The Bubble Has Burst
The following article is Barron's Midyear Roundtable. I find it ufb that not a one suggests that we ain't seen nothing yet. Or even that we may have entered a secular bear market, wherein in the long run, investors stand to loose their vests.
Barrons June 26, 2000 - Midyear Roundtable
interactive.wsj.com
Participants
Barton Biggs
Founder And Chairman, Morgan Stanley Dean Witter Investment
Management, New York City
Scott Black
Founder And President, Delphi Management;
Portfolio Manager, Kobren Delphi Value Fund,
Boston
Meryl Buchanan
Co-Founder And Partner, Buchanan Parker
Asset Management, New York City
Abby Joseph Cohen
Chair, Investment Policy Committee, Goldman Sachs,
New York City
Mario Gabelli
Chairman, Gabelli Asset Management,
Rye, New York
Archie Macallaster
Chairman, Macallaster Pitfield Mackay,
New York City
John Neff
Retired Portfolio Manager, Vanguard Windsor Fund And
Gemini Ii; Managing Partner (Retired), Wellington Management Co.,
Radnor, Pennsylvania
Art Samberg
Chairman And Ceo, Pequot Capital Management,
Westport, Connecticut
Oscar Schafer
Member, Cumberland Associates,
New York City
Felix Zulauf
Founder And President, Zulauf Asset Management,
Zug, Switzerland
After the Deluge
With stocks on the rocks, our pros spot values
By Lauren R. Rublin
Whew! The past five months have put a few-or at least a few moregray hairs on the heads of anyone who has tried to navigate the financial markets, in particular that roller coaster known as Nasdaq. All things considered, the members of the Barron's Roundtable did the job admirably over this tumultuous span (see "Progress Report"), in which the bursting dot.com bubble and lesser pullbacks in other frothy issues paved the way for value to come to the fore.
Barron's Midyear Roundtable -- Participants
In the second half of 2000, our pros hope to repeat their storied successes while sidestepping the market's excesses, of which they expect notably fewer, thanks in part to the interest-rate medicine lately doled out by the Federal Reserve. They're buying financials and energy shares, "deal" stocks and European issues, just to mention a few of the investment ideas you'll find in the pages that follow. In telephone check-ins over the past 10 days, these investment luminaries also shared their piquant views on politics, currencies, financial speculation and the next new thing in the Internet revolution. We don't want to spoil the surprise here, so read on.
Art Samberg
Barron's: You warned us in January the markets would be very volatile this year, Art. Whom can we sue for whiplash?
Samberg: The Nasdaq has been cursed by volatility. Some of the volatility numbers have been published, and they just blow my mind. How do I account for it? The first stage of the revolution is over. Maybe even the second stage. The Internet is a defining moment in economic history. In the first stage the market is not going to be very discerning, because its function is to raise capital and sustain the revolution for as long as possible. People who did not understand that walked away too soon. I was interested in America Online in 1994 because I thought it was the start of that first phase. I was not at all distressed by the speculative bubble, because I thought it was healthy for the development of the trend, if not necessarily markets.
Q: Don't tell that to the guy who got caught in the bubble when it burst.
A: That phase is over, and the repercussions will be seen as more and more venture-capital funds 'fess up to some of the losers in their portfolios.
Q: When does the next stage start, and how is it going to unfold?
A: It's got to come from lower levels, because metrics like price-to-sales are no longer relevant. I mean, they're almost laughable at this point. The only thing that really matters now is, when are you going to turn a profit? When are you going to be cash-flow positive? If you tell me it's late next year, my eyes are probably going to glaze over because I won't believe you. The days of free capital are over, and there aren't many companies that will make the cut. The other question is, are things like Amazon.com and Priceline.com for real? They are strong, powerful companies with unique business models, but they might never be enormous moneymakers. There are so many cross-currents. As the dot.com spending disappears, will that influence total spending in the area in a measurable way? What happens when big companies like General Electric focus on all of this?
