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Date: 24 April 2013

Analyst: Garrett Lachney

CIF Sector Recommendation Report (Spring 2013)

Sector: Healthcare Review Period: 04/05 - 04/18

Section (A) Sector Performance Review

Copy/paste “Sector Review Spreadsheet” (the entire spreadsheet) here

Review sector performance relative to the broad market (SP500) and explain why; Include a

two-week (for the two-week window reviewed) price chart of the SPDR sector ETF and SP500

(on the same chart)

The healthcare sector was able to push higher than the S&P as the broad S&P was dragged

down in its worst week of 2013, due to the commodity crunch and China’s disappointing

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growth numbers. With news in the beginning of April that Medicare and Medicaid

reimbursements will be increased, large insurance giants such as Humana and

UnitedHealth edged the XLV to outperform the S&P over the two-week review period.

http://www.nasdaq.com/article/medicare-news-sends-healthcare-stocks-higher-cm232751

Highlight noteworthy headline news from the sector (company-, industry-, or sector- level

news)

Mark Hayes, a lobbyist for Humana, is currently under investigation for links to insider

trading. Height Securities supposedly traded on insider information that Hayes had

allegedly disclosed in an email. Height Securities is a client of Hayes’, while Hayes has also

advised Rep. Charles Grassley on health policy in Congress. Furthermore, he has been

involved with the CMS in the past. Height Securities may have unfairly profited on

investments made in healthcare companies directly before the announcement of increased

governmental reimbursements.

http://online.wsj.com/article/SB10001424127887324345804578427102504475618.html

UnitedHealth announced its Q1 revenue and earnings. The stock fell 3.8% even with

slightly better-than-expected revenue results, due to a pessimistic outlook for the rest of

2013. This dragged the XLV down 1.2% with it.

http://www.zacks.com/stock/news/97429/stock-market-news-for-april-19-2013

The federal government is making a push to accelerate and begin implementing Stage 2 of

Meaningful Use. Meaningful Use is a government program intended to “…promote the

spread of electronic health records to improve health care in the United States.” The

“stages” refer to the various requirements that are expected to be met by the subsequent

hospitals, patient centers, clinics, and health IT firms regarding the electronic healthcare

records.

http://www.informationweek.com/healthcare/interoperability/healthcare-directed-exchange-

gets-big-go/240152932

Highlight the biggest (+) and the biggest (-) movers from the sector holdings during the review

period. Are there notable reasons why the stocks had big moves (e.g., earnings surprises, etc)?

BIIB (Biogen) +5.87% - Biogen’s CEO George Scangos has recently been praised for his

driven attitude and relentless perseverance in pursuing new drugs. With a strong pipeline

of drugs, including Roche, a cancer drug with sales recently forecasted to $7 billion out to

2015; and Tecfidera, the new multiple sclerosis drug that made it to market in less than a

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week of being approved, Biogen is now steering a high-return biotech company. In

addition, competitor Teva Pharmaceuticals is facing the loss of its own multiple-sclerosis

drug patent by 2015. Biogen is well-positioned all around.

http://www.fool.com/investing/general/2013/04/22/this-is-what-the-perfect-biotech-

would-look-like.aspx

ALXN (Alexion Pharmaceuticals) -2.32% - Concerns about Alexion’s manufacturing

facility in Rhode Island (specifically, addressing supply-chain risk and back-end loaded

costs) and announcements of negative reimbursements by the UK’s government in

healthcare pushed Alexion shares down. Credited with the most expensive drug in the

world, Soliris, this is not good news. The company has seen an overall sluggish 2013.

http://seekingalpha.com/article/1323591-alexion-s-manufacturing-concerns-to-abate-and-

commercial-expansion-to-drive-shares-higher

Highlight the largest two holdings from the sector and note any headline news on the

companies

Johnson & Johnson (JNJ) and Pfizer (PFE) are the largest holdings in the healthcare sector.

JNJ reported earnings on April 16 for Q1 2013. JNJ beat Wall Street estimates and

helped send the XLV to positive heights. EPS figures were beat by about 4 cents.

