Tuesday, June 22, 2010

Bought 100 NVS at 49.08/Sold 50 FPCPRA/BP-Wall Street & The Rogue Corporate Culture/

China's decision to allow the Yuan to appreciate some is a positive for world stock markets. This decision will improve the purchasing power of Chinese consumers. It will also have a small positive impact on firms competing with Chinese companies for customers located outside China. NYT While the U.S. market agreed with this assessment for about an hour yesterday morning, a steady stream of selling drove the market averages down to a negative close.

Early this morning, the market has focused its angst on Fitch's downgrade of BNP Paribas's long term default rating to AA- from AA. WSJ.com I know that it is difficult to comprehend. BNP reported a 46.5% increase in earnings for the 1st quarter easily beating the consensus expectation. bnpparibas.com/press-release-1q10.pdf

1. The Rogue Corporate Culture: At its most basic, the rogue BP corporate culture, focusing on cost savings at the expense of safety, is the same as Wall Street's renegade culture prior to the Near Depression, where the Masters of Disaster had a linear focus on lining their own pockets irrespective of the consequences to society or even to the institutions that provided them with the opportunity to earns millions. The many failures of both corporate cultures start from the top and wind their way down through the layers of management, infecting the entire organization. In the end, these companies will eventually fail, relegated to the dustbin of history with Enron, Worldcom and Lehman, unless bailed out by the government of course.

I would challenge anyone to read the books and articles written about the epidemic of reckless (and frequently stupid) corporate cultures at America's large financial institutions prior to the recent Near Depression and find any meaningful difference compared to the one at BP described in this recent WSJ article, Joe Nocera's last column in the NYT, and elsewhere. (some citations about BP are in Item # 1 BP-Needs To Be Debarred) In both the Wall Street and BP cultures, anyone who recommended prudent courses of action, which would have resulted in less profit, would have been fired or forced out. Those BP engineers who were selecting at every turn the least expensive and less safe alternative were acting in line with the BP corporate culture. (see summary in Letter to Tony Hayward, Chief Executive Officer of BP (Rep. Henry Waxman and Rep. Bart Stupak) A recommendation for the more expensive and safer alternative would be career suicide. Safety at the expense of some profit would always be the wrong choice for those engineers. The same would be true for anyone recommending against an investment's firms involvement in CDOs of subprime mortgages or who even counseled for more prudent and less profitable investments purchased with funds acquired via hyper levels of leverage.

2. Bought 100 Novartis at $49.08 (Large Cap Valuation and Dividend Growth Strategies) (See Disclaimer): There is nothing in my background that would be helpful in assessing the efficacy of a new drug or the likelihood of the FDA approving a new drug application. Instead of trying to make those kind of assessments, I will evaluate a pharmaceutical company based on the same criteria that I would apply to any company.

Take for instance a company like Apple compared to Microsoft. In recent times, Apple has a proven track record of bringing new products to the market. Microsoft, on the other hand, lost that kind of mojo a long time ago. In the drug area, the same kind of big picture judgment can be made. Some pharmaceutical companies can spend billions and come up with a series of dry holes, while others spend less and have a series of successful FDA approvals for new drugs.

One company that has spent tens of billions in drug research and has a Microsoft kind of mojo is Pfizer. After Pfizer's research lab came up with Zoloft and Viagra, approved by the FDA in 1991 and 1998 respectively, the company poured tens of billions into research with little to show for it. Keep in mind, several of Pfizers well known products were developed by other companies, such as Lipitor by Warner Lambert (Atorvastatin) that were acquired by Pfizer. Sutent originated from Sugen, which was acquired by Pharmacia (Celebrex), that was merged into Pfizer. Zithromax, Pfizer's antibiotic, was discovered by scientists working for a Croatian pharmaceutical company called Pliva and licensed by Pfizer. Pregabalin was discovered by chemist Richard Silverman while working at Northwestern University. The Daily Northwestern - Drug may pay big for NU Previously I have referenced this point which I consider relevant in assessing whether to buy a pharmaceutical stock. I would give Pfizer a failing grade on generating new products that create new revenue streams. This is something that a non-expert can evaluate by simply looking at the firms existing products and then identify the ones originating from their in-house research operations.

Novartis is far more successful in discovering new drugs. A list of their current pharmaceuticals can be found at Novartis Pharmaceuticals In 2009, NVS received 25 positive regulatory decisions in the U.S., Europe and Japan.

Unlike Pfizer which sold its consumer division to JNJ, and I am pleased with that acquisition as a JNJ shareholder, Novartis has a large over-the-counter consumer products division.Novartis OTC (Over-the-Counter) Some of the products include well known brand names like Maalox, Prevacid, Benefiber, Ex-Lax, Gas-X, Bufferin, Excedrin, Lamisil and Theraflu. NVS also has a large vaccine and diagnostic unit, primarily known publicly for its flu vaccines.

Novartis has a large generic division, Sandoz, which had 7.5 billion dollars in sales in 2009: Sandoz Generic Pharmaceuticals Division of Novartis This is the second largest generic business by volume, with TEVA at number one.

Novartis is in the process of acquiring the shares of Alcon which it does not own. The first step is to buy Nestle's stake which will give NVS a 77% ownership stake in ALCON INC ( ACL).

