💊 The Highest-Grossing Drug Ever
Plus, three Cell-Tower REITs worth watching.
Happy Sunday to everyone on The Street.
Remember the guy who told everyone to buy the dip in 2020 at the outset of the pandemic? He said the historic amount of fiscal and monetary stimulus would push stocks higher after their initial crash?
Well, he's back with a new prediction, and this time he's not as bullish. Marko Kolanovic, J.P. Morgan's Chief Global Market Strategist, said more pain is on the way. “We believe that further market and economic weakness may occur as a result of central bank overtightening,” he said in a note published this past Wednesday. Kolanovic thinks previous lows will be tested primarily because of "a significant decline in corporate earnings" and that this "market decline could happen between now and the end of the first quarter of 2023.”
On a somewhat related note, we heard an interesting take on Bloomberg Radio this past Thursday. The discussion was focused on small business owners who are feeling scared about the future, but in reality, are actually doing pretty well right now. If Americans are hesitant and pull back on spending, does this full-blown recession end up becoming a self-fulfilling prophecy? What do you see where you work? Reply to this email and let us know.
💸 Plus: our giveaway is still going. Fill out this survey and enter for a chance to win a $50 Amazon gift card. It literally takes 48 seconds. Okay, maybe not exactly 48, but you get the idea. Click here to help us help you.
US stocks were mixed Friday as a hotter-than-expected November jobs report suggested the Fed has more work to do in terms of putting the brakes on the economy.
The Labor Department reported the US added 263,000 jobs last month, which was better than expected, putting downward pressure on equities. The unemployment rate held steady at 3.7% in November. Throughout 2022, the robust jobs market has been a relative source of strength, despite the central bank’s rate hike campaign.
That said, positive jobs data has led to selling because it suggests the Fed should maintain its hawkish stance toward inflation. Broadly stated, demand for labor is outpacing the number of available workers at present. That also puts upward pressure on wages, a key aspect of inflation. US Treasury yields rose in response to the report.
On the commodity front, the European Union agreed to place a $60 per barrel price cap on Russian oil. Officials in Moscow have cautioned that such a step will push energy and oil prices further.
For the week as a whole, the Dow Jones Industrial Average rose 0.24%. The S&P 500 gained 1.13%, and the Nasdaq Composite climbed 2.09%.
Friday’s close was the first time all three major averages posted back-to-back weekly gains since October.
Tomorrow, the ISM services index will be released for November. This monthly survey of non-manufacturing firms fell to 54.4 in October from 56.7 in September. That indicated the slowest growth within the sector since May 2020.
Tuesday, the US trade deficit for October is due. In September, the trade gap increased to a three-month high of $73.3 billion. Our country’s deficit widened with the EU and with Mexico, but narrowed with China.
On Wednesday, the market will be paying close attention as October’s consumer credit numbers will be published. In September, credit cards and other sources of revolving credit rose 8.7%, down significantly from the 18.1% gain posted in August.
On Thursday, Wall Street will be watching the job market and studying how many Americans are filing first time claims for unemployment insurance. For the week ending November 26th, this metric decreased by 16,000 to 225,000, a steeper decline than expected. Continuing claims will also be published.
On Friday, the Producer Price Index report for the month of November is due. In October, the PPI rose just 0.2% month-over-month, signaling that wholesale inflation is holding relatively steady for the time being.
Tomorrow, biotechnology firm Veru (VERU) will publish its fourth-quarter results for fiscal 2022, as well as for the year as a whole. In November the company’s COVID-19 drug lost a split decision in front of an FDA advisory committee.
Tuesday, AutoZone (AZO) and Dave & Busters (PLAY) will give us insight into how consumers are spending. As an entertainment company, Dave & Buster’s earnings report should be a good indicator of consumer confidence.
