Submitted by David Gould as part of our contributors program.
While the fundamentals of direct selling and healthcare firms remain strong, they are still heavily discounted above a rational rate. Herbalife (HLF), for example, is down 37.8% from its 52-week high, despite delivering stellar quarterly results and generating substantial free cash flow relative to its size. And while, yes, Pfizer (PFE) and Abbott Labs (ABT) may be facing several patent cliffs, their forward PE multiples are approximately less than half of the S&P 500’s current PE multiple. An 8.3% per annum growth rate over the next half decade, 2.5% perpetual growth rate thereafter, and an 8% discount rate would suggest that Abbott’s price target is just north of $80, for example. Similar assumptions also reveal Pfizer to be substantially undervalued. On top of this, direct selling and healthcare firms are safe investments. From incentive-based production and solid free cash flow in the former to high dividend yields and low betas in the latter, risk/reward is highly compelling. It follows then that these two sectors are well positioned to generate strong returns as investor fatigue dissipates.
There are several reasons to be optimistic that this indeed will occur: demographic changes, accretive acquisitions, and strategic developments, among others. And perhaps nowhere will these returns be stronger than at companies that combine the best of both worlds: a nutritional distribution business and a wellness / healthcare line. Emergent Health Corp (EMGE.PK) is one such company.
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Emergent specifically targets the regenerative medicine niche market. In the US Department of Health’s seminal report “A Future for Regenerative Medicine”, the agency highlighted the sector’s positive secular trends:
“The majority of these projected costs [pertaining to healthcare representing a quarter of economy] stem from recurring treatments for diseases that arise from tissue failure commonly seen in the elderly. The baby boomer demographic… expects the best from healthcare and will have the greatest need for regenerative medicine”.
While demographical changes are certainly pointing in Emergent’s favor, so are the strategic developments and various takeover backdrops. On the takeover-side, many healthcare companies are eyeing biosimilars and biobetters in order to “resurrect” themselves from exclusivity losses, so to speak. These biological versions of existing and previously-approved drugs enable companies to gain quick immediate access to certain markets without all of the regulatory hurdles and inherent risk in typical product development. What this means for Emergent is that there will be less competitive pressure going against its own products as BioPharma increasingly saturates others.
From the strategy-side, Emergent is also delivering impressive momentum. Emergent’s JDI International member network has reportedly realized a monthly double-digit growth rate. Towards driving accelerating growth, management has launched a variety of products, including Vita-Stim Stem Cell Nutrition Concentrate, Infinity Anti Aging supplement, and Hungarest Diet & Energy Aid, among others.
Better yet, management has now stated that it sees first quarter sales generating high double-digit returns (or possibly doubling) year-over-year in 2012. In addition, the company’s current lead product is a unique patented and patent pending multi-vitamin, which adds stem cell nutrition to a class of nutritional products and is believed to be exclusive to its market. Finally, management is not resting on their laurels. They expect to release their newest AntiAging product, Infinuity Plus, later this quarter or early next quarter. This product is particularly attractive in light of how it is designed yet again for the baby boomer generation and thus will generate meaningful cross-selling opportunities.
In conclusion, Emergent not only has tailwinds from momentum and industry trends, but also, in my view, the sizable undervaluation that makes it an attractive investment. With innovation driving greater free cash flow and discount rates likely to normalize, it is likely that the value gap will soon be closed.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EMGE.PK, PFE, HLF, and ABT over the next 72 hours.
DISCLAIMER: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and management and cannot be guaranteed by us to be fully accurate. Always discuss investments with a licensed professional before making any financial decision. We are a consultant to Emergent and have been compensated ten thousand dollars for independent research.