Q: More immediate, how do you think the market will wind up the year?
A: We all know what the issues are, but I don't know the outcome. I follow the fundamentals of companies and the emotion of the crowd, and watch very carefully how the market is voting. I think "buy the dips" will work because this is a long cycle. But the parameters of what you buy on the dips clearly change. At least for the remainder of this year, and probably forever, you want to buy dominant companies in areas where all kinds of good stuff is happening. That's why we like Gemstar International, which is a strange animal in that it's an intellectualproperty company. But it incorporates all the attributes that made the prior generation of 'Net companies like Yahoo, AOL and, in some ways, Microsoft very successful.
Q: How so?
A: Interactive TV is a huge market, and Gemstar has tied up the intellectual-property rights to the electronic programming guide. When you get into the digital age with hundreds of channels, you can't live without it. People have fought the validity of this copyright protection, but now Microsoft, John Malone and others have signed deals with the company. Right now Gemstar just has a programming guide, but in the future it will be an advertising medium. The company is in the process of merging with TV Guide, in a deal that everyone hoped would be done by the end of June. The government is still reviewing the combination. Even if it doesn't happen, TV Guide would still have to pay Gemstar royalties. Here's another thing: Gemstar made two acquisitions in the electronic-book area in January, which no one has paid attention to. They have patent encryption technology to protect themselves from piracy. The music industry wasn't on top of this, but the book industry is smarter.
The Participant's Picks
Q: Let's go to the numbers. Where is Gemstar trading?
A: The stock is at 52 [it has since fallen to $46], and the company has $23 billion in combined market value, assuming the acquisition of TV Guide. In the fiscal year ended March EBITDA mearnings before interest, taxes, depreciation and amortization] was $131 million. This year, who knows? It could be anywhere from $280 million on up. Sales last year were $241 million. This year they could do about $1.15 billion. The stock has been all over the map, like everything in my portfolio. But I love the story.
Q: How about another pick, Art?
A: McLeodUSA is a bit more staid. It was founded by Clark McLeod, a terrific entrepreneurial manager. The company is going into the CLEC [competitive local exchange carrier] space, which is similar to Time Warner Telecom, which I talked about in January. McLeod's business is concentrated in the Midwest and Rocky Mountain states. A few months ago the company bought a data network and over time it plans to transition its own voicecentric network into a nationwide voice and data CLEC. Clark McLeod got $1 billion from Forstmann-Little, and the business is growing dramatically. Revenues of $1.1 billion this year will climb to $2.6 billion in 2002. EBITDA could go from $55 million to $505 million. It's just a high-quality way to play broadband access. My third pick is Abgenix.
Q: The mouse company?
A: The company has developed a transgenic, fully "humanized" mouse to use in drug testing and development. Its technology significantly shortens the testing process to three to four months. Abgenix will get a piece of the royalty stream on products developed by drug companies using the mice, and it's also developing drugs in-house. The company has more than $500 million in cash, which is good because payday is a few years out. They get milestone payments as the drug companies' clinical trials proceed, however. By 2005 the antibody market is expected to be $7-$8 billion. If you assume royalties are 4%-5%, you're talking an available market of $300-$400 million, which all drops to the bottom line. The stock trades at around 140 and the company has a market cap of $5 billion. Having said that price-to-sales doesn't matter on the dot.coms, I'm now giving you an absurd price-to-sales ratio and saying I don't care. Why? Because it is a patentable technology with clear economic benefits to the user.
Q: What a world! Thanks, Art.
Mario Gabelli
Barron's: It's been a wild five months for investors. What now, Mario?
Gabelli: A year ago the Dow was at 10,700. As we speak, it's near 10,700. Yet in the past 12 months we've had an enormous number of opportunities to make money, both in trading and takeover situations. I think the next 12 months will be much like the past 12 -- that is, just volatility in valuations. The big change is that we'll have a new Administration in six months. It's not significant in terms of the Presidency, because we've survived all types. But it could have an incredible impact on the attitudes of appointees at various government agencies.
