In Case of Recession: Buy Drugs
Cramer thinks the Fed isn’t going to cut rates anytime soon, and that, to him, could mean recession. It means investors are going to need stocks that work even when the economy doesn’t. And it means international exposure. Schering-Plough fits right in.
Schering-Plough is a terrific drug company that has taken an absolute beating lately, Cramer said. The stock has pulled back 13% in the last month even though the Street’s consensus earnings estimates are on the rise. SGP looks like a case of the market throwing the baby out with the bathwater.
Nothing fights a recession better than medicine, which is only one reason why SGP should be bought, Cramer said. UBS upgraded the stock today and Cramer is happy they’re joining him in recommending the stock. SGP has everything Cramer looks for in a drug company. It has the most robust earnings outlook for the entire drug sector with analysts predicting it grows at a five-year compound annual growth rate of 24% through 2011, compared to 7%, which is the industry average.
In addition, Schering-Plough is in a good place when it comes to patent expirations - the issue Big Pharma companies are most plagued by. The only drug that SGP makes that will lose its patent before 2012 is the allergy drug Clarinex, which is only 6% of the company’s sales. SGP has great earnings growth and patent protection for those earnings for the next five years.
The company’s drug portfolio is strong as well, Cramer said. It’s got Nasonex for allergies with sales up 22% last quarter. It’s got Remicade for arthritis with sales up 28% last quarter and Vytorin and Zetia – both weight-loss drugs – which bring in a combined $1.2 billion in sales.
At the end of the day, SGP is a turnaround story, Cramer said. CEO Fred Hassan has transformed the company through great acquisitions like Organon, which SGP bought for its pipeline of fertility drugs, contraceptives, muscle relaxants, an anti-psychotic drug called asenapine with “blockbuster potential,” and Sugammadex, a chemical for general anesthesia. The deal added five products in Phase III trials – the last phase before FDA approval – and was a huge pickup for Schering-Plough’s bottom line.
The other side of Hassan’s turnaround is that he is bringing up SGP’s operating margins, which had been well below the sector’s average. Hassan is cutting the fat at the company to raise profits: He started a major restructuring that includes plant closings and layoffs. It’s never fortunate when companies lay off workers, Cramer said, but the stock should go higher because of it – and Mad Money is a show for stockholders.
Bottom Line: Because of the UBS upgrade, SGP spiked. Cramer is behind this stock, but he’d wait for the price to come in before buying.
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