In a previous post I spelled out, why I am buying healthcare stocks for an Obama presidency . In that post I promised to provide three stocks that would benefit from this fact. The first stock was AET and now I will discus the second stock in this series, Schering-Plough Corporation.

Schering-Plough (SGP)

Schering-Plough discovers, develops, manufactures, and sells pharmaceuticals worldwide. The company has a joint venture with Merck & Co., Inc. for the development and management of two cholesterol-lowering drugs and an allergy/asthma drug.

Political concerns over government price negotiations with pharma companies have pressured the industry’s stock prices over the past year. I feel that this impact will not be as large due to its slowing momentum in Washington and the patent expirations coming in the next 3-7 years. These patent expirations will lower drug costs for consumers and insurance companies devoid of any government plan.

It is apparent that many big pharmaceutical companies are facing numerous blockbuster patent expirations in the next 3-7 years. In my opinion, Schering Plough has the best portfolio and pipeline position within the big-pharma group. Although SGP stock has faced headwinds from a recent ENHANCE panel, which I will discuss, I feel because of their above average portfolio/pipeline SGP will out perform its competitors in the next 12-18 months.

Product Portfolio and Pipeline

Almost every U.S. pharma company will experience sharp blockbuster patent expirations starting in 2011. Add this to a large pipeline shortfall along with the fact that drug development takes a decade and the future becomes very foggy for these firms.

In this fog, one pharma firm stand out, Schering Plough. SGP has the lowest patent exposure in the industry, with only 15% of current revenues exposed to patent expirations in the next 7 years. This relatively low exposure will allow SGP to remain the industry’s top growth firm well into 2012.

Source: Credit Suisse Estimates

SGP has its fair share of patent expiration in the next 7 years, these include Zemuron, Puregon(Follistim), Livial, Temodar, Implanon, Noxafil, Depot, Avelox, and Asenapine. But if you look at the expected revenue of SGP’s pipeline compared to the loss of patent exposed revenues, SGP is an industry leader. Its 2015E pipeline revenues exceed its patent exposed revenues by 11.6%.

Source: Credit Suisse Estimates

Given the above information, you can see why I feel SGP has the best pipeline/portfolio mix to weather the coming patent expiration storm.

Concerns over ENHANCE Cholesterol Findings

The study found that Vytorin, a combination of Merck’s Zocor and Schering’s Zetia, worked no better than Zocor alone at removing plaque from arteries. This has had the effect of reducing the market share of Vytorin from ~12% to about ~9.0%, where it has stabilized since April. The ENHANCE panel results should not effect the stock price further as Vytorin’s market share is stabilizing.

Valuation

Given SGP’s low exposure to patent expiration and promising pipeline revenue, investors would expect to see SGP have a premium multiple. This is not the case.

Looking at the industry’s P/S and P/E multiples we see SGP trading inline with its more patent exposed and less pipeline plentiful competitors. I feel SGP is deserving of conservative industry leading forward multiple of 15x giving me price target of 26.00, representing 20% increase from yesterday’s close.

Tags: Equities, Healthcare

Yes, it looks like option traders are betting on a jump in EMC shares during the next two weeks. Aggressive call-buyers traded over 113,000 of the $15-stirke calls, three times the open interest, pushing the contract up 72 cents or up 380%.

The contracts closed at 89 cents, meaning the EMC shares would need to surpass $15.89 for the call buyers to be profitable. One can only hypothesize the motivation, but the WSJ’s Tennile Tracy quoted rumors that Cisco Systems might make an offer for EMC, or that EMC possibly will divests its 85% stake in VMWare.

EMC’s Chairman and CEO Joe Tucci did not deny this proposition in EMC’s Q2 earnings call saying “I kind of know a lot more of what’s going on than anybody else and we will do the right thing for the shareholder when and if the time is right.”

Additionally, the opportunity to announce this divestiture may come at be Pacific Crest Securities technology conference on August 4.

Tags: buyout, EMC, Equities, Spin-off

As a shareholder of Enterprise Products, I can’t say that I was excited by the stock’s reaction to is earnings release last week, but after looking beyond the surface EPD presents a compelling buying opportunity for the medium-long term investor seeking a safe yield.

Earnings
For the second quarter, Enterprise Products earned 52 cents per share, compared with or 26 cents per share, in the year-ago quarter. The results beat Wall Street expectations by 16 cent. This large earnings surprise comes after an 18 cent earnings surprise in their first quarter. If these results were not astounding enough, EPD produced the results while its Independence Hub was impaired for 66 days during the quarter.

Distributions
Additionally, earlier this month EPD raised their cash distribution to shareholders by 1.5% over the first quarter 2008. Its increased distribution brings EPD shares payout to $2.06/unit annualized and is currently yielding 7.1%.

EPD’s total liquidity equaled $1.3 billion, which should give confidence to further distribution increases. EPD’s ability to tap multiple sources of capital (retained distributable cash flow, equity capital, debt capital raising and potential asset sales) should rest any concerns of a decrease in its distribution, which has not happened since going public in 1998.

Outlook
Going forward, EPD should have no difficulty maintaining its strong momentum as it has three large organic growth projects scheduled for completion in the second half of 2008, which will boost growth into 2009. These projects are outlined below.

• Meeker natural gas processing facility - Will double processing capacity to 1.5 Bcf/d and increase NGL extraction capability to 70,000 barrels per day
• Sherman extension to the Texas intrastate natural gas pipeline
• Exxon central treating facility - Will ship up to 1.1 Bcf/d of natural gas from the Barnett Shale region.

Valuation
Current 12-month analyst price targets for EPD average $35.00, which can be derived trough a basic Discounted Dividend Model. Using its current distributions and conservative forward estimates, a $35.00 price target is more than reasonable.

With its current shares trading at $28.95 this price would reflect a 27% 12 month return.

Summary
With two quarters of spectacular growth and increasing prospects for continued operational success, one would expect EPD’s stock to have increased drastically on this release. This is incorrect – EPD was down 11 cents on the day of its earnings release, giving medium-long term investors a compelling entry point.

Tags: Dividends, EPD, Equities, MLPs, Oil, Yield