By Philip van Doorn, MarketWatch
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 /zigman2/quotes/204262347/realtime BUFIX +0.46% 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 /zigman2/quotes/210598083/delayed XX:892400 +0.0018% , 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 /zigman2/quotes/202630793/delayed DE:FRE +1.85% 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 /zigman2/quotes/210057637/composite FMS +0.33% /zigman2/quotes/209597554/delayed FMCQF -4.50% /zigman2/quotes/200900833/delayed XE:FRE +1.54% , 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 /zigman2/quotes/210599714/realtime SPX -0.80% 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 /zigman2/quotes/208424563/composite GRFS +3.09% /zigman2/quotes/203805978/delayed ES:GRF +2.35% 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.