This is the 4th in a series of articles that attempt to identify relative value discrepancies between two closely related securities. So far, the first three have been modestly successful in aggregate, though it's a little early to be drawing conclusions:
- 3/14: Buy Met-Pro (MPR), Sell Nalco Holding (NLC)
- 4/18: Buy Johnson & Johnson (JNJ), Sell Allergan (AGN)
- 5/3: Buy Columbia Sportswear (COLM), Sell UnderArmour (UA)
I will eventually do a review of each of these, but the first one is slightly negative now (after a great start) while the other two are equally positive.
As many of you are aware, I love Intuitive Surgical (ISRG) as a company. But as I warned when I was very bullish on the name back in March, "I have always believed that one shouldn't fall in love with stocks." I reported back after their disappointing Q1 results that the stock still had room to run, highlighting 175 by year-end as a potential target in an optimistic case. Well, 8% upside over the next 8 months doesn't seem worth the risk. I actually sold the last piece in my Top 20 Model Portfolio last week to buy C.R. Bard (BCR). We have been very fortunate in the model, with a return in 2009 so far of almost 28%, and I want to protect those returns!
Big picture, both of these companies are excellent Healthcare companies with similar market caps. The whole idea here is to move out of the high PE (high expected growth) story into a more conservative and safer stock. This rationale is quite similar to the JNJ/AGN trade. Here is how it looks:
Again, ISRG has a great balance sheet (as does BCR). The key metrics here are the ones I boxed: The PE is very high for ISRG relative to BCR, and the FCF yield doesn't give any room for disappointment. In contrasting the two, it is important to consider that BCR derives essentially all of its sales from consumables, while ISRG relies upon $1.4mm (or higher now with the new product) capital equipment sales for about 1/2 of its revenue. If you share my view that the economy will remain weak for quite some time, this isn't the time to be aggressive in growth assumptions. I want to own ISRG again, but not at this price.
Disclosure: Long BCR
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