Tuesday, April 27, 2010

Johnson & Johnson

I started accumulating Johnson & Johnson (NYSE: JNJ) as one of my health sector picks as it seems to be an excellent company and one of the most respected ones out of all U.S corporations (like Berkshire Hathaway).

It did not first hit my screens, but I took a look at it because Warren Buffett has purchased it to BRK's portfolio and it is one of the major holdings BRK has via common shares. His has paid on average 60,42 USD per share. JNJ is now trading at 64,76 USD.

Unlike pure pharmaseutical companies, JNJ has actually three legs: Pharma, Medical devices/ diagnostics and consumer segment. Thefore, sales in long run is not as much affected by patent expirations, which all of the big pharmas will suffer in the next five years in a major way.

By typical valuation methods (P/E, P/S, P/B) it certainly is not cheap, but not expensive either. I would call it fairly priced. Also, compared to most other pharmas, it is low on debt which is allways a good thing.

Friday, April 23, 2010

Thanks, Mauri

When Minister of Finance Jyrki Katainen said yesterday "Thanks, Mauri" (Mauri meaning Minister of Economic Affairs Mauri Pekkarinen) he indicated that he was very happy of the "big energy package" including preliminary decision for two new nuclear power plants in Finland.

I want to say Thanks, Mauri with a different meaning. First of all, as stockholder of Fortum I am naturally not happy about Fortum being left standing with aging nuclear power plants without licenese to replace them.

I see two things positive in the decision:
- 2 new nuclear reactors is better than one or none - position held by Mauri and many members of the same party for a long time
- Teollisuuden Voima (TVO) got permission to build it's fourth reactor. Fortum has 26,6% stake in TVO so it gets some new capacity in that way.

However, if Fortum does not eventually get a permission to replace it's Loviisa plants, it means pretty much that Fortum does not increase it's share of Finnish nuclear power plants in long run. In fact, Fortum's share of the two new reactors in Olkiluoto is less than what it has now running in Loviisa.

So, It seems that the cabinet of Finland will propose two new reactor licenses for approval in Finnish parliament. If approved in parliament, these would go to TVO and Fennovoima. Behind Fennovoima are various Finnish entities with 66% stake and the world’s largest privately owned energy company E.ON from Germany with 34% stake.

I simply do not understand how it's better to give license to a brand new entity without existing nuclear power plants in Finland (hence no experience in building and running a plant and no existing solution for the nuclear waste apart from maybe the co-owner E.ON). There are now two locations that have nuclear waste being cooled down for eventual shipment to the final storage deep underground: Loviisa and Olkiluoto. The decision to grant license to Fennovoima means a new site will contain (cool) nuclear waste and perhaps also a new location is needed for the final storage unless TVO and Fortum yield in the matter and give permission use Posiva's site.

The Finnish state has majority ownership in Fortum and it is indicated to be company with strategic significance: "Besides a strong shareholder interest, the company is connected with strategic interests owing to which the State is to remain so far a strong shareholder or to safeguard in other ways the strategic interests concerned, if the shareholding is reduced or relinquished."

Apparently the state has plans to diminish the significance of Fortum as a player in the Nordic power market. Or then there is some other reason for this kind of decision. Helsingin Sanomat speculated today that this might be yet another punishment for Fortum for granting too generous stock options in the past for the management. This was based on quote from somebody near the matter. Excuse me, but:
- ain't that a very old matter
- Former CEO and chairman were basically "lynched" connected to that and more recent disagreements about the size of bonuses (forced to resign)
- with majority ownership that state could have capped the option and bonus plans, but they didn't (so politicians should have looked into mirror long ago about how they have managed Fortum over the years)
The big old Fortum options fuss was never handled properly. Not by the press, nor by the politicians. You see, the fuss was never about dilutation effect (the TRUE cost of options) - it was about how much money that generated for the managers. These are two completely separate things. Apparently it would have been "OK" for the politicians, the press and the public that the options would have yielded smaller profits. This would basically meant LESS taxes to the state (managers have typically tax rate of 50-60%) with the same cost (dilutation effect to the state's own share of Fortum's profits).
So with this kind of FUZZY LOGIC one can maybe understand also how it was possible to grant the permission to Fennovoima instead of Fortum.
I would have only granted Fennovoima a license if THREE licenses would have been granted. Now the state is saying to the state-owned Fortum that "you can not invest into your home country". GREAT!

