Quick Look at Health Care Headed into Q1 ’19 Earnings

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Every Thursday night, Bespoke publishes a YTD return for all 11 sectors of the SP 500, and last Thursday night’s bar chart shows that the Health Care sector was now negative for 2019 YTD, dramatically under-performing the SP 500 YTD.

Using IBES by Refinitiv actual earnings and revenue growth for the sector, here is historical growth rates for the Health Care sector:

Earnings Growth:

  • 1-year: +16.1% avg
  • 3-year: +10.8% avg
  • 5-year: +12.4% avg
  • 29-mos: +10.2% avg

Revenue Growth:

  • 1-year: +7.5% avg
  • 3-year: +6.8% avg
  • 5-year: +8.1% avg
  • 25-mos: +7.9% avg

But here is what is interesting for readers: looking at the sector growth rate revisions since April 1, ’19, both Q1 and Q2 ’19 Health Care revisions have been higher:

  • expected Q1 ’19 Health Care earnings growth has been revised from 4.5% as of April 1 to +5.1% as of April 19, 2019;
  • expected Q2 ’19 Health Care earnings growth has been revised from 3% as of April 1 to +3.4% as of April 19, 2019;
  • Quarter’s 3 & 4 of 2019 have been revised slightly lower.

But here is what was really surprising: expected Health Care sector revenue growth is 13.3% for Q1 ’19 and +12.4% for Q2 ’19.

Those revenue growth rates are well above the historical averages shown above.

Here was a snippet cut-and-pasted from “This Week in Earnings” on Health Care revenue growth:

The health care sector has the highest (expected) revenue growth rate (13.3%) of any sector. It is expected to earn $506.4B in 19Q1, compared to revenue of $447.1B in 18Q1. All of the 10 sub-industries in the sector are anticipated to see higher revenue than a year ago. The health care services (56.4%) and managed health care (13.5%) sub-industries have the highest revenue growth in the sector. If these sub-industries are removed, the growth rate declines to 3.1%.”  (The one flaw to this blog is that I don’t have access to those “sub-sector” growth rates or revisions on a weekly basis. I’ve asked frequently.) 

Summary / conclusion: Has the drop in Health Care been a head fake for 2019 or is there some worries over “Medicare for All” and nationalized medicine as the Presidential rhetoric heats up ? During the Spring and Summer of 2016, when it was widely thought that Hillary Clinton would be our next President, the Health Care sector didn’t trade well into the election.

This blog is not about political statements or political ideology, although personally I do prefer private-sector solutions to broad public policy issues, since the “cost” of these public solutions when proferred by the pol’s is usually higher taxes to pay for their brilliant ideas.

Clients are long biotech in the form of the IBB and the XBI, which didn’t really get hit until last week, probably since the sector is below it’s all-time-highs last seen in 2015, and the fact is biotech does seem to correlate with the Russell 2000 which has lagged for some time too, so I felt biotech was a safer way to play Health Care for clients, and whether that was a smart allocation remains to be seen. Our largest single stock position in Health care is Pfizer (PFE) since it and Merck (MRK) are working off the 20-year bases formed after the drop from the year 2000 highs. Both pharma giants have substantial free-cash generation, good dividends and from a sentiment perspective are completely unloved and unwanted, although Merck (which was added to on Thursday) has seen some success with Keytruda.

So is the Health Care under-performance peril or opportunity ? As Bespoke noted earlier in the week in one of their research hits, under-performing sectors like Health Care -when within a bull market – usually remain under-performers, but I’d suggest readers look at your favorite names and watch and see what Q1 ’19 earnings look like and what happens with earnings revisions.

Intuitive Surgical (ISRG) reported Thursday night after the bell and it might drop on Monday, but bear markets in sectors tend to compress P.E multiples on growth stocks even when the underlying business is fine, so use the selloff in growthier healthcare names as longer-term opportunity.

Thanks for reading…

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