A decade and a half ago, I remember sell side analysts pounding the table on the big pharmaceutical companies. Their multiples were 25 times trailing or higher and we were told that was a good deal. They were cash machines and most of them had a blockbuster drug that targeted ageing baby boomers. The most memorable was Pfizer (PFE) who took a failed blood pressure med and put the zing back into the love lives of millions of middle aged couples. Other companies reduced cholesterol and made mountains of money. Aren’t you glad you bought ’em when the multiples were way up there?
Fast forward past the Medicare prescription drug thingy, patent expirations, healthcare “reform,” and a scary, global financial crisis. Drug companies look a lot different. Teens, even single digit multiples. No bona fide blockbuster drugs with many stalwarts coming off patent and nothing really that spectacular in the pipeline. Not too exciting? Well, they do have Amazon.com sized warehouses full of cash. So what’s the plan now? PFE’s shown their hand. They’ve decided to buy instead of build. Two other giants, Lilly (LLY) and Merck (MRK), have chosen seemingly different paths. Both could pay off handsomely but are still fraught with risk.
LLY has decided to take a page from the old Smith Barney handbook and make their money the old fashioned way: earn it. The first step was tapping John Lechleiter as CEO in 2008. A card carrying LLY lifer, Lechleiter started as a chemist 31 years ago. Under his leadership, LLY has set an organic course to growth by focusing its energy on new drugs rather than acquiring their pipeline. Incidentally, Lechleiter lives a mile from the office (downtown Indianapolis). A guy with a research background that lives around the corner from the factory; that’s a good sign. Especially for a company that will lose patent protection over the next seven years on drugs that represented 74% of sales in 2009. LLY trades around 33.97 at 7.79 times trailing earnings and yields 5.77%. They’ve got a little better than $6 billion on the balance sheet.
With MRK’s recent appointment of Ken Frazier, formerly their top lawyer, their path could be one of two. Frazier’s claim to fame was guiding the company through the Vioxx legal swamp. Rather than settling en masse, MRK pretty much took each case on one by one and came out relatively successfully. The first thought would be that company wants to put itself on the block. Who better than our first string legal eagle to clean it up before we close? Sounds like the most logical guess. The second would be a bit more sinister. Since Frazier did such a great job with the Vioxx challenge, he’s the only choice to lead us through another Cat 5 legal storm that’s on the radar. Either way, their focus seems to be on risk management rather than hitting a pharmacological home run. The stock trades around 35.50 at 12.7 times trailing and yields 4.28%. The future’s a bit “mercky,” pardon the pun, but not a bad deal on a world class, big company with some yield.
Who knows what 2011 will bring to the table? Hopefully, good stuff. But with the dicey situation in Europe, stubborn domestic unemployment, a housing market that’s bottoming at best, and the great unknown of interest rates, equity portfolios should probably continue to play defence. Big, cheap, pharmas with sick dividend yields should help.
From pill poppers on to piggies…let’s meet this week’s contestants!
“Workin’ in a coal mine…goin’ down…down…down…”
Alliance Resource Partners LP (ARLP)
Recent Price: 64.51
Current Yield: 5.14%
The “clean coal” commercials cracked me up. That’s one of the best oxymorons since “military intelligence”. Anyway, it’s kind of neat to find an energy MLP that’s not an oil and/or gas transporter. ARLP produces and markets coal mainly to utilities and industrial users in the U.S. They’ve got all kinds: low sulfur, medium sulfur, and high sulfur. The numbers are impressive: 32% ROE, steadily growing revenue. Analysts project 2011 EPS will grow by 8%. Love coal or hate coal, the U.S. is probably close to being the Saudi Arabia of coal. It’s a cheap, abundant, flexible energy source. South Africa converts it to a liquefied auto fuel. There’s got to be something we can do with it here, right? That should benefit companies like ARLP directly.
Although coal is plentiful, it’s one of the most reviled energy sources available. Bad…bad…dirty coal! The economy, healthcare, Finreg, and the battle over the Bush tax cuts have put energy policy on the back burner. Rest assured, it’s coming back to the forefront. Coal will be praised and damned mightily. Many industries (i.e. the utilities) know this and are planning as such. Any negative legislation wouldn’t be a positive for ARLP. Also, like most of the energy MLP’s, ARLP has run hard and fast this year. Units are up 48%+ this year exclusive of income. May be time for a rest.
“Two Irishmen get on an aeroplane…”
Ryanair Holding ADR (RYAAY)
Recent Price: 30.33
Current Yield: 5.97%
Emerging in 1996 as the Irish Tiger began to roar, RYAAY established itself as Europe’s premiere discount airline. Pull up a chart. The climb has been pretty steady and even as the party came to an end in 2007-2008, share prices haven’t completely cratered. YOY load factor for October was steady (85% vs. 85%) despite the battering the European economy has been taking. In general, RYAAY appears to be a well run outfit. 14 years and not a single bankruptcy! Few airlines can brag like that.
It’s an airline. It’s an airline domiciled in one of the “I’s” in “PIIGS”. They make their money when people spend it on travel. Sure, there’s a lot of business travel. But leisure travel’s an important component of the number. Folks in Europe, especially peripheral Europe, will be taking staycations for a while. Quite a while. Also, RYAAY’s share price is bumpin’ its head a wee bit on the 52 week high. With some nasty headwinds, it might make sense to stay grounded. But if you must fly, please fasten seatbelts and return tray tables to the upright position.
“Yes…we probably are insane.”
National Bank of Greece SA Sponsored ADR Non-cumulative Perpetual Preferred Series A 9.00% (NBG-PA)
Recent Price: 18.79
Current Yield: 11.97%
Greek bank junior debt? No…we’re not writing this from a dispensary in Oakland. Everybody’s lookin’ for yield? So…here you go! All kidding aside, there may be some validity to our whacked out idea. The issuer, NBG, trades under two bucks and yields nothing or as they say in Greece, “zero”. The contrarian wisdom says that since Greece was the first PIIG to get hammered, maybe a lot of the risk has been extracted. While the numbers look like the movie that would be titled “My Big, Fat, Greek Train Wreck”, Q2 earnings were a little better than expected. Driven primarily by decent loan growth in Turkey which is one of peripheral Europe/Asia’s more vibrant emerging markets. NBG-PA trades at a 25% discount to a par price of $25 and is callable at par in 2013. So, if, and it’s a BIG “if”, NBG can maintain the payments, you get some sick yield and a nice bump if called (with a 9% coupon, if they have the ability to refinance at a lower rate they probably will). And remember, in any sort of sovereign debt/monetary crisis, the first sector to be taken out and shot is the financial sector. Typically, they’re one of the first to come back when the market decides that the sun will shine again.
It’s Greek. Another thing, it’s in Greece. Oh, and, by the way, it’s Greek. If you’re going to drain this swamp, be prepared for alligators. As the Greek government imposes austerity measures, the Greek citizenry has expressed their opinion of that mainly through street protests and tire burning. That’s usually where the ugliness starts (although, Europe has become a riot-a-day kind of place over the last 20 years). Greece and all of the other PIIGS…hell…ALL of Europe has some rough sledding ahead and it will take a lot of time to work through the mess. NBG-PA trades at around 18. It could get cheaper. It’s also non-cumulative. If the bank decides to not pay the preferred dividend, oh well. Non- cumulative means that deferred dividends stay deferred for ever. A Greek bank? I’d say the chances of a deferred preferred dividend are better than 50%, probably much higher. Mid 60’s or even 70%. The question is: do you feel lucky? Well do you, Zorba?
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