Health Care Sector: Investors Need to Pick Your Spots

Thomson Reuter’s quick peek at Health Care earnings as of 11/7/16:

 

# of # Earnings Revenue
Health Care Cos Rep Surprise Above Match Below Growth Surprise Above Match Below Growth
Biotechnology 8 8 2.1% 75% 0% 25% 2.1% 0.5% 63% 0% 38% 3.2%
Health Care  Services 4 4 0.2% 50% 25% 25% 13.9% -0.3% 25% 0% 75% 1.4%
Health Care Distributors 5 4 0.0% 75% 0% 25% -5.8% -0.4% 25% 0% 75% 6.5%
Health Care Equipment 14 13 3.8% 69% 23% 8% 8.4% 0.6% 85% 0% 15% 3.7%
Health Care Facilities 2 2 8.4% 50% 0% 50% 28.2% -0.9% 50% 0% 50% 5.0%
Health Care Supplies 2 1 5.3% 100% 0% 0% 4.8% -1.4% 0% 0% 100% 32.1%
Health Care Technology 1 1 -1.9% 0% 0% 100% 9.3% -4.9% 0% 0% 100% 5.0%
Life Sciences Tools & Services 6 4 3.8% 75% 25% 0% 12.6% 1.7% 50% 0% 50% 7.3%
Managed Health Care 6 6 2.3% 67% 0% 33% 11.6% 0.6% 67% 0% 33% 12.1%
Pharmaceuticals 11 7 2.1% 57% 0% 43% 9.7% 0.8% 57% 0% 43% 5.5%
TOTAL 59 50 2.3% 66% 10% 24% 7.5% 0.2% 58% 0% 42% 7.0%
Source: Thomson Reuters I/B/E/S

 

As of yesterday in terms of Q3 ’16, Health Care is still growing revenue at 7% driving earnings growth of 7.5%.

If readers look at the above chart, “Health Care Distributors” looks to be the trouble spot, with companies in that category reporting just 25% of those company’s reporting better-than-consensus revenue. 75% of thise companies missed their revenue estimates.

The real issue is what happens to Health Care in 2017: here is a quick table of the Health Care sectors “expected” 2017 earnings growth:

  • 11/4/16: +8.8%
  • 10/28/16: +9.5%
  • 10/21/16: +10%
  • 10/14/16: +10.1%
  • 10/7/16: +10.2%
  • 9/30/16: +10.2%
  • 9/23/16: +10.3%

While there is some downward pressure as long as the numbers stay above “mid-single-digits” HealthCare should be ok.

CVS’s guide-down this morning was a shocker. Although the stock is found in Consumer Staples, CVS is tied to the Health Care sector, and the warning around the retail drug segment for 2017 wasn’t good. I expected the PBM to be under pressure, not the retail drug segment,

Clients are currently “underweight” Health care with the largest position being Pfizer (PFE). Clients do own a little IBB, and some IHE, and PPH, but the positions are small right now.

How Prop 61 does tonight in California and the composition of the Senate, will matter. It is price controls that is the biggest risk over the next year.

Bristol-Meyers (BMY) has gotten crushed, Pfizer is down from $38 to $31, and testing its uptrend line, Merck is acting very well, I do think there is value in the old-school large-cap pharma stocks.

 

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