At the London Value Investor Conference, famous value investor Michael Price pitched Hospira, Inc. (NYSE:HSP) as one of his favorite stocks. As of March, Price owned 400,000 Hospira shares. Hospira seems to be a popular stock among investment gurus including Brian Rogers, John Rogers, and Larry Robins. Let’s take a closer look to see whether or not we should invest in Hospira at its current trading price.
Business had been growing
Hospira, incorporated in 2003, is the developer and manufacturer of injectable drugs and infusion technologies, providing three main product lines including specialty injectable pharmaceuticals, medication management, and other pharmaceuticals such as nutritional products and contract manufacturing services. Hospira, Inc. (NYSE:HSP) generated nearly $2.35 billion, or 60% of the total revenue, from specialty injectable pharmaceuticals, while medication management contributed nearly $1 billion in sales in 2012.
Hospira had been a growing business from 2003-2010. Revenue increased from $2.6 billion in 2003 to $3.9 billion in 2010, while the net income was climbing from $260 million to $357 million in the same period. However, the operating results in 2011 and 2012 were quite sluggish. The net loss of $9 million in 2011 was due to a $400 million goodwill impairment charge of its Europe, Middle East and Africa reporting unit. In 2012, it reported $44 million in profits. The lower profit in 2012 compared to 2010 was mainly due to a 24% rise in its costs of goods sold.
Price dropped because of a plant shutdown
After temporarily shutting down its largest plant, Hospira, Inc. (NYSE:HSP) dropped from the $45-$50 per-share range to only $28 per share. With around 165.5 million total outstanding shares, a drop of around $17 per share has made Hospira lose around $2.8 billion in market share. Price thought that it was when the growth guy sold to the value guy. The value guy would look at Hospira and think that it might take two years for the company to fix the plant. It might also cost the company $500 million to $1 billion. Then, when it could earn $3 per share again, the business would be worth $45 or more again.
The highest earnings valuation, but lowest by book value
At $36.60 per share, Hospira, Inc. (NYSE:HSP) is trading at 17.24 times its forward earnings and more than 2 times its book value. Compared to its peers, including Baxter International Inc. (NYSE:BAX) and Becton, Dickinson and Co. (NYSE:BDX), Hospira is still the most expensive company in terms of earnings valuation, but it’s the cheapest company in terms of book value.
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For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
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