Author: Julie Praline

Cigna to acquire Express Scripts

Cigna is acquiring ESRX for a 31% premium ($48.75 in cash and 0.2434 in stock). This deal validates the shift towards vertical integration in the healthcare space, as the different players try to resolve the continued pricing pressure and recent Amazon threat.

I believe standalone PBMs will disappear from the system, especially smaller PBMs that won’t be able to compete as well, although they only control 8% of the market currently.

According to the Insurance Information Institute, there are 858 health insurance companies in the US, which leaves room for the major players to keep gaining shares. Major mergers have been blocked by the Justice Department (Anthem/Cigna and Aetna/Humana), but by integrating PBMs with their insurance operations, majors insurance companies will squeeze out smaller players as they will be able to negotiate better terms for their clients.

My assumptions is that the integrated PBM business will over time no longer grow from outside health insurance contract wins, but support the growth of their own insurance business (with a better margin and revenue growth profile in the mid-single-digit range).

What sets CVS/Aetna apart is its retail pharmacy network and growth potential in the MinuteClinics. UNH is now trying to replicate this MinuteClinic model by acquiring small clinics/urgent care centers, and recently made a bid for Envision (an ambulatory outpatient surgery center such as ophthalmology – FYI I tested it in Boston a couple years ago, it wasn’t that bad and very convenient).

Health care Insurance companies market share (the left chart is a bit outdated, as it is from 2015):

PBM Market shares (a bit outdated, as this is from 2016, and Express Scripts lost the Anthem business, representing 20% of their revenue):

Julie S. Praline

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Fortive announces spin-off/split-off deal with Altra Industrial

This morning Fortive announced merging its Automation & Specialty business with Altra Industrial. The initial transaction details are below.

Terms of the deal:

Partly structured as a Reverse Morris Trust and as Direct Purchases of Assets & Equity interest:

· FTV will contribute a portion of FTV A&S businesses to the newly created subsidiary

· FTV will distribute the equity interests in Spinco to FTV shareholders in either split-off or spin-off

· Spinco will merge with a subsidiary of Altra, and as a result will become a subsidiary of Altra, and Spinco shareholders will receive 35M shares of Altra common stock

· Upon closing, FTV will own 54% of the combined company, and Altra 46%

Fortive A&S brands Kollmorgen, Thomson, Portscap and Jacobs to be divested to new Spinco ($907M in sales, $220M in EBITDA)

Fortive shareholders to receive ~$3B ($1.4B in cash proceeds and debt reduction, $1.6B in newly issued Altra common stock)

Transaction expected to close by the end of the year

Continue reading “Fortive announces spin-off/split-off deal with Altra Industrial”

EOG reported good 4Q17 results, but 2018 capex higher than expected on lower production guidance

EOG reported 4Q17 oil production of -1% vs. high end of guidance and in-line with consensus, while adjusted EBITDA 9% above consensus. The stock consolidated today after disappointing production and capex guidance for 2018. However we think the thesis is intact, as Premium wells now represent the majority of completed wells, FCF outlook is positive even at $50/bbl, and dividend growth has been resumed. Price target under review. Continue reading “EOG reported good 4Q17 results, but 2018 capex higher than expected on lower production guidance”

Medtronic reported solid 3Q FY18 earnings but delay in robotics program weigh on the stock today

Medtronic reported strong 3Q FY18 sales and earnings results this morning. FY18 guidance and FY19 commentary were reiterated. Competition is still a threat to MDT’s growth, but we expect some tuck-in M&A to help, following the cash repatriation from the tax reform. Price target increased to $93.

Continue reading “Medtronic reported solid 3Q FY18 earnings but delay in robotics program weigh on the stock today”

Pepsi 4Q17 earnings: results in line, 2018 guidance is conservative

Pepsi reported 4Q17 earnings in line with estimates of organic sales +2.3% and EPS growth of +8%. Management provided its initial 2018 guidance which is a bit light vs. expectations, but certainly achievable for Pepsi. We will look for a positive margin progression in the coming quarters as new products come to the market. Currently the stock is supported by an increased dividend and new repurchase program. Price target unchanged at this time. Continue reading “Pepsi 4Q17 earnings: results in line, 2018 guidance is conservative”

Fortive 4Q17 earnings results were good – 2018 guidance is supportive of our thesis

Fortive reported a good 4Q17 with sales growth of 11% (+3% organic) and adjusted EPS growth of 20.6%, mostly in line with expectations. Management provided its initial 2018 guidance of 3-4% organic sales growth and 16-19% EPS growth. We should expect some M&A activity during the year, with $5B available for deals. We are pleased with the results and maintain our position size and price target. Continue reading “Fortive 4Q17 earnings results were good – 2018 guidance is supportive of our thesis”

CVS 4Q17 earnings were good, but 2018 profit guidance lowered as the company reinvests in the business

CVS reported 4Q17 revenue growth of 5.3%, and adjusted EPS of $1.92 (+12% y/y) at the high end of its guidance. CVS provided its 2018 guidance which was good, although expected profit was lowered by 250bps to account for the $275M reinvestments that will be made in the business (wages/benefits, data analytics and new store format). We are not surprised by this disclosure as it was our assumptions that extra cash from the tax reform would be put into the business. We remain bullish on the company’s strategy and are maintaining our position size and price target. Continue reading “CVS 4Q17 earnings were good, but 2018 profit guidance lowered as the company reinvests in the business”

Sanofi reported disappointing sales and EPS growth in 4Q17, recent deals integration will be key

Sanofi reported 4Q17 sales growth of -1.6%, impacted by the Dengue vaccine issue in the Philippine and continued pressure in its Diabetes franchise in the US. As a consequence, Business EPS declined ~9%. Sanofi has been more successful recently in its M&A strategy, which should bring back some growth to the business in the coming years. Price target and position size unchanged. Continue reading “Sanofi reported disappointing sales and EPS growth in 4Q17, recent deals integration will be key”

Exxon 4Q17 earnings results disappoint but no change in long term thesis

Exxon released 4Q17 earnings and cash flow below consensus expectations, driving the stock lower today. In addition, investors were expecting a share buyback announcement that did not materialize. The next catalyst for the stock is its March’s analyst day where a more detailed capital allocation plan will be released. We are maintaining our position size and price target. Continue reading “Exxon 4Q17 earnings results disappoint but no change in long term thesis”

Sensata 4Q17 earnings results: thesis is playing out, we still see some upside going forward

Sensata (ST) reported 4Q17 organic sales +5.2% and adjusted EPS +14.5%. For 2017, organic sales growth was 4%, and adjusted EBIT margin expanded by 100bps. 2017 was a strong year of new design wins for Sensata, leading the way to another year of growth. The company is performing in line with our expectations regarding margin improvement and deleveraging, paving the way for more M&A in the future. We are maintaining our price target and position size. Continue reading “Sensata 4Q17 earnings results: thesis is playing out, we still see some upside going forward”