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DrGoldin (99.08)

Why now is the time to buy biotechnology



April 24, 2014 – Comments (0) | RELATED TICKERS: CELG , PFE

I was in there buying when Celgene (CELG) went down into the 130's today, and looking back on it tonight I'm sorry I didn't buy more.

I do understand why biotechs have been out of favor over the past several weeks.  The thesis has been essentially this: if it's really true that we're looking at imminent and broad-based improvement in the economy, then low-multiple industrials and other cyclical businesses, many of which have been in the doldrums since 2008, are suddenly more appealing than a high-multiple biotech like Celgene.  The very reason why the Celgenes of the world were so attractive over the past several years is that they were among the few companies that could generate substantial earnings growth in the mess of an economy that we've lived through.  Just take a look at Celgene since 2011:

2011 EPS: 3.47

01/03/12 opening share price: 68.51

2011 p/e: 19.7


2012 EPS: 4.64

01/02/13 opening share price: 80.12

2012 p/e: 17.3


2013 EPS: 5.77

01/02/14 opening share price: 169.01

2013 p/e: 29.3


2014 estimated EPS: 7.28

current share price: 141.25

current forward p/e (from Yahoo Finance): 14.7

Look at those surging earnings!  But now, the reasoning goes, Celgene is no longer the only kind of company that can expect good growth, and therefore it's no longer entitled to a rich multiple.  And lo and behold the p/e is right back to where it was before last year's bulge, if not lower than ever.

But if you think a forward multiple in the teens is high for Celgene, you're essentially discounting any growth--and that's just silly when consensus earnings are going to DOUBLE in less than three years.  Just to get a handle on these numbers, let's compare Celgene to Pfizer (PFE), and we'll use estimated 2017 earnings.

Celgene 2017 earnings: 15.20

Celgene current share price: 141.25

Celgene p/e based on 2017: 9.3 

Pfizer 2017 earnings: 2.53

Pfizer current share price: 30.71

Pfizer p/e based on 2017: 12.1

Don't get me wrong; Pfizer is a fine company.  It's also cheap (current ttm p/e of 9.62), pays a handsome (3.4% yield) and well-covered dividend (which it can afford to do because it's cheap--these things tend to go together), and posts reliable numbers quarter after quarter.  But the one thing it doesn't have is growth (we're talking about a long-term growth rate of something like 3%), and that means it won't be very long before Celgene tears past it.  By 2017, it's not even close.  (Incidentally, I consider Pfizer's dividend a liability rather than an advantage, but that's really a different conversation.  In a nutshell, the point is that too many people have invested in Pfizer as a bond proxy, and as interest rates go up--as they inevitably will if that long-awaited economic recovery is really coming--those investors are going to have to sell.)

OK, you say, estimates are just estimates; how do we really know that Celgene will earn 15.20 a share in 2017?  We don't, of course.  We rely on guidance from the company and from sector analysts.  But for Celgene not to have passed Pfizer by 2017, the earnings misses would have to be stupendous.

In sum: biotechs have taken such a beating recently that some of them can't even be considered high-multiple stocks anymore, and if you like growth at a reasonable price, you've got to buy them now, while they're on sale, because I think the market will soon realize that it has overcorrected. 

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