Q: Such as the the Justice Department.
A: One could argue that Microsoft's problems would not exist under a different Administration. Secondly, if the Republicans control all branches of government, you could see a different attitude at the Federal Communications Commission. If Colin Powell's son becomes chairman, for example, new policies could provoke another round of consolidation in the telecom and media business, allowing American companies to size up to compete more effectively globally. If the Democrats win, on the other hand, the new chairman might take an even more Draconian approach to regulation. There could also be lots of changes with regard to tax policy. As for the big picture, a new President wants to get re-elected. Therefore, if we're going to have a slowdown to rebalance the world, the new guy will want it early in his Administration. Using macroeconomic policy to cool things off could have a chilling effect in 2001.
Q: We trust you'll still find some worthy investments.
A: The landscape will be characterized by even more global transactions. Hostile bids. Overbids. Lots of financial engineering. Everybody repositioning himself. That's how capitalism in its freest form is supposed to work. I want to re-recommend Chris-Craft Industries, which I talked about back in January. The stock is trading at 64. Under the FCC's duopoly regulations, put in place last August, a company now can own more than one television station in a given market. Chris-Craft, through its controlling stakes in BHC Communications and United Television, has stations in excellent locations. Those stations would complement Viacom's properties. It's logical to assume that Chris-Craft will be sold, and that Mel Karmazin [president of Viacom] will be the buyer, now that Viacom's merger with CBS has been blessed.
Q: What is Herb Siegel's asking price?
A: Herb Siegel [chairman of Chris-Craft] needs to be a little more flexible in his negotiating tactics, but investors will make a return that is not uncomfortable, given my view that the market will be flat. Granite Broadcasting is another name I'd like to revisit. The stock is selling around $6 because the company structured a 10-year affiliate deal with NBC in the San Francisco area that basically destroyed the economics of the affiliate arrangement. Granite followed bad advice. If they tweak the deal, which I think they'll do, they will give themselves more financial flexibility. Also, NBC will have to lift its foot from its affiliates' throats, because it is in their mutual self-interest. Granite can go from $6 to $12 overnight just by making some changes in a dumb deal.
Q: Have you any new names for us?
A: Modine Manufacturing is a stock I've owned before. It's selling at 25 and there are some 30 million shares outstanding. The company will earn about $2.25 a share this year-another year of disappointing results. But earnings could accelerate to $3 in 18 months, with some new business coming in. The company makes radiators and other sophisticated heat-transfer equipment. It's got good technology and R&D. Modine recently announced a pact to develop fuel-cell components with Xcellsis, a joint venture involving DaimlerChrysler, Ballard Power Systems and Ford. If the fuel cell works, the company could get a 20 multiple on $3 earnings, which would translate into a $60 stock. That's a lot of upside.
Q: By the way, what do you think of Seagram's pending sale to Vivendi?
A: Seagram near 60 is no longer "on the rocks." Smile! At current prices, you'll get 0.80 of a share of Vivendi, worth about 68 per Seagram share. With Seagram at 58, you can make 10 points, or 16%. That is not a shabby return. Now, what to do with Vivendi? We own Vivendi, but it is not a takeover play. It is a global growth company with strategically attractive assets. We tend to like takeout plays. For those who follow the Gabelli style of looking for companies with takeover potential, your money could be better served in other things.
Q: Got the picture. Thanks, Mario.
Archie MacAllaster
Barron's: How do you read this market, Archie?
MacAllaster: Stocks are pretty high, and interest rates aren't helping any. The averages probably aren't going to do much for a while. But the best thing about this market is that it's cracked a lot of the excesses without killing everything. The reason, I think, is that there's so much more money out there chasing stocks. Everyone's on the in. They take them high, they take them low, but they've got to have action. In my opinion, investors are concentrating way too much on the short term. But my opinion's gotten to be a little lonely.