Sales were beat by around $80 million.

On April 18, JNJ announced the sale of Elan Corporation, held by its subsidiary

Janssen. The after-tax gain will be approximately $213 million, which JNJ expects to

reinvest in its business.

On April 10, Pfizer’s new experimental cancer drug was granted a “breakthrough”

designation, sending shares up 2.6% on the day. The medicine is called Palbociclib

and is expected to generate sales of around $5 billion or more if approved by the

FDA.

Pfizer is expected to report earnings for Q1 2013 on April 30th.

http://www.foxbusiness.com/news/2013/04/16/johnson-johnson-results-beat-wall-street-

estimates/

http://www.jnj.com/connect/news/all/johnson-johnson-announces-sale-of-elan-american-

depositary-shares-to-elan

http://news.yahoo.com/pfizer-breast-cancer-drug-wins-breakthrough-status-shares-

162330753--finance.html

Comment on short-term outlook of the sector (including noteworthy upcoming events)

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The short-term outlook in the healthcare sector is relatively bullish. However, this industry

is perhaps one of the most volatile right now. This is not due to its nature, but rather the

effects of government transformation in healthcare spending and reimbursement. Changes

in government policy and the Affordable Care Act can, at almost the drop of the hat, send

the whole sector skyrocketing or through the floor.

With that being said, I am cautiously optimistic about the near-term success of the XLV.

Section (B) Sector Holding Updates

Company #1: Laboratory Corporation of America, Holdings. (LH)

Date Recommended: 02/13/2013

Date Re-evaluated: 04/24/2013

Company Update

Briefly update what happened to the company the last two weeks (up through your re-

evaluation date). This should include noteworthy headline news on the stock (e.g., earnings

announcement, management’s comments on company outlook and/or strategic changes,

changes in analyst recommendations or estimate revisions, new product launch, management

turnover, legal or regulatory issues, merger/acquisition announcement, restructure

announcement, news from major competitors, etc.)

The most important piece of information pertaining to LabCorp is its Q1 earnings release

on April 18. LabCorp missed earnings estimates, though the stock price was fairly un-

impacted as management advised stakeholders that 2013 looks brighter than previously

expected with higher volume of tests and the CMS reimbursement announcement. The

disappointing news was attributed to higher costs in its testing facilities. However, testing

volume and revenues were up from the previous quarter, though down year-over-year.

http://www.marketwatch.com/story/labcorp-profit-falls-89-as-costs-rise-2013-04-19

In the beginning of April, LabCorp also announced that it had become the preferred

provider for Global Central Laboratory Services by Bristol-Meyers Squibb.

http://article.wn.com/view/2013/04/01/LabCorp_Clinical_Trials_Selected_as_a_Preferred_Pro

vider_for_m/

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Relative Performance

Review relative performance of each sector holding, over the two-week review period, both

relative to the SP500 and to the respective SPDR sector ETF. Relate your comments on relative

performance to the updates discussed above

LabCorp outperformed the S&P as well as the sector ETF over the review period (which

starts in April). The news discussed above is no doubt the reason for this. Becoming a

preferred provider as well as a positive announcement regarding CMS reimbursements

pushed LH above the performance of the XLV as well as the S&P.

Price Charts

Insert a price chart of the stock for the most recent three months. You should include on the

same chart (1) the SPDR sector ETF, (2) and the SP500 prices for the same period

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Insert a price chart of the stock for the most recent one year. You should include on the same

chart (1) the SPDR sector ETF, (2) and the SP500 prices for the same period

Valuations Analysis

Original Analysis

Copy/paste P/E (TTM), P/S (TTM), P/B (MRQ), P/CF (TTM) of the stock, the industry, and the

sector from “ratio analysis” section of the original stock recommendation report (from CIF

website, “reports” tab)

