Amid uncertainty surrounding the Affordable Care Act and with looming midterm elections that threaten to ignite a renewed debate around health care, Lazard Senior Analyst Thomas Gallucci sees value in hospital operators with acquisition deals.
“Our favorite name in the group is Universal Health Services (UHS), and there are two key reasons behind our recommendation, and they’re both related to the company’s acquisition of Psychiatric Solutions (PSYS),” Gallucci said.
Gallucci considers UHS a “buy” for the diversification the PSYS acquisition will provide in addition to the company’s solid fundamentals and synergy opportunities. His other “buy”-rated stock is Community Health (CYH).
“Historically [CYH is] not only very strong at the blocking and tackling of the hospital business, but they also have a very good track record of buying and integrating, and ultimately running better not-for-profits,” Gallucci said. “They have a strong acquisition track record in addition to understanding the basics and running the business very well.”
Johnson and Johnson’s longtime CEO, Bill Weldon remains on the hot seat. The numerous problems J&J has had with recalls and manufacturing oversight through its huge network of subsidiaries particularly its McNeil Consumer Healthcare firm continues to plague the firm and particularly the firm’s CEO. Weldon will be testifying later today before a House Congressional Committee. All eyes will be on weldon today to see how he responds to the criticism the firm has faced for its response to the continuing problems at McNeil as well as other parts of the firm. Despite the recall related pro
blems, J&J overall has continued to remain very profitable but J&J more than most drug firms has relied on its reputation as a means for success all these years. Investors and analysts are beginning to question whether Weldon’s response to the problems were adequate. More importantly whether he managed the crisis sufficiently to protect the firm’s reputation. According to piece by Johanna Bennett in Barron’s Blog entitled J&J Reputation on the Line,
… a recent survey by CLSA analyst David Maris indicates that the company’s reputation among mothers and doctors may need a Band-Aide.
When 136 mothers and 50 pediatricians and general practitioners were asked to rate J&J’s formerly unassailable reputation before and after the recalls on a scale of one to 10 (1=horrible and 10=perfect), J&J’s score fell 26% from an eight to a 5.9, according Maris.
And for some respondents, the recalls have permanently dented their regard for the the health care titan.
Weldon has a difficult task ahead of him before Congress and his shareholders. Despite his long reputation for fine management his survival as CEO may be an uphill battle as this problem continues to have legs. Stay close to the news on this one.For more:New York TimesSeeking Alpha
With pricing, reimbursement and demand issues afflicting all medical device stocks, it may seem like no matter where one looks, investment opportunity in this sector is hard to find. However, Piper Jaffray Managing Director and Senior Analyst Mike Miksic sees three distinct buckets of opportunity among the medtech companies he covers.
“The first and maybe the bucket with the most perceived risk around it are device stocks that we like and that we think are going to persevere through this period and are executing well, even though they’re holed up in a challenging neighborhood at the moment, if you will,” said Miksic, who includes NuVasive (NUVA) and Wright Medical (WMGI) as two companies that would fall in this first group.
“The second bucket includes stocks that are less correlated to device volumes and on the margin more tied to hospital equipment and capital investments. What we have seen is that capital spending among hospitals, reinvestment in instruments and equipment, has actually been recovering at a steady pace, and new hospital construction is starting up again,” said Miksic, citing Hill-Rom (HRC) and MAKO Surgical (MAKO) as two examples.
“In the third bucket are diversified health care providers, pure and simple, large, mature businesses that we see to some degree as favorable safe havens for investors.”
For-profit hospital providers have a stable operating outlook and positive credit ratings in the near term, said Megan Neuburger, a director in the corporate finance group at Fitch Ratings.
“Since the beginning of 2010, we’ve placed five of our six for-profit hospital provider ratings on positive outlook,” Neuburger said. “What that indicates is that over the next 12 to 24 months, ratings across the sector will likely migrate upwards by about one notch on average.”
This optimism stems from a stable operating outlook that may continue through early 2012 and a confident liquidity profile, which hospitals built up by taking advantage of strong debt capital markets.
“We don’t have a lot of concern about near-term debt maturities; we don’t have a lot of credits with negative free cash flow profiles,” Neuburger said. “We do have some concern in that area, but it’s relatively limited.”
While capital spending is slowly returning, hospitals will wait for an increase in patient volumes before purchasing medical technology, says Joanne K. Wuensch, a research analyst at BMO Capital Markets.
“Entering earnings season, people were worried about European austerity budgets and pricing,” Wuensch said. “Exiting the earnings season, what people are worried about more is where have all the patients gone?”
Increased copays and higher deductibles have caused changes in the purchasing pattern cycle of patients and medical facilities. The analyst predicts patients will continue to defer treatment until the end of the year and possibly into the next year, as people await reimbursements or hold off until they’ve met their deductibles.
“The question really is how many of these procedures permanently go away and how much of it creates pent-up demand?” said Wuensch, who believes patient volumes will eventually return, as people can’t put off necessary procedures indefinitely.
Compelling valuations for several health care facility segments under the medical real estate umbrella should turn some investors’ heads despite the recent pullback that’s taken place over the past few months.