Q: We know what you mean. What are you buying these days?
A: First, I want to comment on Frontier Oil, which has moved up a little since I recommended it in January at 6 11/16. The company reported a loss of 22 cents a share in the first quarter-more than I had expected. Frontier relies entirely on refining now, and is very sensitive to crack spreads [the difference between crude prices and prices for refined petroleum products]. The company loses a lot of money if the crack spread is less than $4 a barrel, as was the case earlier in the year. But spreads since have moved above $10, and if they remain near here, Frontier could earn as much as $1.50 in the second quarter. The balance sheet is highly leveraged, but there's also enormous operating leverage. Eventually, crack spreads will narrow, but right now you've got a $7 stock that has the potential to earn $2-$2.50 for the year. The situation has changed a lot since January, and I just want to bring it to readers' attention.
Q: Consider it done. What else have you?
A: MONY Group, which I recommended earlier in the year, still is exceptionally cheap, even though it's moved up to 31 1/2 from around 27. There are 47 million shares outstanding. Book value was $40.71 at the end of the first quarter, and the company pays a dividend of 40 cents. As a mutual insurer MONY had profit margins of 6%, but the company expects to have 10% margins by 2003. The board has authorized the repurchase of 5%, or about 2.3 million shares, and management has bought in about 800,000 shares since February 1 at an average price of just under $30. Operating earnings in the first quarter were $2.60 a share, but that included $1.99 of partnership profits. So profits from operations were about 61 cents, up from 45 cents. For the full year MONY will earn over $5 a share, including $2.50 of partnership profits. Basically, the company's a natural for a European acquirer.
Q: Have any come calling?
A: Under de-mutualization -- this is the old Mutual of New York -- MONY could not grant options for a number of years. You can bet these people will not be sellers until they get their options, which is happening now.
Q: How fortunate for shareholders.
A: My next pick is a high-multiple stock Flextronics International. It sells for about 64 [the stock since has moved up to 71], although it's come down from a high of 79. There are 200 million shares outstanding. The company earned $1.14 a share in the year ended March, and could do $1.65-$1.75 in fiscal 2001. So it's selling for about 38 times estimated profits. Last year Flextronics had sales of $5.7 billion. The company's growing about 50% a year and recently signed a five-year, $30 billion deal with Motorola, which will produce sales of $10 billion in the fifth year. This year sales will jump to $9.5 billion. Flextronics' gross profit margins are about 10%-probably the highest in the industry.
Q: What's the downside here?
A: You're going to get very wide swings in the stock. Also, Flextronics is getting so much business there's a risk the company won't be able to handle it efficiently. One bad quarter and these kinds of stocks sell off 25%, 30%, 40%. But if you look ahead two or three years, you'll see a company three or four times its current size, and I believe you'll make a lot of money.
Q: What else charms you?
A: I haven't mentioned Polaris Industries in some time. The company makes water craft and all-terrain vehicles, and is the largest snowmobile producer. But it's come down sharply in value. Polaris now sells for 31 1/2 and it earned $3.07 a share last year. So it's selling for close to 10 times earnings, which is below its annual growth rate of 12%-15%. The company pays an 88-cent yearly dividend and yields about 3%. This year Polaris could earn $3.45 a share. The other attraction, frankly, is that Thomas Tiller, the CEO, indicated to the Minneapolis Star-Tribune back in February that he would not rule out taking the company private if investors remained unwilling to pay a reasonable price. In a takeout we think the company could fetch $45-$50.
Q: Thank you, Archie.Abby Joseph Cohen
Barron's: The markets are "all shook up," to quote Elvis, since the Nasdaq hit the skids in early April. Has there been a sea change among investors, Abby, or is it just a momentary mood swing?