Ratio Analysis Company Industry Sector

P/E (TTM) 14.80 16.67 25.52

P/S (TTM) 1.51 1.31 5.93

P/B (MRQ) 3.13 1.14 3.24

P/CF (TTM) 10.22 9.61 16.83

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Re-evaluation Analysis

Copy/paste the requested valuation multiples from http://www.reuters.com/ , “Financials”

tab

Ratio Analysis Company Industry Sector

P/E (TTM) 15.88 16.16 28.39

P/S (TTM) 1.53 1.53 22.75

P/B (MRQ) 3.15 1.02 2.33

P/CF (TTM) 11.47 7.22 16.74

Briefly discuss the changes

The fluctuations in valuation ratios have changed little from the last time this stock has

been reviewed. The stock was never a “cheap” buy in terms of financial ratios, however, so

it is not surprising that the ratios are still not stellar. However, the CIF did not buy into LH

with the intention of finding a intrinsically undervalued stock, but rather, the long-term

prospect of future-growth with healthcare reform.

Historical Surprises

Original Analysis

Copy/paste “Historical Surprises” Table from the original stock recommendation report (from

CIF website, “reports” tab)

Estimates vs Actual Estimate Actual Difference Surprise %

SALES (in millions)

Quarter Ending Sep-12 1,438.52 1,419.40 19.12 -1.33

Quarter Ending Jun-12 1,440.10 1,423.40 16.70 -1.16

Quarter Ending Mar-12 1,403.39 1,423.30 19.91 1.42

Quarter Ending Dec-11 1,377.74 1,366.10 11.64 -0.84

Quarter Ending Sep-11 1,407.39 1,404.50 2.89 -0.21

Earnings (per share)

Quarter Ending Sep-12 1.74 1.76 0.02 0.95

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Quarter Ending Jun-12 1.77 1.77 0.00 0.00

Quarter Ending Mar-12 1.67 1.74 0.07 3.95

Quarter Ending Dec-11 1.53 1.56 0.03 2.23

Quarter Ending Sep-11 1.60 1.61 0.01 0.85

Re-evaluation Analysis

Copy/Paste the “Historical Surprises” Table from http://www.reuters.com/ , “Analysts” tab

(include both revenue and earnings; make note that revenues might be in “millions”)

Briefly discuss the changes

Estimates vs Actual Estimate Actual Difference Surprise %

SALES (in millions)

Quarter Ending Mar-13 1,447.55 1,440.90 6.65 -0.46

Quarter Ending Dec-12 1,393.37 1,405.30 11.93 0.86

Quarter Ending Sep-12 1,438.52 1,419.40 19.12 -1.33

Quarter Ending Jun-12 1,440.10 1,423.40 16.70 -1.16

Quarter Ending Mar-12 1,403.39 1,423.30 19.91 1.42

Earnings (per share)

Quarter Ending Mar-13 1.76 1.74 -0.02 -1.27

Quarter Ending Dec-12 1.62 1.63 0.01 0.77

Quarter Ending Sep-12 1.74 1.76 0.02 0.95

Quarter Ending Jun-12 1.77 1.77 0.00 0.25

Quarter Ending Mar-12 1.67 1.74 0.07 3.95

The changes from the previous table to the more updated one is the two quarters of

earnings that had not been announced when the stock was recommended. The results were

mixed, but nothing extremely tide-changing. The causes of the most recent dip in earnings

is discussed above.

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Consensus Estimates

Original Analysis

Copy/paste “Consensus Estimates Analysis” Table from the original stock recommendation

report (from CIF website, “reports” tab)

Current

1 Week Ago

1 Month Ago

2 Month Ago

1 Year Ago

SALES (in millions)

Quarter Ending Mar-13 1,448.33 1,450.89 1,450.89 1,450.89 1,476.67

Quarter Ending Jun-13 1,453.98 1,456.18 1,456.18 1,456.18 1,516.07

Year Ending Dec-13 5,765.71 5,772.39 5,776.53 5,777.92 5,987.13

Earnings (per share)

Quarter Ending Mar-13 1.80 1.81 1.80 1.80 1.81

Quarter Ending Jun-13 1.84 1.85 1.84 1.84 1.93

Quarter Ending Dec-13 7.26 7.28 7.29 7.29 7.66

Re-Evaluation Analysis

Copy/paste the “Consensus Estimates Analysis” Table from http://www.reuters.com/,

