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Selected Low-P/E Health Care Picks from Edward Owens

December 30, 2011 | About:
Federico Flom

Federico Flom

6 followers
Edward Owens has worked in investment management for over 30 years. He has managed the Vanguard Health Care Fund since its launch in May 1984.

Mr. Owens averaged 16.2% a year since the fund's inception. Over the past 10 years, the average health care funds returned 3.86% a year, while Mr. Owens’ fund gained 6.27% a year.

Mr. Owens is primarily focused on investing in health care companies. His strategy is a long-term approach and he pays careful attention to valuations.

Jack Dierdoff of BW Online has characterized the situation: “The Vanguard Health Care Fund is the granddaddy of all health care funds. Mr. Owens invests primarily in health care companies. His strategy is characterized by a long-term focus and careful attention to valuations. It has been run by the same person since inception, with an outstanding track record. Mr. Owens and his research team are on top of what is happening on the cutting edge of biotechnology.”

Here are Mr.Owen's low P/E stocks that portray his investing method:

Warner Chilcott Plc (WCRX): With a P/E of just 4.2, it is a very interesting to analyze

Warner Chilcott markets women's health, gastroenterology, dermatology, and urology products. The firm's top drugs include osteoporosis drugs Actonel and Atelvia, oral contraceptives Loestrin 24 and Lo Loestrin, and Asacol and Asacol HD for ulcerative colitis.

The company had a solid quarter as it continues to drive sales gains in its key promoted brands and it had strong cash net incomes as well. In addition, patent expirations on its main drugs are still two to three years away.

Warner's low tax rate makes it very profitable and potentially gives it the opportunity to increase the profitability of a company or asset that it acquires. The firm's Loestrin 24 oral contraceptive is the most prescribed branded oral contraceptive, and the firm has recently launched Lo Loestrin, which should further increase its market share.

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HCA Holdings Inc (HCA): HCA has a P/E of just 4.4.

HCA is the largest private hospital owner and operator in the United States. It operates 164 hospitals and 106 outpatient centers, offering a broad range of health services. HCA has operations in 20 states and in England, but a majority of its operations are in the Southern U.S., particularly in Florida and Texas where HCA should realize strong admission growth.

As the largest private hospital, HCA has more scale advantages than competitors. In the U.S., the 65-and-older population is expected to be the fastest-growing segment during the next decade.

Speaking about last quarter results, HCA reported adjustment EBITDA growth of 4% or $1.412 billion. From an operations perspective, its earnings were achieved primarily due to strong patient volumes and expense control despite a continued softness in revenues per unit.

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Forest Laboratories Inc. (FRX): FRX has a P/E of almost 7, one of the cheapest research pharma stocks.

Forest Laboratories is a pharmaceutical company focused on in-licensing drugs for development. The company has a strong focus on central nervous system drugs, including antidepressants Celexa, Lexapro, and Viibryd, Alzheimer's drug Namenda, fibromyalgia drug Savella, and beta blocker BYstolic. Forest predominantly sells drugs in the United States but has a small presence overseas.

Forest has a very strong balance sheet. Even after its accelerated share repurchase program and the acquisition of Clinical Data, the company has nearly $3 billion of cash and no debt.

CEO Howard Solomon has a terrific multi-decade record of creating shareholder value, adding confidence that he will invest the company's large cash position wisely.

A highly respected sales force helps Forest attract partners and licensing deals.

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Aflac Inc. (AFL): P/E of 7 places it in the low end of AFL valuation range.

Aflac offers supplemental health insurance and life insurance in the two largest insurance markets in the world, the U.S. and Japan. In addition to its cancer policies, the company has broadened its product offerings to include accident, disability, and long-term care insurance. It markets its products through independent distributors, selling most of its policies directly to consumers at their places of work.

In terms of policies, clients, especially in Japan, are very sticky once they purchase them. Persistence in Japan usually clusters around 95% as the average customers stays with Aflac for nearly 20 years.

As the nation gets older they will increasingly demand coverage to augment the state-run health-care system.

In terms of last quarter results, Aflac's debt/equity ratio of around 30% is low relative to other life insurance peers and reasonable considering the firm's consistent profitability. The firm's credit rating is higher than those of its Japanese competitors, fostering an excellent reputation among consumers, an advantage in selling long-duration policies. Aflac's payroll deduction system helps enable it to be the low-cost provider for them.

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AstraZeneca Plc (AZ): P/E of 7. I like AZ most of all the stocks in his portfolio.

AstraZeneca was formed in 1999 by a merger between Astra of Sweden and Zeneca Group of the UK. The company sells branded pharmaceutical products across several major therapeutic classes including gastrointestinal, cardiovascular, respiratory, cancer, neuroscience and infectious disease. Just less than 40% of its sales are derived in the U.S.

The company is expanding its biologic presence in pipeline products. The biologics tend to carry higher pricing power and may hold off generic competition longer than typical drugs. For instance, Crestor continues to post positive gains in the highly competitive market

Although Astra doesn't have the largest presence in emerging markets, the company is growing the fastest in these territories. This will certainly help offset patent losses in developed markets.

Strong cash balances and robust cash flows provide ample fuel for acquisitions and share buybacks. AZN has a beta of .65 and with the risk free rate at a very low 1.9%, which gives the discount rate to be 6.5%. As noted above the forward dividend is approximately $2.90. Applying a long term growth rate of 2% gives an estimated price of $64.65 for AZN. This is approximately a 45% premium to the current price.

The FDA's approval of a new indication for Crestor in patients with high C-reactive protein opens the door to a much larger patient population and suggests Crestor could be the best-in-class statin.

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Rating: 3.5/5 (8 votes)

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