Some Thursday reporters: Adecco, Agrium, Celgene

Having already appraised Randgold Resources (link here) and Apache (link here) time to take a look at a few other companies that reported today (Thursday). 

Adecco - the Swiss listed recruitment company - induced me to comment on Twitter earlier: 

'2015 EBITA margin..strong at c. 5.2%..below target of >5.5%..organic revenue growth is steady but not accelerating'

You can see this deterioration in the chart below: 

I last wrote on Adecco here when I observed that a sub CHF70 share price offered trading opportunities (which last time I took).  And with the share below this level now...

...I am starting to think along similar lines. Around a x10 EV/ebita multiple and a 3%+ yield plus an emerging market opportunity it feels opportunistic to me...

 Talking about opportunities I have been quite vocal about commodity-centric opportunities and even noted that stocks like Mosaic (link here) are starting to outperform after big falls. Another sector peer Agrium reported today...and their shares have also started to recover.

Their presentation document was worthy of a look with this chart of particular note.  Some fundamental support for the potash and related markets?

Finally, Celegene:

Celgene at c$120 level so many times over last year. Ok nos but valuation needs more

The troubles is a x20s EV/ebit valuation always requires more. In the space I still prefer Gilead (link here).  

Today's US earnings wrap: Gilead, Agco, Mondelez, Hershey

Far too many numbers out to easily keep abreast of...but here are a few names which caught my attention.

Gilead is a stock I have written at length about before (link here) and last time established a top of the range US$125 price target.  Biotechnology can be a divisive area and certainly there have been significant bouts of rotation against the space over the last few months.  Nevertheless Gilead shares have remained relatively resilient:

Tuesday's after hours results continued the solid story progress...although unlike in previous quarters the only guidance edging up occurred at the net product sales line: 

No doubt this disappointed some investors but the investment story outlined above remains very much on-track be it for the HCV (below) or the HIV franchise:

Gilead only guided for full-year product revenues of US$30.5bn which would imply Q4 revenues of only US$6.8bn which does not appear realistic given the US$8bn+ of revenues in Q3.  Low-balling?  Quite possibly.  

The c. US$90-125 range still works for me even if the company was pretty coy about wider corporate initiatives (raising of monies via bond issuance etc.)  At the upper end of this range that is still equivalent to only a low teens prospective EV/ebit level.  

Turning to today inevitably I reviewed events at my old friend Agco (last written up here).  I found the tone of the Q3 update slightly better than expected and it resulted in a tweak up in EPS hopes (US$3.20 versus US$3.10!) and a maintenance of the free cash flow expectations (a handy 7% free cash flow yield at the prevailing share price) even if sales and capex were both cut back: 

Yes, conditions remain tough especially in South America but inventory management is apparently solid ('better than the industry average') and pricing is still positive (a trait noted by Deere too).  Clearly still not the easiest conditions but the stock is pushing in the right direction - and with a 1% dividend yield, ongoing share buyback and net debt around x1 ebitda this should continue.  

I am still only looking to review my holding in the stock c. 10% higher than prevailing when the company starts to trade more clearly in the double digit EV/ebit valuation space.  

Finally Mondelez which I described last month as having 'warmed up to' as 2015 progressed.  No surprises to regular readers that their continuing excellent pricing power was an influence here:

The above focus actually took the edge off their revenue/market share performance (with the exception of gum/candy - more of that later) but in a choice between price and volume nine times out of ten I will choose price, so I am not too worried about this. 

Otherwise - fearful of potential activist pressure no doubt - shareholder remuneration (mostly buyback but also including a 1.4% dividend) is currently running nicely over a 5% free cash flow yield and margin enhancement targets for 2016 were reiterated.  Blighted by FX negatives the shares are not classically cheap (EV/ebit >x20s) but that is why as noted last month you get aggressive at the c. US$40 share price mark.  Thematically the company are in the right products (premium/pricing power) with a very international sales base. 

