A monthly review of Big Cap pharma stocks by Sanford Bernstein, a large fee-analyst company, offers some insights in what it says and what it doesn't say.
As with other equity analysts, Bernstein draws a wide distinction between a company's/sector's fundamentals and its value as a stock. Based on this premise they rate six of the nine Big Caps they cover as Outperform, even though their discussion of each company's fundamentals reveals most of them to be mediocre at best.
For example Bristol-Myers Squibb has some of the best fundamentals in this group, yet the Bernstein group rates the company as only a "Market Perform" because they claim its price is up in the range of large biotechs "which have higher long-term growth rates."
On the other hand, Merck holds Bernstein's "Outperform" rating, even though a discussion of the company reveals "a challenging story over the last few quarters because of pipeline setbacks." Also, "MRK has lost its way in R&D...[F]ixing R&D from the inside out can be a 5 y[ear]+ process [while] most of MRK's phase 3 pipeline looks relatively uninteresting and has felt very 'old school' (small molecule, primary care)."
Implied between the lines of Bernstein's discussion is the notion that Big Cap equities are effectively bonds whose value lies in the fact that several of them are paying +/-6% dividend yields in this low interest environment.
That's all well and good, but when interest rates go up, as they inevitably will, who will want to own these stocks that have traded away their growth prospects by borrowing money to pay high dividends and repurchase their own stock? Will safe 6% yields appear as attractive when greater appreciation opportunities appear in other sectors?
While Ben Bernanke and the Federal Reserve have reminded Congress and investors to be mindful of that day, perhaps two years ahead, pharma managements act as if it is another millennium.
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