Cohen: There's been a real change in "attitude," as New Yorkers refer to it. What we saw in January-and it reached a climax in the middle of Marchwas exuberance and enthusiasm carried to very interesting levels. In the third week of March we adjusted our recommended portfolio, lowering our equity allocation to 65% from a prior 70%. We consider 65% a "normal" weighting. Secondly, we concluded technology was getting more than enough respect, and that the tech and telecom portion of the portfolio should be underweight relative to the S&P 500. Technology by itself had quadrupled as a percentage of the S&P 500, and it wasn't going to quadruple again.
Q: What's next for tech and telecom stocks?
A: Fundamentally, the technology sector is in very good shape. U.S. companies are still at the leading edge, and we expect to see enormous penetration into non-U.S. markets. There's a great deal of good news coming from these companies in terms of both products and earnings. From a stock standpoint, however, it's a very mixed bag. There is going to be significant consolidation within the industry. We're not negative on technology, not at all. It's still 35% of our model portfolio. But in the case of many poorer-quality companies, investors had put too much emphasis on share-price momentum, rather than earnings momentum and cash-flow generation.
Q: Which stocks will lead the market in this year's second half?
A: Our view is controversial: financial services. Financial stocks have been pummeled in recent months for a variety of reasons, chiefly concerns about higher interest rates. These concerns are largely reflected in the stocks, many of which now trade at very low price/earnings multiples. Also, there has been renewed focus on bad lending practices after one regional bank [Wachovia] recently issued an earnings warning. On average, though, lendingquality standards have gotten tougher since the autumn of 1998. We also view recent delinquencies and defaults in the corporate bond market largely as company-specific, not economy-related events.
Q: Financial services is a broad category. Which stocks do you like most?
A:Citigroup and Wells Fargo are among our favorites. Both are well managed and have good long-term growth prospects. Both also have very good market share. Citigroup is one of the largest financialservices companies in the U.S., and it's multinational in scope. The company has become increasingly effective in crossselling its multiple product lines to a large client base. As a result, the company has a diverse earnings stream, and results have been terrific. Return on equity exceeds 20%. Earnings are growing at a long-term rate of 15%. Yet Citi is trading at a discount to the market because its group is out of favor. At a current price of about 64 it sells for 18 times this year's estimated earnings of $3.60 a share, and 16-17 times next year's estimate of $3.85.
Q: What's to like about Wells Fargo?
A: Much like Citigroup, the new Wells is the product of an effective merger. The old Wells Fargo was a leader in online banking, ATMs and other forms of high-tech distribution. When you couple that with the full-service nature of Norwest, you have a superregional with a commanding market share. The company's got a 16%-17% ROE, and long-term earnings are growing by 15%, as with Citi. This year Wells will earn around $2.56, and next year we're expecting $2.90. Also, the bank has a joint venture with HSBC, which gives it greater reach.
Progress Report
Q: To what degree are investors' rate fears justified?
A: We think the Federal Reserve will raise rates one more time if the situation warrants. Most economists agree that we're going to know a lot more about the state of the economy toward the end of the summer. If I were a member of the Fed I would certainly want to wait until I had more data and could pull together the pieces of the jigsaw puzzle. And if our 2000 earnings forecast is correct-namely, that there is a notable deceleration in earnings growth under way-the Fed might decide it doesn't have very much more to do this summer.
Q: How about one more pick, Abby?
A: Merck, which I mentioned in January, previously was a well-loved stock that now is plagued by a variety of issues, including patent expirations and concerns about the changing health-care landscape. While we recognize some products will be coming off patent, we also see a lot of strength in some newer products, such as Fosamax, for osteoporosis; Cozaar, for high blood pressure, and Singulair, for asthma. Merck continues to have one of the strongest research programs in the pharmaceuticals business, which attests to the fact that these are very innovative and creative people. The company will earn about $2.80 a share this year, and $3.10 in 2001. Most people would view Merck and Citigroup as high-quality companies, although their P/Es are not particularly stellar right now. In an environment in which the economy is doing okay, but isn't going gangbusters, these are the kinds of companies you want to look at.