“Analysts” tab (include both revenue and earnings) # of Estimates Mean High Low 1 Year

Ago

SALES (in millions)

Quarter Ending Jun-13 21 1,458.72 1,476.50 1,444.30 1,486.61

Quarter Ending Sep-13 21 1,451.82 1,470.40 1,425.01 1,490.06

Year Ending Dec-13 22 5,788.22 5,845.50 5,726.26 5,915.85

Year Ending Dec-14 20 5,932.40 6,022.30 5,800.26 6,159.11

Earnings (per share)

Quarter Ending Jun-13 16 1.80 1.84 1.74 1.94

Quarter Ending Sep-13 16 1.81 1.88 1.74 1.95

Year Ending Dec-13 15 7.08 7.17 6.93 7.64

Year Ending Dec-14 20 7.63 7.98 7.06 8.43

LT Growth Rate (%) 10 10.15 14.00 6.30 12.25

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Briefly discuss the changes

The changes in analyst estimates concerning earnings from the time the stock was

recommended has been modestly increased. This is due to the increase in CMS

reimbursements announcement by the federal government. Sales and EPS have all been

adjusted upward slightly across the board.

Estimate Revision Analysis

Original Analysis

Copy/paste “Estimates Revision Summary” Table from the original stock recommendation

report (from CIF website, “reports” tab)

Last Week Last 4 Weeks

Number Of Revisions: Up Down Up Down

Revenue

Quarter Ending Mar-13 0 0 0 0

Quarter Ending Jun-13 0 0 0 0

Year Ending Dec-13 0 1 0 5

Earnings

Quarter Ending Mar-13 0 1 0 1

Quarter Ending Jun-13 0 1 0 1

Year Ending Dec-13 0 1 0 2

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Re-Evaluation Analysis

Copy/paste the “Estimates Revisions Summary” Table from http://www.reuters.com/,

“Analysts” tab (include both revenue and earnings) Last Week Last 4 Weeks

Number Of Revisions: Up Down Up Down

Revenue

Quarter Ending Jun-13 5 1 5 1

Quarter Ending Sep-13 4 2 4 2

Year Ending Dec-13 5 4 5 5

Year Ending Dec-14 5 2 5 3

Earnings

Quarter Ending Jun-13 4 1 4 1

Quarter Ending Sep-13 2 1 2 1

Year Ending Dec-13 1 3 1 3

Year Ending Dec-14 3 3 3 4

Briefly discuss the changes

There has been a significant amount of activity surrounding LabCorp’s analysts. Many have

revised their estimates recently. The majority have revised estimates upward, both within

the last four weeks as well as the last week. However, there is still a significant amount of

down revisions. These most likely have to do with the mixed earnings results.

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Analysts’ Recommendations

Original Analysis

Copy/paste “Analyst Recommendations and Revisions” Table from the original stock

recommendation report (from CIF website, “reports” tab)

1-5 Linear Scale Current 1 Month Ago

2 Month Ago

3 Month Ago

(1) BUY 1 1 1 1

(2) OUTPERFORM 2 2 3 3

(3) HOLD 17 16 16 17

(4) UNDERPERFORM 3 3 3 2

(5) SELL 0 0 0 0

No Opinion 0 0 0 0

Mean Rating 2.96 2.95 2.91 2.87

Re-Evaluation Analysis

Copy/paste the “Analyst Recommendations and Revisions” Table from

http://www.reuters.com/, “Analysts” tab (include both revenue and earnings) 1-5 Linear Scale Current 1 Month

Ago 2 Month

Ago 3 Month

Ago

(1) BUY 1 1 1 1

(2) OUTPERFORM 2 2 2 2

(3) HOLD 18 16 16 16

(4) UNDERPERFORM 2 3 3 3

(5) SELL 0 0 0 0

No Opinion 0 0 0 0

Mean Rating 2.91 2.95 2.95 2.95

Briefly discuss the changes

The revision table has remained almost completely unchanged excluding one analyst who

has changed an opinion from “Underperform” to “Hold”.

