The wireless telecommunications industry is changing in Europe by leveraging network-sharing deals, which is effectively consolidation, due to companies’ lack of cash and the added pressure from ratings agencies to clean up balance sheets, says Robin Bienenstock, Senior Analyst for European and Latin American telecommunications at Sanford C. Bernstein & Co., LLC.
“You don’t have consolidation of the retail brands on top, but you have consolidation of everything else, and that has big implications for what will happen to prices, what will happen to marketing,” she said. “The other reason that I think you’re going to see a lot more in the way of network-sharing deals is so that they can accelerate LTE.”
Bienenstock favors Vodafone Group Public Limited Company (VOD) in the European market because she believes the upside of the wireless telecommunications industry change is still at the early stages, and is not yet focused, so when Vodafone announced it U.K. network-sharing deal, the stock didn’t recognize that shift.
“Again, it has a very limited downside, but the reality is every time Vodafone starts to look cheap, U.K. investors to start to speculate about whether or not Verizon is going to buy it to get back full ownership of Verizon Wireless, so I think limited downside and a 7% dividend growth is a very good combination,” Bienenstock said.
The explosion in the wireless telecommunications sector has positively impacted the semiconductor space, particularly those names with exposure to chip production, as semiconductors are the basic building blocks for electronics, including cell phones and smartphones, says Craig Berger, a Managing Director at FBR Capital Markets & Co.
“Given how much chip stocks have sold off, I am now positive on the group heading into the end of the year. I am also constructive on handset-exposed chip firms, as it is one of the few real growth areas out there in the world. So it’s one of the better end markets to be exposed to, and I put wireless infrastructure in that same bucket with handsets,” he said.
Berger likes Qualcomm Incorporated (QCOM), a semiconductor manufacturer, due to its chip business where it powers one-third of the world’s cell phones, and the company also collects royalties on about half of the world’s cell phones.
“They are investing the most into R&D, and they are involved in two different businesses. They invented 3G- and 4G-cellular technologies. The sale of any 3G or 4G device will drive royalties to Qualcomm, and they also are investing a tremendous amount into the chips. That will continue as well,” he said. “Qualcomm has the only good 4G LTE chip solution now out there in the market.”
Specialty and ag chemical companies with pricing power are favored within the European chemicals industry versus the more commodity-type exposure in the space due to concerns about margins and volumes, says Jeremy Redenius, a Research Analyst at Sanford C. Bernstein & Co., LLC.
“We hear a lot of concern from investors about European exposure. Demand trends are negative and not getting better yet. It’s not clear when that will start to get better, given a lot of the economic and political uncertainty throughout Europe,” he said.
Redenius says Akzo Nobel NV (AKZOY) is his preferred stock in the sector because the company is able to increase prices consistently in their industry with a lag versus raw-materials cost inflation. He adds that Akzo Nobel has been able to increase prices faster than before, and basically, offset unprecedentedly strong raw-materials cost inflation, which he believes will start turning in their favor. Also, AKZOY offers the potential for volume improvement in its space.
“They are very levered to home-improvement spending. If people buy and sell, they repaint. They also buy new things, like white goods and furniture, and Akzo Nobel makes the coatings for these. In the U.S. and Europe, volumes for these products are down more than 20% from precrisis levels. They’ve been pretty stable at that level, and so there will be a very strong volume leverage uplift when people start to turn over homes again,” Redenius said.
Tower companies are well positioned to benefit from the secular growth trends driving ongoing investments tied to the 3G to 4G migration by telecommunications carriers, says Ben Lowe, an Associate Analyst at Stifel, Nicolaus & Co., Inc.
“So from a tower perspective, anytime that we see this technology migration, whether it’s 2G to 3G, now 3G to 4G, this isn’t a one- or two- or even three-year investment cycle for the carriers. This is often a five- to seven-year investment cycle,” he said.
Lowe has American Tower Corporation (AMT) as his number one pick among the tower companies due to its scale and position to benefit from the attractive industry trends while also capitalizing on company-specific growth initiatives including its ongoing investment overseas.
“AMT has gone into a lot of these emerging markets and introduced this model, where they are doing sale leasebacks with some of the incumbent carriers in those markets, and they’ll buy that tower portfolio again. It will have a low average tenancy, and then they are going to increase that cash flow on those sites over time as they add tenants. That serves to enhance and extend their growth opportunity,” he said.
Chemical companies leveraged to North American housing are showing modest growth despite some slowdown in Europe, with the paint and coatings segment as an interesting space for its defensive qualities in a soft demand environment, says Ivan Marcuse, an Equity Research Analyst at KeyBanc Capital Markets Inc.
“Chemical companies with heavy exposure to Europe are likely seeing slowing in those markets, and even China is beginning to see a lower level of growth, which will definitely impact volumes for some companies in my space,” he said. “Right now, outside-of-Europe demand is not exactly humming, but it’s not all awful across the board.”
Marcuse likes Compass Minerals International Inc. (CMP) because it is a stock that has been out of favor due to several weather-related issues, but it is primarily tied to North America, and is a good defensive stock. He says CMP has solid returns, decent cash flow, a nice dividend and little European risk.
“Any paint and coatings company with large exposure to North America is in a better position than most right now,” he said. “On the architectural side, paint tends to be replacement driven. Even in areas where there is a slowdown, it tends to be fairly resilient.”
Continued increase in insurance pricing in specific products or geographies, and also a continued slow rebound in selling units should add up to more insurance premiums, and therefore, should add up to higher revenue for brokers as they get more commissions on those premiums, says Brett Huff, a Research Analyst at Stephens Inc.
“I think right now an important point is just how the brokerages are paid, and general brokerages are paid in two ways, either by fee or by commissions,” he said. “The reason that’s important right now is because we think rates are getting better, albeit slowly.”
Huff favors Brown & Brown Inc. (BRO) in the insurance brokerage segment because it is a stock that has a lot of exposure to smaller businesses, and as a result, has lots of opportunities for organic growth as those businesses begin to recover. He also believes there could be further meaningful upside for Brown & Brown due to the company transitioning from an environment where rates and exposure units have been against it more than its peers.
“And I think both of those trends are abating and they are going to start seeing some tailwinds rather than headwinds. And we think that bodes well for Brown & Brown, moving from sort of the eight-ish times forward EBITDA valuation to nine or even higher,” Huff said.
