Healthcare Stocks: Too Late To Jump Aboard Obamacare Train?

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By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

Hedge funds ranking

Larry Robbins, manager of Glenview Capital Management, topped the list of best-performing hedge funds in 2013. The significant outperformance that his funds achieved in 2013 is due to a large bet on healthcare stocks. It is expected that after the Affordable Care Act is fully implemented, healthcare companies will reap the benefits as more people with medical insurance will receive services. The healthcare sector outperformed the S&P 500 Index in 2013 as well as over the last 2 year period by a large margin: iShares U.S. Healthcare Providers ETF and iShares U.S. Medical Devices ETF returned 35.7% and 33.7% respectively, in 2013, compared to an S&P 500 return of 25%. Over a 2 year period 2012-2013, these sector ETFs returned 52.8% and 55.5% respectively, while S&P 500 had risen 43.2% over the same period. After such recent returns, one wonders if there is still value left in healthcare related stocks and if it is not too late yet to jump about Obamacare train?

Glenview portfolio holdings

Lets take a closer look at Glenview Capital Management portfolio holdings in the healthcare sector. According to the latest quarterly holdings filling of Glenview Capital Management, the firm had approximately 40% of the portfolio in healthcare related companies. These 40% in turn, were spread across four main subsectors: hospitals, medical devices, healthcare insurance and plan providers, and drug distribution businesses. Looking at the performance of individual healthcare companies that comprise the portfolio, one can easily note that Hospira was the most underperforming company on the list – its stock price rose only 36% over last two years. This is compared with an average rise of 85% in individual holdings over the same time period. Hospira is a provider of injectable drugs and infusion technologies that it develops, manufactures and markets globally. In medication management segment of its business, Hospira competes with such companies as CareFusion Corporation (NYSE:CFN), ICU Medical, Baxter International, and others. After a quick look at few companies, CareFusion appeared to me as relatively undervalued compared to other companies in the sector.

CareFusion valuation

CareFusion Corporation (NYSE:CFN) is a global medical technology company and offers a comprehensive portfolio of products in the areas of medication management, infection prevention, operating room effectiveness, respiratory care and surveillance and analytics. Based on a recent share price of $41.22 per share, CareFusion Corporation had a market capitalization of $8.7 billion and an enterprise value of $8.4 billion. CareFusion is valued at an EV/EBITDA multiple of x10.5, which is an attractive valuation for a medical devices company.

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The company does not pay a dividend, but in the fiscal year ended June 30, 2013, CareFusion Corporation (NYSE:CFN) repurchased $400 million worth of stock, which equals to a buyback yield of 4.5% based on the current market capitalization. In the most recent quarter company repurchased another $114 million worth of stock. CareFusion has a share repurchase authorization in place which allows it to buyback up to $750 million worth of shares through December 2015. The company provided guidance that it intends to repurchase up to $500 million worth of shares authorized by this program in fiscal 2014. After taking into account buybacks done in the latest quarter, the remaining buyback amount would provide investors buyback yield of 4.4% in the company’s fiscal 2014 year. CareFusion’s conservative valuation, little debt and active share buyback program provide an attractive entry point for investors who want to add healthcare related stock to their portfolio.

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