Company #2: Express Scripts (ESRX)

Repeat the above for Company #2, and all other sector holdings in CIF.

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Date Recommended: 02/27/2013

Date Re-evaluated: 04/24/2013

Company Update

On April 9, TRC Capital solicited a “mini-tender” offer to acquire just less than 5% of

Express Script’s shares outstanding at a price less than its current market value (at the

time). TRC offered $55.75 per share. Express Scripts urged shareholders to reject the offer,

as these mini-tender offers are usually unsolicited attempts at acquiring a significant

amount of company influence while simultaneously avoiding many SEC regulations that

come with a 5% or greater stake in a company. The stock seemed to fall in the following

days; whether this was a consequence of the TRC offer or not, I am not sure.

http://phx.corporate-ir.net/phoenix.zhtml?c=69641&p=irol-

newsArticle&ID=1804889&highlight=

ESRX also announced its plan to release first quarter 2013 earnings Monday, April 29 after

the market-close.

http://www.wave3.com/story/22044972/express-scripts-holding-company-announces-first-

quarter-2013-earnings-conference-call

Relative Performance

Express Scripts did not perform very well over the review period. It was outperformed by

both the S&P and the XLV. The largest dip in the last half of the chart coincides with around

the time that TRC Capital made the 5% bid, as well as an announcement of a 50% increase

in pay to ESRX’s CEO. It is interesting the stock should fall this much regarding this news,

however. Zack’s upgraded ESRX to a “buy” the previous day.

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Price Charts

3 months

1 year

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Valuations Analysis

Original

Ratio Analysis Company Industry Sector

P/E (TTM) 21.97 19.02 27.42

P/S (TTM) 0.49 0.41 3.12

P/B (MRQ) 1.95 1.99 2.57

P/CF (TTM) 10.79 9.95 19.10

Re-Valuation Analysis

Ratio Analysis Company Industry Sector

P/E (TTM) 33.21 20.95 29.05

P/S (TTM) 0.48 3.91 3.57

P/B (MRQ) 1.94 1.99 2.71

P/CF (TTM) 9.65 9.50 20.08

The valuation multiples of ESRX has, like LabCorp, changed very little. Earnings seems to be

rather expensive, but that is somewhat offset by cheaper sales valuations. The stock price

has had very small fluctuations since it has been added to the CIF, so interpreting the small

differences too much between these two chart multiples would probably be over-

speculation.

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Historical Surprises

Original

Re-Evaluation

Estimates vs Actual Estimate Actual Difference Surprise %

SALES (in millions)

Quarter Ending Dec-12 27,240.10 27,410.70 170.56 0.63

Quarter Ending Sep-12 27,465.00 26,999.40 -465.57 -1.70

Quarter Ending Jun-12 26,540.70 27,692.50 1,151.84 4.34

Quarter Ending Mar-12 11,484.80 12,132.60 647.79 5.64

Quarter Ending Dec-11 11,604.60 12,101.40 496.79 4.28

Earnings (per share)

Quarter Ending Dec-12 1.04 1.05 0.01 0.59

Quarter Ending Sep-12 0.99 1.02 0.03 2.54

Quarter Ending Jun-12 0.82 0.88 0.06 7.20

Quarter Ending Mar-12 0.77 0.73 -0.04 -4.82

Quarter Ending Dec-11 0.85 0.82 -0.03 -3.44

These two charts are the same. No new earnings announcements have been made

regarding ESRX. Express Scripts will announce Q1 earnings next week.

