Congratulations, Fool. You've made it to part 4 of our Olympics-inspired survey of German American Depositary Receipts (ADRs) trading on U.S. stock exchanges. Consider today your "hump day" -- we've passed the halfway mark, and it's all downhill skiing from here.
As mentioned recently, we've already covered the "old economy" offerings from this "Old Europe" nation, and now we're moving into the sexy "new economy" spheres. Having covered semiconductors and electronics last time, today we move on to the nation's health-care and Big Pharma offerings. In the final article, we'll explore the world of German biotech.
Now that we can finally see the finish line to this five-part race through Deutschland, let's not slack off. It's once again time to ...
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Fresenius Medical Care
(Level II ADR) 1 ADR = 0.333 Common Share
Fresenius Medical Care, one of three subsidiaries to the Fresenius AG health care conglomerate, specializes in caring for patients with kidney failure. The firm provides kidney dialysis, lab testing, and renal diagnostic services through a network of more than 1,600 clinics throughout North America, Europe, Latin America, and the Asia-Pacific region. In doing so, it butts up against such U.S competitors as Baxter
Fresenius also looks to be priced at a discount to its U.S.-based competitors, sporting a P/E ratio of 17. Its rivals all average about a 26 P/E.
The one fly in Fresenius' ointment is growth; the single U.S. analyst who follows the company projects 10% annual growth over the next five years. The 15 analysts who follow this one on the Continent, however, expect it to grow by 12% next year, which compares very well to its competitors. If the company is able to sustain a growth rate of between 12 and 15%, its stock will look very close to fairly priced objectively -- as well as cheaply priced relative to its competitors.
As a final bonus, Fresenius pays its shareholders a modest dividend yield of 1.4%.
(Level II ADR) 1 ADR = 1 Common Share
Investors in Altana can breathe easy. The firm, which splits its efforts between producing specialty chemicals and pharmaceuticals (which are, when you think about it, just specialty chemicals with an easy-on-the-tummy coating), specializes in the treatment of gastrointestinal, cardiovascular, and respiratory tract ailments. Altana's other ventures include the production of over-the-counter medications and vitamins, and media used in X-ray, MRI, and ultrasonic imaging.
As you can imagine, this relatively small member of Big Pharma ($7.2 billion market cap) faces a lot of larger rivals, including Merck (NYSE MRK), GlaxoSmithKline
Its valuation is similarly small. Trading at just 14 times trailing earnings, Altana looks attractively priced relative to competitors trading in the upper teens and twenties -- but perhaps it deserves to. Although no U.S. analysts appear to track Altana, the consensus of the 24 foreign analysts who do is that Altana will grow its earnings by a paltry 5% next year. That hardly seems like the makings of an attractive PEG ratio.
Finally, Altana's 2.1% dividend underwhelms. Relative to its competitors, it beats only Novartis' 1.6%, and it's but a fraction of the cash paid out by Merck and Glaxo.
(Level II ADR) 1 ADR = 1 Common Share
Like Altana, Schering also dabbles in the "media" market, producing media used for showing the results of MRIs and X-rays. Additionally, Schering produces drugs for treating multiple sclerosis, cancer, skin diseases, and heart and nervous system disorders. But the firm is best known for its efforts to control population growth, one customer at a time. (I'm referring to the company's contraceptive products, and that's as far as I'll go on that particular subject.)
At first glance, Schering looks like quite a pricey pill. It sells for 18 times earnings, but it's projected to grow at just 8% per annum in the long term. A closer inspection of the firm's cash flows shows it to be somewhat less expensive but still not terribly attractive, at a bit more than 13 times trailing free cash flow.
Finally, the firm's 2.1% dividend beats the average payout of the U.S. S&P but still looks a bit skimpy compared to what some of the aforementioned pharmas pay their owners.
Overall, I'd say that of the three firms named above, U.S. investors should focus their attention on the plain-vanilla business of kidney disease. As populations age in the markets that Fresenius serves, its services should come into increasing demand. I suspect the single U.S. analyst tracking far-off Fresenius may well underestimate the company's growth potential.
Mind you, even if Fresenius achieves the rapid growth projected for its competitors, it still looks fairly priced at best today. However, the good news is that stocks go down from time to time. Watch this one for a dip.
While you're waiting, tune in for our last installment, as we wrap up this series with one final foray into the world of German ADRs.