On Wednesday, reports are due from Vera Bradley (VRA), Campbell Soup Company (CPB), and GameStop (GME). In times of economic uncertainty, Campbell’s traditionally does well. With recessionary fears rising in the US, it will be illuminating to see how they performed over the last quarter.
Thursday will be the busiest day of the week on the earnings calendar, with Costco (COST), Lululemon (LULU), Chewy (CHWY), and DocuSign (DOCU) all sharing their latest results. Both Costco’s and Lululemon’s reports will give us a good idea of consumer spending at different price points, as the holiday shopping season continues.
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Humira's Patent is Expiring; Here's Who Stands to Benefit
The Highest-Grossing Drug of All Time
Humira, the multibillion-dollar blockbuster drug that treats everything from arthritis to stomach diseases, is coming off patent next year. This means rivals can make their own version of the AbbVie (AABV) hit.
It's a big opportunity for Amgen (AMGN), Teva Pharmaceutical (TEVA), and other drugmakers. Humira is the world’s top-selling drug, raking in $200 billion since its launch nearly twenty years ago. This year it’s projected to bring in more than $21 billion.
While competing manufacturers stand to benefit, the end of patent protection is an even bigger deal for the pharmacy benefits managers. United Health’s (UNH) OptumRx, Cigna’s (CI) Evernorth/Express Scripts, and CVS’s (CVS) Caremark could ultimately be the biggest winners.
They are the ones working behind the scenes to negotiate drug prices for insurers. They’re also responsible for getting new versions of the medicine to patients through specialty pharmacies.
A Special Type of Drug
One big reason PBMs will be in the driver’s seat when Humira loses protection is because of the type of drug it is and how it’s administered.
Humira is classified as a biological drug, meaning it's produced by a living system like a plant cell. It is typically administered via an injection or infusion in a clinical setting with the supervision of a medical professional.
Since over 70% of the sales going off patent through 2025 will be covered and dispensed by pharmacy-benefit managers, according to Morgan Stanley estimates, these centers will have a massive influence on the market for the generics’ distribution.
In the US it's the PBMs, not the government that decides which drugs land on insurance companies' formulary lists and at what price. As a result, drug companies will likely try to woo PBMs by offering discounts and rebates. All of this should boost earnings for the companies dispensing these drugs.
Patients Win Too
In addition to the PBMs, patients taking these specialty drugs stand to benefit big time. In the next five years, the potential savings from generic versions of Humira could be over $100 billion.
OptumRX is the first PBM to say how it will handle the move to Humira generics. Its CEO Heather Cianfrocco said the company will offer Humira as well as up to three other medications in 2023. The company says patients should see double-digit savings as a result.
Humira coming off patent is a headache for AbbVie but for the generic drug makers and the middleman distributing the drugs it can be a big money maker.
An Industrial Stock That Looks Attractive During Ups and Downs
Finding Outsized Growth in Industrials
When it comes to investing in industrials, few companies can beat the market over the long term. The ones that do — Danaher (DHR), IDEX (IEX), and Ametek (AME) — are adept at keeping costs down, making smart acquisitions, and maintaining low margins. Known in the industry as compounders, these companies are in the lead, realizing strong returns on invested capital and outperforming the market.
Ingersoll Rand (IR) could be poised to join that group. The number 2 maker of compressors is seen by some including Melius Research analyst Rob Wertheimer as “an emerging compounder.”
“We think operations are well targeted, well executed, and likely to deliver above-normal returns,” Wertheimer was recently quoted as saying. The analyst has an outperform rating on the stock and a $76 per share price target. On Friday shares closed at $54.55.
A Hidden Weapon
Ingersoll currently sports a market capitalization of about $22 billion and is expected to achieve sales of $5.81 billion this year. If that occurs, it represents 13% year-over-year growth. To make it into the compounder group, Ingersoll has to provide consistent stock market returns for multiple years. The idea is that it will eventually morph into a “10-or-20-bagger” or a stock that increases ten or twenty-fold over an extended period of time.