Wednesday, April 21, 2010

Sold Russian ETF

I have been gradually selling shares in an ETF tracking DJ Rusindex Titans 10 and have now completed offloading all of them. To begin with that was a high risk investment as there was only 10 stocks in the ETF and about 70% of them from oil & gas sector.

While I expect that best returns in really long run (30 years) will come from BRIC countries, I have sold both Brazil and Russian ETF now and only hold small positions in ETFs tracking stock indexes in India and China. The particular euro-denominated Brazil ETF tracking Ibovespa index that I used to have, has already surpassed its pre-crisis top. The Russian index has also had pretty spectacular gains already. Enough for me, for now.

BRIC indexes are likely to hit hard if there will be a double dip / new recession. And I believe there will be soon enough. I don't think the situation is "normal" as interest rates are abnormally low AND most of the western world has unsustainable deficit levels. Not to mention the overly bullish sentiment.

Each passing week I have become more bearish.

Monday, April 12, 2010

Trillion dollars

It is said that one of the warning signs of upcoming serious inflation is introduction of new "powers of ten" in reference to amounts of currency that have been formerly rather unknown to the public.

You know, it used to be millions this and millions that. Once upon a time a millionaire was the term to reference really rich people. Now it's billionaire.

Recently term trillion has been popping up a lot. Like in reference to the US budget deficits.

So, how much is $1 Trillion?

I guess 200 euros or dollars a day is a pretty big spending budget in any country for an average person. Atleast in my country that would require earning something well over 10.000 euros a month. At any rate, if you were given a million, you could spend like that for 13,7 years. Actually longer, as you would probably earn interest on the remaining money.

So if you were a billionaire, you could provide the same purchase power to 999 of your friends and relatives too. Or then you could spend your lifetime like that and leave the rest to your kids, grandkids and so one until thousands of years were spent.

A trillion is so much money that it can not be dealt in terms of even above average purchase power. So lets check the spending rate of MILLION A DAY.

You could go on like that for the next 2700  years. Or then you could alternatively provide that nice spending budget of 200 a day for a million people. Because trillion is "million times million".

These video clips sum up the number quite well also:

- http://www.youtube.com/watch?v=oPfY0q-rEdY&NR=1

Pretty BIG number, don't you think?

Saturday, April 3, 2010

Cheap Big Pharma stocks?

Analysing pharmaceutical companies proved to be much more challenging than I initially thought. I started screening best stocks in this sector with my usual parameters (ROE, ROA, gross margin etc.) and first focused on the ones paying over 3% dividend and having the lowest P/E ratios.

As the efficient market hypotesis (EMH) suggests, all information available should be already reflected on the stock price. Therefore, there should be a good reason why some Big Pharmas trade at P/E over 14 and some below 10. While I don't fully agree with EMH in it's broadest form which suggest basically that people like Warren Buffett should not exist, I do acknowledge that Big Pharmas are probably priced correctly as they are probably being followed by hundreds of professional analysts and there is no free lunch to be found. Nevertheless, I am curious as to why such a big differences in P/E.

So far, I have looked at two companies: AstraZeneca and Merck that have P/E below 10. While Merck has some fairly big one-time items in profit and loss statement explaining low P/E calculated from 2009 result, I found out something much more interesting.

I have been aware of the significance of patent protection for drugs, but I imagined the big companies had large enough existing portfolio and a lot of new drugs in the R&D pipeline to offset the impact of patent expiry. I may have been wrong. Although, it is immensely difficult to assess the drugs in the R&D pipeline for their eventual selling potential.

Three of the most revenue generating drugs for AstraZeneca are Nexium, Crestor and Seroquel. Each of these drugs generated between 4.5-5.0 billion USD of revenue 2009. That's a lot compared to sales of 32,8 billion for the whole company. Overall, four out of 10 best selling drugs will be without patent protection by 2012:

Patent expiration will likely take away most of that sales as generic drug companies will come into play and the prices will be slashed. AstraZeneca better have some pretty good stuff in the R&D pipeline as many of their key selling products will face competition in five years.

For Merck the situation seems to be pretty much the same, although they seem to have their sales spread over their product portfolio more evenly:

I will be going through some more annual statements in near future to look for similar information as I want to understand if these patent expirations explain the differences in P/E of big pharma companies.