European health-care companies have a special advantage in the U.S. — high prices for their products and services. Nicole Kornitzer, a portfolio manager of the Buffalo International Fund, discussed broad health-care trends and named three European companies well-positioned to benefit from them.
Kornitzer has been a co-manager of the Buffalo International Fund BUFIX, -0.19% with her cousin Bill Kornitzer since 2009. She is based in Paris. Kornitzer Capital Management of Mission, Kan., has about $7 billion in assets under management and is the investment adviser for the Buffalo Funds.
The Buffalo International Fund has a four-star rating from Morningstar (the second highest). It typically holds shares of 65 to 85 companies outside the U.S.
During an interview, Kornitzer described a top-down strategy through which she and her colleagues identify “20 to 25 secular growth trends” they expect to continue for at least three to five years. This is followed by bottom-up analysis of fundamentals, including unit sales growth, “strong and expanding margins,” cash-flow growth, and low levels of debt.
All of this has led to a portfolio that leans away from cyclical industries and commodities, and toward consumer discretionary and staples, technology, and health care.
Kornitzer stressed that she also looks to buy or add to positions at “reasonable prices,” while trimming or selling positions when they are trading too high in their peer groups.
That may not appear to be a radical management strategy, but it has led to significant outperformance against the fund’s benchmark, the MSCI All Countries Index ex U.S. in U.S. dollars 892400, -0.19% and its Morningstar category, as you can see below.
Kornitzer cited two main health-care trends driving her stock selection in the industry: cost containment and increasing consumption as the middle class quickly expands in developing countries and as populations age. She worked as a health-care analyst before becoming a portfolio manager.
Kornitzer named three European companies benefiting from these trends. All have significant sales in the U.S. and enjoy greater profit margins there, because of the higher prices they can charge. This means there is an obvious threat from efforts to bring down health-care prices.
”The concern about health-care pricing is not limited to U.S. companies, it is a concern for all companies around the world that sell in the U.S. market,” Kornitzer said.
How long might it take for U.S. prices to come down significantly relative to other markets? Answering that question would require a crystal ball. But the need for large health industry players around the world to develop lower-cost products and services is obvious.
Fresenius SE FRE, +0.66% is based in Germany but derived 41% of its 2018 sales in the U.S., according to Kornitzer. It manufactures generic injectable drugs — a rapidly increasing product category because of increasing prevalence of diabetes, as well as the increase in health-care access and hospital construction in emerging markets.
Fresenius SE also holds half of Fresenius Medical Care AG FMS, +0.62% FMCQF, -1.11% FRE, +1.98% which is a provider of dialysis services in the U.S. In addition to the above, Fresenius SE also manages hospitals in Europe and Latin America.
In the injectable business and in the hospitals, Fresenius is focused on efficiency improvements, according to Kornitzer. She called the company “complicated,” but also “well managed.”
She also said the shares trade at “pretty low multiples” to competitors. The holding company’s shares trade for 13.6 times the consensus earnings estimate for the next 12 months, among analysts polled by FactSet. To put that valuation into some perspective, the S&P 500 Index SPX, -0.12% has a weighted aggregate forward price-to-earnings ratio of 16.8, and the S&P 500 health care sector’s forward P/E ratio is 15.5.
Analysts polled by FactSet expect the holding company’s sales to increase 5.2% this year, followed by increases of 6.9% in 2020 and 6.1% in 2021. Analysts expect net income to decline 7.7% this year, but then to increase 7.8% in 2020 and to increase another 8.6% in 2021.
Grifols SA GRFS, -1.09% GRF, +2.55% is based in Barcelona, Spain. The company provides plasma-therapy products and is benefiting “from trends in demographics such as aging of the population and population growth that drive use of immunoglobulin, which is their largest product,” Kornitzer said. During 2018, 66% of the company’s sales were in the U.S.
Immunoglobulin therapy is used to treat immune deficiency.
Kornitzer said: “It is really quite an interesting business because of aging and the increasing incidence of chronic diseases.”
A major part of the company’s business is the collection of blood donations for plasma, which is a different process from ordinary blood donation. This collection work and the fractionating of plasma require “a very strong attention to detail” and the plasma-therapy products require “a perfect manufacturing process,” which contribute to very high barriers for potential competitors, Kornitzer said.
Nicole Kornitzer, portfolio manager for the Buffalo International Fund.