A final company: Hershey.  I wrote up a couple of extensive pieces on the stock earlier in the year (link here) concluding that a sub US$85 was ideal to buy the stock.  We did not get there during the early Autumn (despite sometimes being close) but it appears that currently we may be building into another opportunity: 

So what did they say?  Well essentially earnings are to be at the low end of the +3-5% hopes as:

'U.S. net sales were below expectations due to lower than expected candy, mint and gum (CMG) retail takeaway in the third quarter. This softness also impacted broader mainstream snacks, where consumption trends during the quarter were less than the June year-to-date increase. It appears that CMG and broader snacks marketplace performance in the quarter was pressured by lower consumer trips and a decline of in-store merchandising and programming at some retailers'.

Funny how Mondelez above did better in their gum and candy division...clearly they took share. 

China was also not firing on all cylinders for the company but innovation, new launches and a hugely important seasonal period is just about to get underway and - as with Mondelez - at least Hershey is not trading off on price:

'Price realization, primarily in the U.S., was a 5.8 point benefit. Volume was off 4.3 points due primarily to elasticity related to the previously announced price increase and lower sales in China'.

Around the US$85 level remains an ideal entry level for me.  One to keep a particularly close eye on. 

Gilead - impressive after hours earnings numbers yesterday, at worst a strong hold

A little over four months ago I established a US$90-110 range for the US biotechnology company Gilead (link here) since when the stock has not breached the lower bound but in the last couple of months has risen above the upper level.

Undoubtedly this performance has been helped by a general 'enthusiasm' for the sector which has manifested itself in some high sector valuations - although not on a relative basis by Gilead.  

So long story short I let my position run ahead of yesterday's (Tuesday's) after hours update...and what an update it was.  Of course the chart which got my immediate attention was the guidance one: 

So let's get this right: on a mid-point basis higher sales, higher margins and lower taxes...that sounds like a positive combination and worth a 5%+ upgrade.  

However the most impressive part of the numbers was the underlying quality. On the conference call the greatest focus was on the HCV rather than the HIV division (an interesting evolution over the last couple of years) and in the former space not only were new product launches hugely net sales generative...

...but further sales extensions are apparent as the international roll-out of the Harvoni product increases apace: 

HIV treatment share remains very high...

...and growth potential (unfortunately) also is still clearly apparent: 

With the company also confirming that there is very limited likelihood of a large material acquisition the continued extension of recently initiated dividend and buyback strategies remains the most likely scenario which - given the low relative rating and growth potential - feels only value adding to the share.  

Given some of the vagaries around the biotechnology space on purpose I was a little ungenerous in my valuation targets during my note of around four months ago linked above.  Given progression in both the numbers and the story pushing through a 10% upgrade to my top of the range level to c. US$125 does not feel particularly aggressive, making at worst Gilead a strong 'hold'.

 An impressive conference call update.

Johnson & Johnson: the biggest barrier to buying big remains the long-term buyers

The last time I wrote about Johnson & Johnson I observed that:

'The company has a high quality problem.  It has little net debt, its current 2.8% dividend yield is covered a couple of times and thematically they are in attractive longer-term areas.  Yes, biosimilars might impact over time in the pharma unit (apparently negligible impact for 2015) and in the medical devices division they have not grown and even lost market share to some smaller players (as disclosed on the conference call).  But the latter division has a big pipeline and 30 new products coming on stream.  In other words it will be fine over time.  They even downplayed their M&A ambitions noting that most of the deals they do are relatively small.  

In short a generation or two ago you may not have been fired for buying IBM but today Johnson & Johnson is one of that small grouping of stocks that fit that billing. 

And that’s the problem.  

Want to know why the company is doing a sideways shuffle at the $100 share price level?  Well for those longer-term focused pension funds following an easy law of round numbers strategy of buying it every time the mythical and magical $100 share price looms into view cannot be critiqued'

Guess where we are today?  Just below that US$100 level...

There was little in today's results to make longer-term holders change their thesis with - as noted below - the company hitting their key near-term priorities...

