Barron's : Barrons weekend update

Barrons weekend update: Part 1 of annual roundtable 

* Cover story: The first 2017 Barron's Roundtable features comments from Scott Black, Jeffrey Gundlach, Oscar Schafer, Abby Joseph Cohen, William Priest, Meryl Witmer, Mario Gabelli, Brian Rogers, and Felix Zulauf; The panelists say that rising bond yields, rich valuations, and global turmoil could limit the market's gains, while the "regime change in Washington will push tax cutters and regulatory reformers back to power." 

* Features: 1) Barron's 2016 stock picks beat the market, with top pick X delivering a 120% return, and combined bullish picks returning 12.8%; 2) Despite the growing popularity of National Front candidate Marine Le Pen, the most likely winner of France's presidential election is Francois Fillon, whose pro-business stance would benefit Renault, BNP Paribas, TOT and other French companies; 3) Peabody Energy investors are upset because the company's bankruptcy reorganization plan would wipe out shareholders and give the company to management and hedge funds that own its debt.

* Tech Trader: Earnings results may be fine for some Internet giants, but their shares aren't likely to move much this year amid cooling investor sentiment and regime change in Washington. 

* Trader: The so-called Trump trade has five stages, says DB strategist Alan Ruskin, and the market has only just moved past the first one; Under the Trump administration, the key to success for pharmaceutical investors will be finding companies with more innovation and less exposure to pricing pressures; Thomas Lee of Fundstrat Global Advisors recommends oil investors take advantage of an industry rebound with RIG, ATW, RDC, DO, HP, NBR, PTEN, and UNT. 

* Profile: George Cipolloni and Mark Saylor, co-managers of the Berwyn Income fund, continuously screen a wide range of assets to find price anomalies (top 10 holdings: Nintendo, TSRA, PBI, PHG, SNI, FLIR, GSK, Carlsberg, GME, GLW). Penta: Joseph Amato, chief information officer at Neuberger Berman, says the economy is still catching up to the Fed's interest rate hike, a "major shift in monetary policy that has yet to solidify." 

* Small Cap: Positive on REV: Compared to rivals such as COTY, EL, and L'Oreal, Revlon shares look undervalued, and the company's recession-resistant business generates stable cash flows. 

* Follow-Up: Positive on GS: Though investors may be tempted to take their profits on Goldman shares, which are up 72% since last summer, the firm stands to benefit from a rebounding economy, and the stock could get another 15% boost. 

* European Trader: Positive on UL: Consumer-products major has made smart, accretive, growth-boosting acquisitions, and is making more products in countries where they are sold, reducing transportation costs. 

* Asian Trader: For investors in Chinese stocks, tech has long been a major draw, but infrastructure spending in China is likely to boost steel and cement companies such as Baosteel and Anhui Conch Cement. 

* Emerging Markets: "Mexico once advertised itself as 'The Amigo Country,' but for investors in 2017 it isn't looking like a friendly place," and the peso has yet to hit bottom. 

* Commodities: For most commodity watchers, the run-up in iron ore prices was the result of China's credit-fueled steel demand and speculative activity, and they predict a drop in prices when new supply hits the market. 

* Streetwise: With U.S.-China relations likely to hit a rocky patch when Donald Trump moves into the White House, a "honeymoon of sorts is developing between U.S. and Russia," says Joseph Quinlan of U.S. Trust, bringing "asymmetric risks" to U.S. companies.

FT : Drugmakers alarmed by Trump pricing threat

Drugmakers alarmed by Trump pricing threat
President-elect’s anti-vaccine rhetoric adds to concern among pharma executives

Before Donald Trump accused them of “getting away with murder”, the mood among pharmaceutical executives was buoyant as they gathered in San Francisco for the industry’s biggest annual gathering last week.

Not even the torrential rain could damp their spirits as they darted between meetings with investors and presentations in the historic Westin St Francis hotel, the venue for the JPMorgan healthcare conference.