Kornitzer said that for Grifols, improved profit margins have been “slow to come,” which is why the stock “trades at much lower multiples than its peers.” American depositary receipts (ADRs) of Grifols trade for 15.8 times the consensus earnings estimate for the next 12 months among analysts polled by FactSet, compared with a forward multiple of 32.9 for CSL. (A forward price-to-earnings ratio is not yet available for Takeda).
If Grifols “can get their margins to improve, with analysts’ estimates being revised upwards rather than downward, the stock can do quite a bit better,” Kornitzer said.
Analysts expect the company’s sales to increase 10% this year, followed by increases of 7% both in 2020 and 2021. The analysts expect earnings per share for Grifols’ ADRs to increase from $1.09 in 2018 to $1.16 in 2019 and then to $1.34 in 2020 and $1.52 in 2021.
Sartorius Stedim Biotech DIM, +0.29% of France supplies equipment used to manufacture biologic drugs, which are medications synthesized from biological sources. Kornitzer said about 35% of the company’s sales during 2018 were in the U.S.
“The company is involved primarily in single-use technology. It sounds like an ecological disaster but it is probably better for the environment because it uses less water and produces less waste,” she said, adding that the overall market is moving more toward single-use products.
But she still feels good about Sartorius Stedim because “biosimilars are making headway in Europe. They have not in the U.S. but they are coming.” And new market entrants will need the type of equipment Sartorius provides.
The company competes with Thermo Fisher Scientific TMO, -0.44% and Danaher DHR, -0.91% which expects to complete its $21.4 billion deal to acquire General Electric’s GE, +0.49% iopharma business during the fourth quarter.
“Sartorius is not a cheap stock any more,” Kornitzer said. The shares trade for 48.2 times the consensus earnings estimate for the next 12 months. So the Buffalo International Fund is not adding to its position now, she said. The fund took advantage of a decline in the share price in 2017, when the company lowered its guidance because of several operational problems.
Analysts expect the company’s sales this year to rise by 11.8%, followed by increases of 11.1% in 2020 and 12.2% in 2021. Net income is expected by analysts to increase by 15.9% this year, followed by increases of 12% in 2020 and 15.9% in 2021.
Here are the fund’s top 10 holdings (out of 81) as of March 31:
|Company||Ticker||ADR||% of fund||Total return – 2019 through June 24||Total return – 3 Years|
|Kering SA||KER, +0.53%||PPRUY, +0.59%||2.5%||29%||313%|
|SAP SE Sponsored ADR||SAP, +0.77%||2.2%||37%||88%|
|Sartorius Stedim Biotech SA||DIM, +0.29%||SSSGY, +0.00%||2.2%||59%||141%|
|Linde PLC||LIN, -1.08%||2.1%||32%||97%|
|Taiwan Semiconductor Manufacturing Co. ADR||TSM, +0.41%||2.1%||11%||73%|
|Aon PLC||AON, -1.74%||2.0%||34%||92%|
|Davide Campari-Milano SpA||CPR, -1.27%||DVDCY, -1.91%||2.0%||25%||127%|
|Tomra Systems ASA||TOM, -1.69%||TMRAY, -0.21%||2.0%||52%||245%|
|Carl Zeiss Meditec AG||AFX, +0.12%||CZMWY, +5.26%||2.0%||29%||162%|
|Schneider Electric SE||SU, -0.76%||SBGSY, +1.31%||1.9%||35%||64%|
|Sources: Morningstar, FactSet|
Most of the shares held by the fund are listed in the countries where the companies are domiciled, however, some are listed directly on the New York Stock Exchange and some are American depositary receipts (ADRs). If there is an ADR available for the company that isn’t held by the fund, that ticker is included in the “ADR” column.
The Buffalo International Fund has $378 million in assets and an annual expense ratio of 1.05%, which Morningstar considers “average.”
Here are average annual returns for the fund for various periods against the MSCI All Countries Index ex U.S. in U.S. dollars 892400, -0.19% and against the fund’s Morningstar category:
|3 years||5 years||10 years|
|Buffalo International Fund||14.2%||6.6%||9.5%|
|MSCI All Countries Index ex U.S. (in U.S. dollars)||10.8%||2.6%||7.1%|
|Morningstar Foreign Large Growth category||10.7%||4.2%||8.2%|
|Sources: Morningstar, FactSet|
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