“If you look at valuations right now, [hospital] stocks are selling under six times the 2011 EBITDA and trading at about six times the 2010 EBITDA, with two quarters of actual results in the numbers. So that’s certainly a very attractive sector at this level,” said Analyst Frank G. Morgan, a managing director at RBC Capital Markets. “Skilled nursing is down in the 5.5 times EBITDAR. Those are two areas that particularly stand out as attractive valuations.”
Morgan also points to acute-care hospitals — one of the segments investors have been most concerned about in terms of future volume growth opportunities and increasing bad debt expense — as a space with several compelling stock opportunities that have taken some hits from the Street.
“Looking at 2009 and through the first half of 2010, these stocks performed very well, coming off very depressed levels out of the end of 2008; they had a very solid performance in 2009 and were off to a fairly good start in 2010,” Morgan said.
His favorite acute-care hospital picks are Universal Health Services (UHS), Community Health Systems (CYH) and LifePoint Hospitals (LPNT).
While the Street’s sentiment on medical devices companies remains resoundingly negative, with a relatively bleak outlook already priced into many of the sector’s stocks, Lazard Capital Markets Senior Analyst Dr. Sean Lavin, M.D., says things aren’t as bad as the Street would lead many to believe.
“My overall take is that the sentiment on Wall Street, which is extraordinarily negative on at least medical devices, is probably more negative than what we’re actually seeing in health care services and procedures,” said Dr. Lavin, explaining that many of the stocks he covers are down 30% in procedural volume from three or four months ago. “We’ve certainly seen a bit of a slowdown in certain areas, such as spine surgery, which has certainly slowed down a few percentage points, some of the cardiac rhythm management names and the ICD space has slowed down a few percentage points, but I would say with the Street taking 20%-plus off of each of the related stock prices, this has far more than adjusted for the market slowdown with the economy.”
Specifically, Dr. Lavin points out the spine market slowed from 8% growth to 4%, while growth in the ICD market decreased from 4% to 3% — relatively small adjustments when compared to the large hits dealt to stocks.
“It’s kind of interesting that numbers are not really going lower except for a few companies, and yet sentiment in the whole space is still more negative than the valuation, and that’s a potential for a rally because at some point, investors look up and see that these earnings numbers are the same as they were three months ago when the stocks were 30% higher,” Dr. Lavin said. “I think it will start a buy rally. The question is how low do they go first?”
It’s official Olli-Pekka Kallasvuo is out as CEO of Nokia NOK1V and in his place on September 21 is a former high level software executive from Microsoft, Stephen Elop. Liberum has been talking about the need for change at Nokia going back to October 16, 2009. The change at the top of Nokia was essential. Many analysts have been delighted with the change. The selection of 46 year old Elop has merit. He was in charge of Microsoft’s Business Division and is extremely well versed in soft
ware which is the area the Nokia needs to focus on to get its smartphone business at a point where it is capable of competing again with the Apples, Motorolas and Google phones. Elop also has had experience working with Nokia while at Microsoft and in his previous job at Macromedia.
The real question remains can Nokia without a true visionary at the top of the firm make the leap to effectively compete on high end with Apple, RIM, Google and even Motorola. I am somewhat ske
ptical. Change is certainly afoot at Nokia. Just a few hours earlier, Anssi Vanjoki, Nokia’s smartphone chief and a one time candidate for the CEO position, announced his resignation from the firm. Elop will now have a chance to appoint someone to his own specific liking. The firm desperately needs a visionary at the helm and in some of the key management positions if it has real hope to get back near the top.
Investors must keep a very close eye on new management at Nokia.
While confusion surrounding the exact time at which the semiconductor cycle peaked has caused a skittish supply chain for many semis, those with a clear-cut competitive advantage have side-stepped much of the mayhem, said Raymond James Analyst Hans Mosesmann.
“There are companies that are in control over their destinies either because they have some kind of a product that is unique or some kind of competitive advantage,” Mosesmann said. “Or because they’re part of a cycle where they have a product that is ideally suited for that kind of cycle.”
Mosesmann focuses on companies like Micron Technology (MU), NVIDIA (NVDA) and his top pick Altera (ALTR), which he says is a successful secular trend story.
“Altera produces chips that are called programmable logic devices, which allow customers to program their intellectual property or their design into these chips. It’s becoming a pervasive product in all kinds of electronics,” Mosesmann said. He adds that for semis, “It’s more of a stock-to-watch dynamic rather than a sector dynamic, particularly when investors are very skittish from a macro perspective, and it doesn’t seem like that’s going to end any time soon.”
Amid stagnant home sales’ figures, with recent decreases in new and existing home sales, some analysts are turning the spotlight on apartment REITs.
“The benefits to apartments are declining homeownership, increased confidence of those people who have their jobs and survived, and you have an unbundling that’s occurring,” said Sandler O’Neill Senior Analyst Alexander D. Goldfarb. “If you look at Axiometrics‘ data, year-to-date through June, the REITs have pushed effective rents 5.5%, and a few have pushed it in excess of 7%. That’s year-to-date; that’s phenomenal.”
Analyst Michael Levy favors apartment REIT Camden (CPT), as it has increased occupancy and raised rents aggressively, overriding themes in the REIT sector.
“I think right now their occupancy is closer to 95.5%, and they started the year at 92%, so they’ve done a really good job of increasing occupancy,” Levy said. “Should a general revival of the rental markets continue, they are in some of the markets that got hit hardest and are now coming out stronger.”