The bull case was that the election of Mr Trump as president and the dominance of Republicans in Washington had saved the industry from Hillary Clinton, who had pledged to crack down on the soaring price of prescription medicines that cost the US system $325bn in 2015, a 9 per cent increase on the previous year.


“The good thing about Trump is he’s not Hillary, and the good thing about Congress is they’re not Trump,” said Tim Walbert, chief executive of Horizon Pharma, in an interview before the president-elect’s intervention.

For the first part of the week, investors sent healthcare stocks higher on the assumption that drugmakers would be able to continue charging premium prices.

Meanwhile, analysts predicted that forthcoming Republican tax reforms would enable large pharmaceutical groups to repatriate roughly $100bn of offshore cash, leading to a spate of dealmaking and share buybacks that would push valuations higher still.

But on Wednesday the party was interrupted by Mr Trump, who kicked off his first press conference in months with an unprompted broadside against drugmakers. His remarks wiped nearly $24bn from the value of biotech companies listed on the Nasdaq stock exchange.


Some executives were particularly aggrieved by the president-elect’s characterisation of the industry as “murderers”.

“Getting away with murder is exactly the opposite of what the industry does, which is saves lives,” said David Brennan, interim chief executive of Alexion, which makes a drug for rare blood disorders that costs roughly $500,000 a year per patient.

Executives and investors could probably live with fiery rhetoric from Mr Trump were it not for his pledge to “start bidding” for medicines.

“We’re the largest buyer of drugs in the world. And yet we don’t bid properly,” the president-elect said during the press conference. “We’re going to save billions of dollars over a period of time.”

The message [from Trump] is clear: heal thyself or we’ll help you get healed
Dr Leonard Schleifer, Regeneron
Analysts interpreted the remarks as a sign that Mr Trump intends to enable Medicare, the taxpayer-funded healthcare scheme for retirees, to directly negotiate drug prices, something it has been prohibited from doing since a 2003 law passed during the presidency of George W Bush.

Medicare is the largest buyer of prescription medicines in the world, and so pharmaceutical profits would undoubtedly suffer were it able to drive down the price it pays for drugs. Some executives also fear that government-negotiated prices could serve as a reference for the amount they can charge private health insurers.

“This is the second time since being elected president that he has discussed the need for pharma reform, and thus we believe it should be taken with a measure of seriousness,” said Ronny Gal, analyst at Bernstein.

Some executives say they can stave off government intervention by policing themselves, and several companies have recently pledged to cap future price increases or launched assistance schemes to help Americans struggling with their healthcare costs.

However, there is disagreement within the industry on what form that self-policing should take, perhaps unsurprisingly so given the many different business models within the sector.

Dr Leonard Schleifer, chief executive of Regeneron, the New York-based biotech group, says drugmakers should stop implementing large annual price increases for medicines that have already been launched.

Many pharmaceutical groups kicked off 2017 by hiking the price of their existing medicines by about 10 per cent, well above the rate of inflation, while others, such as Pfizer, increased the cost of some products by 20 per cent.

“The message [from Trump] is clear: heal thyself or we’ll help you get healed,” said Dr Schleifer. “Arbitrarily every year increasing prices by egregious amounts isn’t going to work — those days are over.”

Mr Trump’s flirtation with a border tax is also causing consternation among some pharma companies, which import a large percentage of the drugs they sell in the US.

“In our industry I would say the vast majority of manufacturing is done outside of the US,” said Mr Walbert. Even when drugs are made in US factories, the active pharmaceutical ingredient is often sourced from other countries, especially India, he added.

Even before Mr Trump’s press conference there were nagging concerns inside pharmaceutical groups over some of his positions on healthcare, such as his scepticism towards vaccines.

Robert Kennedy Jr, a nephew of John F Kennedy and a long-time critic of vaccines, said last week that he had been asked to head a commission on the safety of the treatments during a meeting with the president-elect at Trump Tower.

Mr Trump has a history of scepticism over vaccines, especially the combined measles, mumps and rubella (MMR) vaccine given to children, which has been erroneously linked to autism. In 2012, he called on the medical establishment to “stop giving monstrous combined vaccinations”.