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Consensus Estimates

Original

Re-Evaluation

# of Estimates Mean High Low 1 Year Ago

SALES (in millions)

Quarter Ending Jun-13 16 25,337.20 26,235.00 22,387.00 24,215.00

Quarter Ending Sep-13 16 24,965.50 26,417.00 24,150.80 24,323.30

Year Ending Dec-13 18 100,855.00 104,287.00 93,517.00 98,311.10

Year Ending Dec-14 17 102,321.00 110,673.00 96,021.00 101,506.00

Earnings (per share)

Quarter Ending Jun-13 22 1.04 1.09 0.99 1.10

Quarter Ending Sep-13 22 1.10 1.16 1.06 1.16

Year Ending Dec-13 23 4.26 4.34 4.21 4.51

Year Ending Dec-14 22 4.91 5.15 4.70 5.41

LT Growth Rate (%) 8 18.00 24.00 13.00 18.13

Estimates have changed slightly in the sales and earnings figures, as well. At first, the

inconsistencies between the estimates in different fiscal quarters and years seems to make

little sense. However, the number of analysts reviewing these numbers increased slightly in

most categories. Therefore, these slight differences that would otherwise seem strange are

more than likely due to the “sample size” of analysts increasing, and not a fundamental

change of analyst expectations or opinions.

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Estimate Revision Analysis

Original -

Re-Evaluation

Last Week Last 4 Weeks

Number Of Revisions: Up Down Up Down

Revenue

Quarter Ending Jun-13 0 1 0 1

Quarter Ending Sep-13 0 1 0 1

Year Ending Dec-13 0 1 0 1

Year Ending Dec-14 1 1 1 1

Earnings

Quarter Ending Jun-13 0 1 1 2

Quarter Ending Sep-13 0 0 1 1

Year Ending Dec-13 0 0 0 1

Year Ending Dec-14 1 0 1 1

Estimates revisions have significantly slowed down since this stock has been recommended. By

a small margin, there has been more downward revisions than upward. This probably has to do

with the stagnant growth of ESRX in recent weeks and stiffer competition. However, the

revisions summaries have significantly slowed, so we can infer most have stayed the same.

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Analysts’ Recommendations

Original -

Re-Evaluation

1-5 Linear Scale Current 1 Month Ago

2 Month Ago

3 Month Ago

(1) BUY 7 7 7 7

(2) OUTPERFORM 11 11 12 12

(3) HOLD 4 4 3 3

(4) UNDERPERFORM 0 0 0 0

(5) SELL 0 0 0 0

No Opinion 0 0 0 0

Mean Rating 1.86 1.86 1.82 1.82

Like most of the other revisions tables, recommendations have stayed near unchanged. It

seems that one analyst had moved from “Outperform” to “Hold”, but this movement was

captured in the original analysis.

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Section (C) Sector Recommendations

You will make recommendations on whether CIF should continue to own its sector holdings

Provide your views on the sector. Are you bullish, bearish or neutral on the sector, and why?

Discuss whether you recommend CIF to (1) stay put with its current sector holdings, or (2) sell

out of the sector, and why?

I recommend no changes in our current holdings in the Healthcare sector. I believe we are

positioned well with the XLV and our current holdings. Although ESRX has been

underperforming the past weeks, the company still boasts strong cash flows, a well-

positioned business, relatively inexpensive valuations, and strong investor and analyst

sentiment.

Being that I was the analyst that recommended LabCorp, I still take the view that LH will

outperform the XLV on a more long-term basis, as I see LabCorp well-positioned in both its

industry and in terms of healthcare reform. The CIF has already marginally benefitted from

LabCorp’s performance in response to increased reimbursement from the CMS. I would

expect more of this in the future.

As far as the XLV goes, it has been one of the strongest sector performers of 2013. At least

for the near future, I believe hospitals, large insurers, and successful biotech firms will

continue to push the XLV higher.

Section (D) Sector Holding Recommendations

Based on your analysis, are there stocks CIF currently owns from your sector you would

recommend to:

1. Sell and why? - No

2. Adjust “target price” and why? If you recommend an adjustment, you must suggest a new

“target price” - No

3. Adjust “stop-loss price” and why? If you recommend an adjustment, you must suggest a

new “stop-loss price” - No

Provide your recommendations in the following table

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Company Name

Ticker

Symbol

Date

Recommended

Date Re-evaluated

Recommendation

(Explain Why)

Sell

Adjust “Target Price”

Adjust “Stop-

loss Price”

Laboratory Corporation of America, Holdings

LH 2/13 4/24 No No No

Express Scripts, Holdings

ESRX 2/27 4/24 No No No