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The $3 Trillion Medical Juggernaut Doesn’t Care Who’s President

By John Persinos on November 17, 2016

My grandmother had an expression: “The dogs bark, but the caravan moves on.” Her wise sentiment aptly describes the post-election debate about health services.

Investors are fretting over President-elect Donald Trump’s stated intentions to eliminate Obamacare and slash spending on Medicare and Medicaid. Ignore the barking. Here’s what you need to remember:

The vast health services sector is a relentless moneymaking machine, no matter who’s in political power.

Concerns about radical Republican policy changes are weighing on the shares of inherently strong stocks in the health and biopharmaceutical industries, but that’s a clear buying signal if we ever saw one.

Below, we examine two health services stocks poised to throw off robust double-digit gains in 2017 and far beyond, but they’re undervalued because of the white noise generated by the presidential election. Each company is a global colossus that’s the largest player in its respective industry. The time to buy these stocks is now, before market sentiment catches on to their true potential.

The Medical-Industrial Complex

According to a new report issued this week by the private, nonpartisan research group the Commonwealth Fund, Americans spend $9,523 per person a year on medical expenses, by far the most among developed countries. Annual spending in the U.S. on health services now exceeds $3 trillion a year.

Think of this spending as the medical-industrial complex, just as formidable as the partnership between the Pentagon and defense contractors that produces planes, tanks and bombs.

One of the surest ways to get rich is to tap into an unstoppable trend that’s largely immune to politics and economic cycles. That’s why our in-house experts are bullish on the health services sector.

Linda McDonough, chief investment strategist of Profit Catalyst Alert, says that leading up to the presidential election, the entire pharmaceutical industry had been under pressure.

Drug stocks were taking it on the chin, she explains, because of “the possibility of price controls from a Hillary Clinton presidential victory and a pending drug price reform bill in California. Instead, both suffered defeats on Election Day.” That spells an imminent rally, McDonough asserts, in select drug stocks.

Dr. Joe Duarte, biotech expert with Breakthrough Tech Profits, notes that substantial Medicare cutbacks are in the works. He predicts: “The upside will likely be a consolidation wave among large pharmaceutical and medical equipment companies.”

All of which brings us to medical equipment maker Medtronic (NYSE: MDT).

People are getting older, fatter and sicker…

Populations around the world are aging, demanding rising levels of care. In developing nations, rising middle classes are growing more affluent and embracing Western eating habits and lifestyles that boost the occurrence of illness and disease. As they get older, fatter and sicker, these people are clamoring for the expensive, high-tech medical care they see in America.

This demographic dynamic is a boon for Ireland-based Medtronic, which sells device-based medical therapies worldwide. With a market cap of $111.79 billion, Medtronic is the world’s largest standalone medical technology development company.

Medtronic offers laparoscopic instruments, surgical staplers, soft tissue repair products, hernia mechanical devices, and a host of vascular products. It also offers nursing care products for incontinence, wound care, enteral feeding, urology, and suction products, as well as accessories, electrodes, thermometry, chart paper, and syringes.

In 2014, Medtronic acquired medical device rival Covidien of Ireland for $42.9 billion. Medtronic then moved its merged operations from Minnesota to low-tax Ireland. From its headquarters in Dublin, Medtronic has made expansion into emerging markets a top priority, especially focusing on China and adjacent Asian countries.

Medtronic is scheduled to report second-quarter fiscal year 2017 operating results on Tuesday, November 22.

According to the average analyst estimate, MDT’s second-quarter earnings per share (EPS) will come in at $1.11, up from $1.03 in the same period a year ago. Full-year EPS is projected at $4.66, compared to $4.37 last fiscal year.

MDT’s trailing 12-month price-to-earnings ratio (P/E) stands at 31.47, lower than the trailing P/E of 42.1 for its industry of medical equipment.

Before the markets opened on Thursday, MDT shares traded at $80.89; the average analyst consensus for a one-year price target is $94.15, for a gain of 16.4%. The dividend yield is 2.14%.

An Unloved Biotech Beauty

Our second health services play is Teva Pharmaceutical Industries (NYSE: TEVA), the world’s largest maker of generic drugs. Teva is one of the best value plays you can find in a broader market that’s still overvalued.

News this month of a U.S. Department of Justice investigation into alleged price fixing among generic drug makers has pummeled shares of companies such as Teva. We think the selloff is overdone and the best buying opportunity is Teva, one of the hardest hit stocks.

If the history of DoJ actions is any guide, penalties against the affected generic drug makers are likely to be modest. In fact, under the incoming Republican regime in Washington, DC, you can expect a hands-off attitude among regulators in all sectors.

Based in Israel, Teva is not only the largest generic drug manufacturer in the world but also one of the 15 largest pharmaceutical companies worldwide. The company’s biggest selling products include Copaxone for the treatment of multiple sclerosis; Provigil and Nuvigil for narcolepsy and other sleep disorders; and Azilect for Parkinson’s disease.

The company develops patented biologic treatments, which are derived from humans, animals or microorganisms. Biologics are composed of proteins, sugars, or living cells and tissues.

Teva also is a leader in the development of “biosimilars,” which are generic, less costly copies of biologics. Gene-based biologics are leading-edge cancer treatments, but as they lose patent protection the door is opening for biosimilars. Teva is readying several new biosimilar drugs for market that should pay off for years to come.

With a market cap of $34.8 billion and total cash on hand of $6.98 billion, Teva boasts more than enough financial wherewithal to weather the temporary political heat from the DoJ.

Teva’s time-tested prowess at engineering new and successful drugs for a growing global customer base prompts analysts to project earnings growth for the company of 4.56% over the next five years, compared to 0.19% for the generic drug industry.

Teva reported strong third-quarter earnings on Tuesday, November 15. Teva’s EPS came in at $1.28, beating consensus estimates of $1.27. Revenue reached $5.6 billion, missing consensus estimates of $6 billion, but the main culprit here was currency fluctuations that cut the number by $188 million.

Teva shares are now down 42% year to date and down 8.9% over the last month, an absurdly harsh punishment considering the company’s deep bench of new drugs.

On the Cusp of a Rally

Teva’s price-to-book ratio is 29.3, compared to 65.9 for the industry, implying that it’s undervalued. The stock’s trailing P/E is 24.43, roughly in line with major drug manufacturers.

The benchmark SPDR S&P Biotech ETF (NYSE: XBI) is down 6.68% year to date, which sets the stage for a biopharmaceutical rally.

Teva shares currently trade at $38.12; the average analyst estimate for a one-year price target is $63.04, for a hefty gain of more than 65%. The dividend yield comes to 3.62%.

Think of Teva’s total return package as a holiday gift to yourself.

Editor’s Note: Our investment strategists are on the job around the clock to help you make money. Got a question, idea or comment for them? Send me an email: mailbag@investingdaily.com. We’d love to hear from you. In future issues, I’ll address the most frequently asked questions. — John Persinos

 


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