Analysis: ABT AMGN DHR CVS

This morning we received some positive macroeconomic information in the form of MBA mortgage applications, which jumped 23.5% in the week ending January 4, 2019 thanks to a 10 bps decline in the 30-year fixed-rate to 4.74%, the lowest reading since April 2018. We view this to be an incremental positive for the housing market (and therefore broader macroeconomic backdrop) which has seen pressure resulting from the higher list prices being compounded by higher mortgage rates to the point that the associated monthly payments have pushed would be buyers out of the market. As members know, we believe housing (~10% of the economy) "punches above its weight" due to the impact positive home buying activity can have on the broader economy, the thinking being, home buyers will look to make additional expenditures as they invest in their new home, be it in the from of home upgrades or via the initiation of new service contracts such as broadband, streaming services, gas & electric or any other services associated with home.

We have also received a number of updates from analysts on the JP Morgan healthcare conference and while they are largely incremental, we want to highlight some updates for members:

Looking at Abbott (ABT) , inline with our own view, analysts at JP Morgan called out the FreeStyle Libre (Diabetes), Alinity (Diagnostics) and MitraClip (Structural Heart) as the key drivers of growth in 2019. Regarding FreeStyle Libre, it is worth noting that the company has already launched second iteration in Germany, equipped with alarms to alert users. On the Alinity front, we remind members that this is a diagnostics platform that has already seen strong trends and positive reviews in Europe, giving us confidence in the franchise as it makes its way to the U.S. later this year. On the MitraClip front, the analyst noted "MitraClip is coming off of a year of 20%+ global growth, and COAPT should represent a meaningful inflection point," as the study could result in an expanded label for the product come the middle of this year for use in functional mitral valve regurgitation (FMR) procedures, a factor that management has yet to include in their outlook, providing the potential for additional upside to current estimates.

Jumping over to Amgen (AMGN) , the analysts at JP Morgan called out that management was "really pleased with initial demand for Aimovig" adding that pent-up demand has resulted in adoption that exceeded their expectations. Additionally, speaking to the importance of first mover advantage, management noted that while patients may look to other solutions should they fail to see results with Aimovig, they have not seen those with positive results "shopping around," giving us increased conviction that the numbers associated with Aimovig will only continue to increase overtime as more people discover the life-changing drug. On the Repatha front, management again called out the 60% price cut while adding that "key opinion leaders" feel "liberated" by the decision as it makes the key drug accessible to ~80% of current Medicare patients. As for capital allocation, while management stated that their top priority is to invest in biotechnology, they also reiterated their shareholder friendly stance, noting that repurchase activity should remain higher versus pre-tax reform levels. As for M&A activity, while the company did not express a sense of urgency to do a large transformative deal, they did note optimism for smaller deals going forward thanks to the reduced valuation being seen for small/mid-cap companies. Lastly, for those who missed it, we would highly encouraging watching Jim's interview with Amgen CEO, Bob Bradway, here (full interview at the bottom of the page).

Moving on to Danaher (DHR) , as we noted in our prior alert, here, the company pre-announced its fourth-quarter 2018 earnings results with core sales growth expected to come in around 5%, above management's previous guidance and consensus expectation of about 4%, while adjusted earnings per share are expected to be at or near the high-end of the previously announced guidance, which was in the range of $1.25 to $1.28. Other noteworthy updates include managements outlook on China, where they expect to grow high-single to low-double digits in 4Q18 and 2019. From a higher, more global level, management noted that despite the ongoing macro uncertainty, they see no cause for concern and business fundamentals have so far not been impacted.

Lastly, we received incremental updates from CVS Health  (CVS) regarding management's plans following the Aetna acquisition (members can listen to the webcast and view the slide presentation, which lays several initiatives as well as headwinds and tailwinds, here, and while we are cognizant that shares are trading lower this morning, we believe this to be a "sell the news" move (given the lack of new updates) as investors await initial 2019 guidance when the company reports 4Q18 earnings on February 20th, rather than reflective of any negative updates or material change to the outlook. Perhaps most important to call out is that according to the analysts at JP Morgan, management did not appear concerned regarding the Tunney Act review by Judge Leon, stating that they view and run the company as a unified entity and are focused on the transformation going forward, adding that their ongoing review is not expected to impact synergy targets. On that note, we remind members that management is targeting over $750 million in synergies within the next two years. The one incremental negative (which we believe to be temporary as the company has plenty of room to deleverage) is that the company's interest expenses associated with the acquisition (~$3.1 billion) came in slightly above expectations, and while this could be causing some of the pressure, we do not believe it to be the main cause as the update was provided on the close presentation, before the keynote presentation began. The update has also caused marginal revisions to analyst estimates (for example, analysts at RBC trimmed their target to $99 from $100 in response). Bottom line, while the event perhaps didn't include the updates some may have hoped for (namely guidance), the presentation served to bolster our conviction that the transformation CVS is now going through is a game changer for the company longer-term. That said, we continue to believe that the more meaningful event/catalyst will come when the company reports earnings in February.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long ABT, AMGN, DHR, CVS.