Let’s take a look at some of the top stories from February 13. Concerns over industrial production in Europe may present challenges to economic growth, generic pharma companies face material competition, and Johnson & Johnson gets into the robotics market.
By Kris Rosemann
Equities continue to benefit from optimism surrounding US-China trade talks, as President Trump recently stated a willingness to let the March 2 trade conflict resolution deadline slide, but industrial production in Europe, which fell at the greatest sequential rate since 2009 in December 2018, has caught the eye of many a market observer. Demand softness from China (FXI) is playing a role, and the usual suspects such as Greece, Italy (EWI), and uncertainty over Brexit (EWU) continue to weigh on expectations as well. However, weak consumption in France (EWQ) and a slowdown in German (EWG) manufacturing may point to greater issues for the EU as the two countries account for roughly half of the European economy. Alarm bells are far from ringing, but the potential for euro-area GDP expansion in 2019 to slow materially is present. Current European Commission GDP growth forecasts for the year currently sit at 1.3%.
Nevertheless, commercial real estate and investment services provider CBRE Group (CBRE) is not anticipating moderately slower economic growth to have a meaningful impact on its business, as international capital flows remain solid despite global trade tensions. President and CEO Bob Sulentic stated,
“The global economy is expected to grow at a healthy, but moderately slower pace than in recent years. Cross-border capital flows are solid, notwithstanding the ongoing trade and geopolitical tensions. While we remain mindful of potential macro challenges and the length of the current economic expansion, this continues to be a supportive environment for our business.”
Though we are not reading too far into the quarterly results of any one company, the outlook suggests that pockets of strength exist as all three of CBRE’s regions (Americas, EMEA, and Asia-Pacific) reported double-digit revenue growth in regional services businesses and leasing.
Generic drug producers faced relative weakness early in the February 13 trading session after Teva Pharmaceutical’s (TEVA) guidance for 2019 disappointed. The company expects “similar challenges to those of 2018” to continue in the near term, and 2019 is anticipated as being the trough for its business. Ongoing erosion of key drug Copaxone will continue in the US and Europe, and increasing competition is expected to help drive revenues down ~9% on a year-over-year basis in 2019 at the midpoint of guidance. Earlier this year, Teva issued expectations for stable prices in 2019 after notable declines in 2018, but concerns over a price fixing probe continue to provide an overhang for the group.
Simulated newsletter portfolio idea Johnson & Johnson (JNJ) has agreed to acquire Auris Health, a privately-held developer of robotic technologies, for ~3.4 billion in cash and additional contingent payments of up to $2.35 billion. Auris’ focus on lung cancer, specifically via its Monarch Platform technology, is expected to be a notable addition to J&J’s Lung Cancer Initiative, but perhaps more importantly, the deal will accelerate its entrance into robotics and open it to expansion into other interventional applications. Management believes expanding its efforts in digital surgery will be vital to the long-term success of its ‘Medical Devices’ segment, which it is targeting to achieve above market growth in 2020 and beyond after an extended period of relative weakness. Our fair value estimate for Johnson & Johnson currently sits at $137 per share, and its Dividend Cushion ratio is a solid 2.3.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.