...even if FX translation considerations meant that there was a material difference in 'reported' and 'operational' sales...

...plus sequential earnings were negative (impacted too by divestment impacts).

Judging by some of my notes from the conference call longer-term holders are not going to be perturbed by some FX related impacts even if sales did plummet at the hepatitis C treatment Olysio due to new product launches by Gilead and AbbVie.  The pharma pipeline potential noted in a graphic above more than makes up for this. In terms of other observations from the call: 

Biosimilars are not generics…market will react quite differently (to an introduction)

Admitted behind in Medical Devices but committed on innovation, ‘pioneer the operating room of the future’ (working with Google)

‘everything starts with innovation’

anticipate at least one major launch each year for the next 3 years in vision care with scope to disrupt

$1bn of ongoing cost cuts

'Uniquely positioned' to link aspects of healthcare industry 

Strategic focus – want to be #1 or #2 ‘we demonstrated that we would divest it’ if this is not the case

$15bn of net cash

sales constant currency +1-2% so $75-76bn estimated for FY15e

M&A scope - 'want to be #1 or #2 in the market place...always interested in growth opportunities'

The valuation - with the corporate progression - is slowly compressing and prospectively is a little over x11 EV/ebit and x15 P/E: nothing that will worry longer-term holders.  For myself - and my pension fund - how I wish we could crash through the US$95 level like last Autumn.  That's a good bad day level for me to buy shares in the company in a world that remains macro challenging.  

Gilead - establishing the range

The US listed biotech company Gilead has had a meteoric last year in share price terms...

...with the rise and rise of its one tablet a day formulation HCV antiviral treatment hugely driving numbers: 

Despite long patents it is small wonder then during December last year that the shares fell sharply (briefly well below US$90/share) when it was announced that low pricing/an exclusive distributor deal from the number two player (an AbbVie product) had forced Gilead to start offering discounts despite a still 90%+ market share (blurred however because Express Scripts with whom AbbVie signed an exclusive agreement) does not provide numbers to various market share watchers.  

Further blurring is possible from a new Bristol Myers product which claims in phase 3 high success especially in combination with the key Gilead Sovaldi product. This development will be a key focus for investors during 2015.  

Of course Gilead are not standing still.  At the end of 2014, Gilead had 225 active clinical studies, of which more than 54 were in phase 3 clinical trials.

Additionally - and easy to forget that HIV products were Gilead's core for all but the last year - there is still a fantastic market share in HIV treatments: 

It is interesting to see where the historic buyback levels were too.  Of course the average is unsurprisingly below the current share price - perhaps it is more interesting that the Q4 14 level is above the prevailing share price as I write.  With a newly announced US$15bn stock buyback facility (equivalent to 10% of market cap) this is also set to be an important source of total returns (especially as there is currently no dividend yield).

So what about 2015 prospects?  If we look at the formal company projections they are for c. US$19bn of operating profit a c. 15% increase versus the FY14A figure.  

With a US$150bn EV this would put the company on a prospective EV/ebit of just under x8...which in almost all eventualities is too cheap for a company growing by a double digit percentage and with strong market positions, an ungeared balanced sheet and lengthy patents.  

For me - still retaining half the position I bought under US$90 back in December - there is enough attraction to retain a position but insufficient to go overboard.  In the absence of new newsflow (clearly the upcoming Q1 2015 numbers on 22 April are an obvious focal point), my range for the stock is US$90-110 to double up again / take some more profit. 

For Gilead keeping an eye on the newsflow - in this important but highly technical area - is of huge importance.  

Spin-off #2: Indivior

Just before Christmas I wrote up the spin-off of Indivior from its parent company, musing whether it was potentially good value or not (I did subsequently initiate a position albeit a relatively small one as my investigations continued).  Even though the share has has been volatile today (day's range of 133-167p!) from the mid 140p level I initially purchased the shares at before Christmas it has been a winner.