Q: Thanks a bunch.
Barton Biggs
Barron's: Barton, you were right as rain in January about the trouble awaiting tech stocks. Is it over?
Biggs: Not entirely. The momentum became so excessive that the bubble burst in the really speculative parts of Techland, particularly in the dot.coms. A lot of the damage is permanent. Of course, out of all this there will be 10 great dot.com companies that will prove wonderful long-term investments. But thousands were created and most are going to fail. As for the rest of Nasdaq, the really good Internet infrastructure and wireless-telecom stocks got nicked. But they didn't get taken apart. There still is a very significant institutional bubble in those areas.
Q: How much longer can it endure?
A: We're going to see the pricking of that bubble later this year, but just when is impossible to forecast. The Ciscos, the Nokias, the Nortels are absolutely marvelous companies. But at 80-120 times earnings, their multiples are too marvelous.
Q: How will the rest of the year play out for the U.S. stock market and economy?
A: The good inflation news we had three weeks ago, and the indications of a weakening economy that triggered the market's latest surge, are false signals. By late summer there will be more signs that inflation is beginning to accelerate, particularly in wages. Also, the economy, though it has slowed, still will be growing at a 3%-4% real rate, and that's too fast. So the Fed will have to take more action and possibly raise rates by another 100 basis points [one percentage point]. The stock market has discounted a soft landing. It may be that we get one, but we don't have it yet.
Q: Does the rest of the world look better from an investment standpoint?
A: Europe is a couple of years behind us in the economic cycle. That means the European economy is accelerating from a low base, rather than decelerating the way ours is. Also, there are real signs that the euro is starting to appreciate against the dollar. So the European markets are going to have the currency wind at their back.
At the same time, I continue to feel good about Japan. It's had its ups and downs, but the Japanese economy looks reasonably healthy, and earnings have been very strong. In the first quarter they were up 40% on average. Corporate restructuring and rationalization continues. Meanwhile, Japanese tech stocks have been hit much harder than tech stocks elsewhere in the world. If I were going to buy tech I would buy it in Japan.
Q: When the day of reckoning comes for the blue-chip techs you mentioned, however, won't Japan's technology stocks get hammered anew?
A: Sure, a big selloff here will affect Japanese tech stocks, but I don't know when it's going to happen. Until then, I would expect Japanese techs, particularly in the wireless and telecom areas, to outperform Nasdaq.
Q: Have you any specific stock recommendations?
A: The single most attractive group right now is energy. Exxon Mobil, Royal Dutch and BP Amoco are very good plays for big money. In the U.S., natural-gas stocks such as Apache, Anadarko and Burlington Resources also look good.
Q: So you're betting that crude prices will stay high?
A: Oil prices are going to stay where they are, around $30 a barrel. But the oil stocks have discounted $20 crude. The earnings surprises are going to be on the upside. The price of natural gas is going up a lot more. We have a real gas shortage in this country, so these companies are looking at really big earnings gains.
Q: Your longstanding REIT recommendation has finally turned out very well. What's the outlook for REITs now?
A: The stocks still look good, but not as good as they did six months ago. REITs and utilities remain a haven of value in the U.S. market, however.
Q: Is value investing, in general, on the cusp of a comeback, particularly now that so many prominent value investors have thrown in the towel?
A: Absolutely. I think we're just in the beginning stages of what will be a major rotation to value from growth in terms of market leadership. The shift has already begun. That's what the decline in the Nasdaq and the rise in the Dow are all about.
Q: Care to mention any European or Japanese picks?
A: European drug companies such as Novartis and Roche still look pretty attractive. We also like some European financial-services companies such as AXA, the French insurer, and cyclicals such as UPM-Kymmene, the Finnish paper company. In Japan I liked Nomura six months ago, and I still like it. In general, financialservices companies around the world are going to be good investments.