A new Novartis Drug, Gilenia, an oral pill for the treatment of multiple sclerosis, has recently been recommended for approval by an FDA Panel and is expected to be approved by the FDA soon. MarketWatch Last Thursday, the FDA approved NVS drug Tasigna as an initial treatment for the blood cancer chronic myeloid leukemia. In April Novartis received approval for Zortress, given to transplant patients. MarketWatch

Earnings for the 1st quarter of 2010 rose by 49% to 2.93 billion on a 25% sales increase. Core earnings were $1.45, better than the consensus estimate of $1.26. MarketWatch Recently launched products contributed 16% of sales or 1.9 billion. www.sec.gov . Femara and Sandostatin grew 20% in sales in USD compared to the 1st quarter of 2009. Sales of Exjade, for the treatment of transfusional iron overload, increased by 47%. (see page 8: www.sec.gov) Gleevec sales rose 15% to over 1 billion. Lucentis increased sales by 59% to 364 million. Exelon sales rose by 24% to 251 million. The second quarter results are scheduled to be released on 7/15: Novartis Investor Relations.

Information at the NVS website shows annual dividend increases since 1997 to date: Novartis dividend history
The dividend is paid annually, and the dividend for 2010 has already gone ex dividend. Novartis AG, NVS Stock Quote - (NASDAQ) NVS

The shares traded on the NYSE, NVS, are currently sitting near the 50 day moving average and under the 200 day moving line: NOVARTIS AG Share Price Chart | NVS

The consensus estimate is for $4.62 in 2010 and $4.79 in 2011 on 56.28 billion dollars in sales. NVS: Analyst Estimates for NOVARTIS AG The forward P/E is around 10. NVS has about 20 billion in cash. (page 22: www.sec.gov Part of the gain originated from H1N1 vaccine. In constant currency, excluding H1N1 sales, revenues increased 9% in the quarter.

One of the major drugs, Diovan, will lose patent protection in the U.S. in 2012. Diovan represents more than 10% of the firms sales. Another important drug, Gleevec, has a patent expiration in 2015.

Morningstar has NVS rated five stars

This is a link to a one year chart of NVS: NOVARTIS AG Share Price Chart | NVS On 11/25/2009, the shares closed at $55.85 and have declined about 12% since then to my purchase yesterday. The ordinary shares on the Swiss Exchange closed at 55.85 CHF on 11/26/2009 and at 54.5 CHF yesterday, a decline of 2.4% NOVN.VX: Summary for NOVARTIS

I checked YF and found that the exchange rate on 11/25/2009 was close to 1 for 1, so it would not be surprising to see a 55.86 USD close on NVS and a 55.85 CHF close for the ordinary shares traded on the Swiss Exchange. Currency Converter (this service from YF allows you to go back into time to compare exchange rates). This analysis confirms to me that the Swiss shares have held their value since 11/25 whereas the NYSE listed shares, NVS, have fallen over 7% due to the Swiss Franc declining in value against the USD. Since I view that decline as unwarranted, this provides an additional reason to buy NVS at this time.

The Swiss Franc currency ETF reflects the variations in exchange rates against the USD and its chart shows a recent upside crossover of the 50 day moving average line. In retrospect, the movement below the 50 day line, around 12/7/2009 at $97.89 on FXF, would have been a time to sell the franc. This USD/CHF Currency Conversion Chart shows the same trends, i.e. parity in late November 2009 followed by a rally in the USD with the current trend being a rally in the CHF after the USD hit 1.16. (USD buys 1.16 Francs in early June and now 1.1)

I previously bought 50 shares of NVS in early April 2009 at $36.9 and sold those shares at $41.86 in June 2009. The trading mode does have its drawbacks.

I first tried to buy 50 with a market order, which Fidelity sent to FDLM when the ask was $49.05. After about two minutes of failing to fill that order, I cancelled it and entered a market order to buy 100.

The purchase of Novartis shares is viewed as consistent with both the large cap valuation and dividend growth strategies {See Item # 3 Large Cap Valuation Strategy-A New Long Term Strategy and Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds }

3. Roche (owned): Roche shares suffered a small downdraft late last week after safety concerns pushed back the expected filing of its diabetes drug taspoglutide by up to 18 months. WSJ This setback makes Roche slightly less attractive.

4. AXA (owned): There are been several reports that AXA was nearing a deal to sell its U.K. life operations for around 4.08 billion USD. WSJ.com

5. Sold 50 of 100 FPCPRA (See Disclaimer): I sold the shares of this TP in the taxable account at near breakeven. Bought 50 FPCPRA at $24.95/ I am keeping the shares bought in the Roth. I am concerned about the current yield on this one given its 2039 maturity date. There is a lot of interest rate risk baked into a bond with such a distant maturity. {Item # 1 Impact of Rising Rates on Bond Prices & Item # 2 Interest Rate Risks- Bonds, see also SIFMA's discussion at Rising Rates and Your Investments) While I am comfortable with the credit risk, I am more than just a little bit queasy about the interest rate risk.

I saw a poll recently, which attempted to measure investor financial sophistication, and only 1 in 5 respondents knew that bond prices go down when interest rates go up.

I made some other trades on Monday which I hope to discuss in the next post. I did replace MJH, sold in the taxable account, with another TP purchase yesterday. A high yielding corporate bond is in effect a tax exempt bond in a retirement account. Where are you going to find a municipal bond yielding 8% now?

No comments:

Post a Comment