Dr Olivier Brandicourt, chief executive of Sanofi, one of the “big four” vaccine manufacturers, said it was unusual for a prominent political figure to express concerns over the life-saving products.

“That type of anti-vaccine campaign, we’ve seen that in Europe, in France — there was always a background of low noise — but usually political figures are very much in favour of vaccines,” Dr Brandicourt said.

A spokesperson for the president-elect later said no final decisions had been taken but that Mr Trump was “exploring the possibility of forming a committee on autism, which affects so many families”.

Barron's : Revlon’s Beautiful Outlook

Revlon’s Beautiful Outlook
The stock could be worth more than twice its current price, even if top shareholder Ron Perelman doesn’t relinquish control.

Beauty-products giant Revlon is the ugly duckling of the beauty space in the eyes of investors. The stock has long traded at a deep discount to rivals.

At a recent $32.00, Revlon shares (ticker: REV) go for an enterprise value of nearly nine times 2017 estimated earnings before interest, taxes, depreciation, and amortization. That compares with 13 to 15 times Ebitda for peers Coty (COTY), Estée Lauder (EL), and L’Oréal (LRLCY).

The reasons for the discount are well known. Billionaire Ron Perelman owns 77.5% of Revlon through his holding company, MacAndrews & Forbes. He has controlled the business since 1985, and is Revlon’s chairman. His control leaves a relatively small public float, limiting the stock’s liquidity, and Perelman has a reputation for being unfriendly to minority shareholders.

Despite those issues, Revlon is a first-class franchise, with familiar brands, including Revlon, Almay, and Mitchum, among others. The stock has rewarded shareholders handsomely over the past few years, and could continue to do so. Barron’s wrote a bullish story on Revlon in June 2013, when the stock was about $20.

One top holder, Chris Mittleman, chief investment officer of Mittleman Brothers, thinks Revlon can command a multiple more in line with its peers’. He thinks the stock is worth $76—an enterprise value of 13.5 times his 2017 Ebitda estimate of $500 million. While the discount may persist as long as Perelman controls the company, Mittleman contends “that doesn’t mean the stock can’t rise dramatically while maintaining the discount.”

In the past six years, Revlon has grown revenue 51% and Ebitda 60%, by making market-share gains and acquisitions. In September, Revlon paid $900 million for cosmetics maker Elizabeth Arden, which has struggled in recent years as its celebrity fragrances have become less popular with consumers. The deal is expected to generate substantial synergies, and could turn out to be opportunistic.


Fabian Garcia, formerly the chief operating officer of Colgate-Palmolive (CL), was appointed CEO in April. His leadership appears to bode well for Revlon’s future.

No Wall Street analysts publish estimates for the company, another likely contributor to its discount to peers. For 2016, not including Elizabeth Arden, Revlon has guided for $410 million in Ebitda on $2 billion in sales. The combined companies will generate $3 billion in sales.

Mittleman expects free cash flow of $115 million, or $2.20 a share, in 2017. Not including restructuring charges, he estimates $175 million in free cash flow.

Founded 80 years ago by Charles Revson, New York–based Revlon sells cosmetics, hair-care products, and fragrances through mass channels, such as drugstores and supermarkets, and on the Internet. The company has leading positions in lipstick, lip liner, eyeliner, and other categories, such as nail polish.

Including Elizabeth Arden, its sales are split geographically, with 60% from North America, and the remainder from international markets.

Over the past 10 years or so, global beauty sales have been growing at a roughly 5% annual clip. Mass-market cosmetics such as Revlon’s, which are sold in retailers like Wal-Mart Stores (WMT) and in drugstores, have been slower-growing, compared with the “prestige” brands sold at Sephora and in department stores.