Q: Thank you, Barton.
Meryl Buchanan
Barron's: You must be enjoying this market, Meryl.
Buchanan: The markets overall are flat to down this year, but there are many high-quality names out there. I'm talking about very, very good business franchises trading at very, very low price/earnings multiples-the sort of P/Es I saw back in 1985 and '86. It seems a lot of money exited the market when the Nasdaq corrected, and that created additional opportunity in value stocks. In the past month or two, though, several stocks we own have moved up quite a bit.
Q: You're not complaining, are you?
A: No. In other parts of the market I think there's been a big shakeout. A lot of people have gone back to look for jobs after unsuccessful attempts at day-trading. Alan Greenspan did what he wanted to do: pop the Nasdaq bubble and get rid of some of the wealth effect.
Q: In that case, can the Fed take a breather?
A: Don't ask me, ask Abby. I just look at stocks. I've got three to talk about, starting with MetLife, the largest life-insurance company in the U.S., with a 9.3% market share. The stock came public in early April at 14 1/4 , at the very bottom of the insurance market. It now trades near 20. MetLife is still very cheap. It's a very, very good company on its way to becoming a great company.
Q: Why is that?
A: Approximately half its business is individual life insurance. The other half is institutional. It's the premier provider of life, dental and disability insurance to large U.S. corporations. This is the business that really attracted us. It is not aggressively bid out because it's so expensive for companies to switch insurance providers. There are also tremendous barriers to entry.
Q: What do Met's earnings look like?
A: Earnings are growing by 15%-20% a year. Met could earn $2 a share this year and $2.75 in 2002. Book value is around $19. Having been de-mutualized, the company is transforming its culture and its financial objectives. It's cutting head count, redeploying excess capital and implementing incentive compensation. The management team, led by Robert Benmosche, is very smart, and its game plan is to achieve an AIG-like multiple of 20-30 times earnings. If management really executes, Met could be a $75-$100 stock in five years. Another money manager told me MetLife reminds him of American Express back when Harvey Golub took over, and I agree.
Q: What's your second pick?
A: It's a mid-cap -- Edwards LifeSciences. The symbol is EW and there are 58 million shares outstanding. The stock's trading around 18 1/2 . Edwards was spun out of Baxter International in March. Its products and services treat late-stage cardiovascular disease. Tissue heart valves and valve-repair products account for 35% of sales but generate 50%-80% of profits. There are two types of heart valves -- mechanical and tissue, and each has advantages and disadvantages. Mechanical valves last forever but require the patient to maintain a lifelong regimen of hard-toregulate blood-thinning medications. Tissue valves, which are made of the lining of a cow's heart, begin to fail after 17 or 20 years but the lifestyle advantages are considerable.
Q: Does Edwards dominate the market?
A: The Carpentier-Edwards is the most widely prescribed tissue heart valve. Sales are growing by 10% a year, and there are natural drivers to growth. People are living longer and are healthier in their old age, making them likelier candidates for open-heart surgery. Also, as the valve's durability record grows, it becomes appropriate for younger patients. Heart valves can go in two positions in the heart. The Carpentier-Edwards is approved for the aortic position, which accounts for about 60% of all valve replacements. This year the valve should be approved for the mitral position, which could generate an upswing in the company's growth curve. Edwards also expects to get approval from the FDA for a stentless valve, which would be Edwards' first ever offered in the U.S.
Q: What will Edwards earn this year?
A: The company has $900 million in sales, and will earn about 86 cents a share. But cash earnings are $1.66, reflecting a lot of goodwill amortization, most of which stems from Baxter's 1985 acquisition of American Hospital Supply. Next year reported earnings will be about $1.03, and cash EPS about $1.83. If Edwards trades at 15 times 2001 cash ear |