The inaugural listed results are always an important point of any new company to the market and it is noteworthy how the company described itself:

Typically when you see 'enormous future potential' this is short-hand for shabby near-term results and on that front this guide was absolutely correct.  I discussed at the above link before Christmas some of the challenges the group was facing and they nicely summarised some of these in an early slide from their presentation pack: 

Share losses, 'forced switching' and price reductions is rarely a good miss but not totally surprising given the profile of company established at the time of its spin-off.  Competition has kicked in and, as noted below, 'will intensify'...

...and hence the key product market share of Suboxone (the background to which is discussed at more length at the link above) is seeing fading market share but it is broadly fair to describe it as 'resilient':

Pull all of this together and revenues are anticipated to fall over 20%...and unsurprisingly net income in a geared fashion much more than this.  

So is the share cheap?  Well with an EV of around £1.4bn the implied EV/ebit (generated using the 29% tax rate guided to by the company for 2015) is just over x10 for FY15.  The free cash flow yield (historically 80%+ of operating profit) is a reasonably healthy c. 8% which no doubt contributes to management's second assertion below that: 

Back in December in my initial piece I noted that the company's pipeline products are focused on later in the decade albeit that the first product (Nasal Naloxone) is twelve months away.  If you are looking for the source of upside it is undoubtedly here.  There may also be some dividend benefit in 2015 as the company looks to assuage concerns used to the Reckitts dividend flow.  

What I also liked about the inaugural results presentation document was that the Indivior management are clearly trying to help educate (potential) investors with two presentation slides full of helpful academic and related information to assist in monitoring the company plus a further two slides encompassing the forward calendar of meetings, presentations and corporate results.  It is a shame other companies do not make such efforts.  

Pulling it all together, Indivior remains speculative but interesting.  The shareholder base is clearly calming down and the apparent support for the share in the 130s/140s is worthy of note.  Clearly there are uncertainties but to have no position feels wrong.  This is a company in transition and it is not well-known (or covered).  

With more information now it is clear that the extent of the undervaluation is not as material as I thought in December but risk-reward still feels sufficient to at least maintain my position in this (unfortunately addiction centred) fascinating theme stock 

"Big cap deal smackdown: Glaxo and BT Group"

I wrote a piece titled "Big cap deal smackdown: Glaxo and BT Group" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Pre Christmas spin-off time: Indivior

So the last full day of trading on the London stock market...and hence a perfect day for Reckitts to spin out their pharmaceutical business Indivior!  Well maybe not...but spin-offs are always interesting and one which occurs at a strange time of year doubly so.  

So who are Indivior?  From today's RNS document...

'Indivior will trade under the ticker "INDV". Indivior is a global specialty pharmaceutical company committed to expanding treatment access and pioneering innovative therapies for the chronic diseases of addiction and related mental health disorders'

Using last month's Indivior investor day presentation here are some key slides on the newly listed company: 

A clear US focus (not unusual for a pharmaceutical company): 

 Main issue been competition rising on main Suboxone (global opioid dependence) product

Other issues/opportunities in the US business.  Note pipeline is more a >2016 factor...

Opportunities in untapped US market as the company sees them...

…but as noted above new products from 2016-2020 only

Hope for non-US interests but market developed not so advanced: 

So outlook not going to be easy.  In my opinion the company is going to do well to keep profitability at these levels without the new products kicking in. This is undoubtedly why Reckitts spun them out...

Quite cash flow generative with high cash conversion.  Even adjusting for business pressures should still be able to generate $500m+

So a profile of $600m+ operating profit, $500m+ FCF (and confirmation of $500m net debt to be given to the company on spin-off which equates to < x1 ebitda so not excessive).  Limited short-term growth but some longer-term potential (pipeline, RoW).  Given there will be some overhang too (RB shareholders not holding onto their shares) I would value at x8 EV/ebit = $4.8bn market cap = c. £3bn market cap. 

And the spin-off market cap today?  718.78m shares at 146p = £1.05bn.  

Either my pre Christmas maths are sunk or this is quite an interesting spin-off.  Small trading position established whilst further investigations continue.