ELIZABETH ARDEN, which has a stable of prestige brands, including Juicy Couture and John Varvatos designer fragrances, could help spur organic growth at Revlon. As of late, Elizabeth Arden has shown signs of turning around. In the September quarter, the business registered its seventh quarter of net sales growth, helped by new products and a focus on revitalizing its existing brands. Arden’s Ebitda margins are considerably lower than the 19% margins that Revlon enjoyed in 2016. With the companies combined, the figure could slip to just over 17% this year. But in time, as Arden is fully integrated, profitability should pick up.

Initially, management identified $140 million in cost synergies, but in a filing released this month, Revlon said it expected that the synergies would exceed that. On the revenue side, Elizabeth Arden has a strong presence in the fast-growing Chinese market, which could aid Revlon. Both companies have sizable overlap in their customer base, so there are cross-selling opportunities.

Revlon’s highly recession-resistant business generates stable cash flows. The balance sheet, with $2.7 billion in net debt, is highly leveraged, but that level looks manageable.

Perelman, 74, isn’t getting any younger. A year ago, he announced “strategic alternatives” for Revlon, leading many to speculate that a sale might be in the works. Instead, the Arden acquisition followed, and the speculation has been tamped down.

But the potential still exists. Unilever (ULVR.UK) has long been thought of as an acquirer, going back to the late 1990s. Several acquisition-oriented Asian companies, such as Shiseido (4911.Japan) and LG Household & Health Care (51900.Korea), could be potential suitors. In 2014, LG expressed interest in acquiring Elizabeth Arden.

Still, it’s important to keep in mind that, if the past few years are any guide, a sale isn’t necessary for Revlon’s stock to rise.

Barron's : A Wary Mexico Awaits Trump’s Changes

A Wary Mexico Awaits Trump’s Changes
America’s neighbor has seen the peso hammered. Now it girds for the wall, new U.S. taxes, and Nafta revisions. Time to be wary.

Mexico once advertised itself as “The Amigo Country,” but for investors in 2017, it isn’t looking like a friendly place.

President-elect Donald Trump reiterated last week that he will build a wall on the border and make Mexicans pay for it. Increasingly unpopular President Enrique Peña Nieto, whose term expires in mid-2018, responded, “Mexico, of course, will not pay.” The wall, however, should matter less to investors than a big unknown: which Republican-proposed income-tax reforms Congress will actually pass. What Trump has proposed is designed to discourage U.S. companies from importing goods. That potentially could trigger a multifaceted trade war between the U.S. and a number of other countries.

The other unknown—proposed revisions to the North American Free Trade Agreement—could turn out to be a big positive for investors if Trump, and his Canadian and Mexican counterparts, can build a stronger trade bloc to prevent partially assembled goods sneaking in from other countries. The percentage of a product that has to be manufactured in North America to avoid tariffs could rise, says Carlos Peyrelongue, Mexico equity strategist at Bank of America Merrill Lynch.

The U.S. probably has a greater quantity of low-hanging fruit to address in its massive trade deficit with China, which is much larger than that with Mexico. An overhaul to Nafta is more likely than a U.S. exit, says BofA Merrill Lynch. But in the near term, there will be plenty of negative headlines, as negotiations unfold.

THE COMBINATION OF TRADE UNCERTAINTY and already-sluggish Mexican economic growth—roughly 1.7% in 2017—have pressured the Mexican peso, which has weakened by roughly 17% over the past 12 months. As Trump spoke about Mexico last week, the iShares MSCI Mexico Capped exchange-traded fund (ticker: EWW) hit a 52-week low.

While the peso is searching for a bottom, it hasn’t yet found it, says Ali Chughtai, a portfolio manager at London-based emerging market hedge fund Whard Stewart. The peso looked oversold in November in the postelection selloff, but going long hasn’t been a good call, and it will take time for short positions to shake out after there’s more clarity on taxes and trade policy. This exchange-rate volatility tops the list of risks for Mexican corporate-bond issuers, Moody’s Investors Services said in a note last week.