It has a hidden weapon to achieve this goal: its culture. CEO Vicente Reynal has created a culture in which employees have an ownership stake in the company and work in teams to quickly and easily solve problems. That enables Ingersoll to run operations smoothly and efficiently and keep morale high. Beyond culture, Ingersoll is also improving its EBITDA margins to a mid-20% range from the low 20% range. Melius’ Wertheimer thinks margins will eventually land in the high 20% range.
Europe is a Risk
Sales are also poised to grow by double digits in the coming years. The company is expected to have $1 billion in free cash flow each year and could use some of that to make bolt-on buys of small companies to consolidate the industry, which to date is pretty fragmented. In the third quarter alone Ingersoll inked six small deals. All of these actions should by some accounts enable Ingersoll to double sales in six to seven years.
There are risks investors need to pay attention to. Europe is a big one. The economy has been hit hard by high energy prices and with about 30% of Ingersoll’s sales coming from there it could weigh on results. There’s also execution risks any company trying to grow faces.
Finding a diamond in the rough in the industrial sector is difficult. There are only a handful that have consistently outperformed the market over the years. Ingersoll fancies itself one of them. Now it has to prove it can shine.
Are you bullish or bearish on Ingersoll over the next 12 months?
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Three Cell-Tower REITs Worth Watching
Can You Hear Me Now?
Not all companies are created equal and that’s particularly true in the REIT space. Higher interest rates have clobbered the sector this year with the cost of borrowing rising and dividend yields contracting. That pain has hit cell tower REITs as well, sending stocks including American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) plummeting.
The sell-off may be unwarranted however. Unlike some other areas of the real estate market, cell tower REITs are sitting on enough free cash flow to finance growth without needing to borrow money. Fundamentals for the group should also remain intact even if the economy falls into a recession next year.
Wireless carriers need towers to operate whether Verizon (VZ), T-Mobile (TMUS) or AT&T (T) is in the lead. They are expanding their user bases and upgrading to 5G which requires even more cell towers.
More Growth in the Cards
The three leading tower REITs — American Tower, Crown Castle, and SBA Communications —are huge, with a combined enterprise value of $285 billion. They have about 300,000 towers in their portfolios located around the world.
The stocks have been compounders for at least twenty years, growing thanks to increasing mobile device usage and network technology upgrades. They’ve got healthy profit margins, high recurring revenue and clear visibility into the future. The contracts with wireless carriers are long term in nature with annual rent increases, providing a reliable, steady stream of revenue.
Wall Street expects several more years of new lease growth for the tower REITs even with rates rising and the economy on the cusp of a potential recession.
“Tower fundamentals weren’t affected by the global financial crisis; they never cut numbers because of Covid-19,” RBC Capital Markets analyst Jonathan Atkin recently said in an interview. “That’s because that next wireless milestone from a technology standpoint is table stakes.”
Despite all the positives, valuations for tower REITs have plummeted. American Tower, the biggest of the three, has seen its ratio of price to adjusted funds from operations, which is a key way to measure a REIT, fall to under 20 times from about 28 times. Multiples at SBA and Crown Castle have fallen even more than that.
The stocks are all down double digits with American Tower off 23% after dividends, SBA 23% lower and Crown Castle down 33%. That compares to a decline of 25% for the Real Estate Select Sector SPDR exchange-traded fund (XLRE), and 15% for the S&P 500 index. At the current average price targets, Wall Street expects American Tower to have 12% upside, Crown Castle to have 15% upside and 11% for SBA.
With American Tower you get international exposure with about 45% of its sales coming from outside the U.S. including in red hot markets such as India and Brazil. Crown Castle is more of a domestic play, which protects it against any blowback from a strong US dollar this year. SBA is the smallest of the three and is a pure US play. Either way you play it all three are cheap, growing, and should be able to weather a recession, providing an entry point for bargain seeking investors.
Are you bullish or bearish on cell tower REITs over the next 12 months?