Investors this year should be underweight Mexican equities, which account for roughly 3% of the MSCI Emerging Markets index, UBS says. Of its four reasons, the main one is that the price/earnings ratio of roughly 16 times forward earnings is hard to justify. Second, earnings growth of 18% probably is overstated. Third, economic growth looks weak with little help from the U.S. economy. Fourth, inflation is rising, and so are interest rates.

If you need exposure, look for Mexican companies with international revenues that offer a hedge against currency and consumer weakness. Those could include beverage producer Coca-Cola Femsa (KOF), telecommunications company America Movil (AMX), and tortilla, bread, and snack producer Grupo Bimbo (BMBOA.Mexico).

There’s a lot of fear baked in, but investors will need to wait for more clarity from Washington before making Mexico an amigo in portfolios again.

Barron's : A Rebounding Unilever Has Room to Rise

A Rebounding Unilever Has Room to Rise
With most of its sales coming from overseas, Unilever is one of the few large European companies with insulation from political shocks.

Anglo-Dutch consumer-goods giant Unilever ’s stock has recovered lately after a stumble in the third quarter, as investors weigh its defensive qualities against businesses with greater exposure to Europe’s political uncertainties.

Unilever shares (ticker: ULVR.UK) came under pressure in 2016’s second half, as tougher competition in some countries and weaker emerging-market currencies took a toll. Unilever’s underlying sales, which exclude currency changes, rose 3.2% year on year in the third quarter, while volume fell 0.4%, missing forecasts and sending shares down 3.5% on the day the figures were released. But after hitting a 12-month low in mid-November, its stock has rebounded 7%.

Unilever is the third-largest consumer-products manufacturer by sales after Nestlé (NESN.Switzerland) and Procter & Gamble (PG). It owns an impressive stable of well-known brands, from toiletries such as Dove, Lux, and Sunsilk to foodstuffs like Flora, Hellmann’s, and Ben & Jerry’s.

Ernie Cecilia, chief investment officer at Bryn Mawr Trust, says Unilever’s difficulties have made it cheap relative to peers. He estimates its price/earnings ratio at 19, compared with P&G’s 21. “One of many attractions in Unilever is that it’s very consistent in terms of revenue growth, and most of it’s organic,” he says.

UNILEVER IS CURRENTLY Bryn Mawr’s only recommended direct investment in Europe, where Cecilia says concerns about uncertainty ahead of elections in France, Germany, and the Netherlands outweigh positives. Although Unilever has European roots, it generates most of its income elsewhere. “About 58% of the company’s sales come from emerging markets, while North America counts for 19%. What you have is a broad-based company that benefits from being domiciled in Europe while generating most of its income internationally,” he says.

Unilever, says Cecilia, has made smart, accretive, growth-boosting acquisitions. It is making more products in countries where they are sold, lowering manufacturing and transportation costs. “So when you look at Unilever, you have a company with very little debt, strong free cash flow, an attractive valuation, and decent dividend growth that currently yields 3.4%. We like the top-line growth story, the fact that sales growth has been consistent,” he says.

While Cecilia credits Unilever with generally deriving revenue from volume gains rather than price hikes, it lifted United Kingdom retail prices by 10% in October, to soften the effect of sterling’s weakness on its dollar-denominated commodity costs after the Brexit vote. That drew the ire of British retailers such as Tesco (TSCO.UK), which threatened to take Unilever products off its shelves.

It has also been pressured by India’s withdrawal of 500-rupee ($7.35) and 1,000-rupee notes to combat corruption, which caused a cash shortage. Berenberg analyst James Targett expects India to weigh on Unilever’s fourth-quarter results, with sales there falling 20%. Tighter competition in China and pressure on Latin America sales, especially in Brazil, will also continue, he says.

Despite that, Targett has it as a Buy, with a price target of 45 euros ($48.03) or 39 pounds ($47.98), a 16% upside. “With 76% sales from country category cells where Unilever is gaining or holding share and good growth in new product launches, both supported by its increased speed to market via third-party collaboration…we are confident it can accelerate organic growth,” he says. Unilever shares closed at €39.03 in Amsterdam and £33.83 in London on Friday.