EFTA01426795.pdf

Subject: FW: US Equity Insights - Rx for healthier productivity From: Stewart Oldfield <MI > Date: Mon, 26 Sep 2016 09:28:57 -0400 To: Richard Kahn ‹ > Cc: Joseph Dursi <joseph.dursi@db.com>, Andrew Kin <andrew.kin @db.com> Bcc: From: David Bianco, Deutsche Bank [mailto:david.bianco@db-gmresearch.com] Sent: Sunday, September 25, 2016 5:06 PM To: Stewart Oldfield Subject: US Equity Insights - Rx for healthier productivity Deutsche Bank - Equity Research - North America US Equity Insights - Rx for healthier productivity 25 September 2016 (28 pages/ 2129 kb) Download the complete report: http://pull.db-gmresearch.com/p/2003-9E1F/- 96505735/0900b8c08bc6470e.pdf Necessity is the mother of invention: US healthcare needs more productivity If the US is to improve its labor productivity, it must do so in the largest and fastest growing segment of its economy: Healthcare. We think Medical Drugs & Devices have the best chance to boost productivity of healthcare workers and US labor broadly. We're encouraged that more productivity enhancers will be found by the high R&D spending at S&P Biotech, Drugs & Devices. This R&D is one of the few areas where US investment is strong and the good ROEs and sales growth at these firms suggest that it is value added to both company and customer alike. In a world where investors prize dividends and politicians prize populism, we hope the value of this R&D investment is appreciated. Life is the economy and health is wealth: Healthcare's forever rising GDP share From food & shelter to health & longevity, and all the experiences in EFTA01426795 between, the economy is about improving life. Whatever the trend pace of GDP growth, the healthcare trend will be stronger. Healthcare is now 16% of US GDP and 23% of PCE with solidly above average mid single-digit growth and about 14% of jobs. This means that HC firms will have a better opportunity than most to invest for growth, but growth in their profits will still be a function of the returns earned on investment. About 80% of healthcare spending is towards practitioners, facilities and other services and about 20% toward drugs, devices and equipment. We expect the share of medical drugs, devices and equipment of total HC spending to rise; driven by a kind of intangible capital deepening similar to increased tangible capital seen per manufacturing worker. Like industrial and info tech capital goods producers in the past, we expect producers of better healthcare tools to earn attractive returns on investment. R&D: An accountant's expense, an optimist's high risk/high reward investment US GAAP still requires expensed R&D, however gov't reports (BEA) treat it as intangible investment, which is now 20%+ of US investment ex. construction and the fastest growing piece. This note identifies the highest R&D spenders in the S&P and compares this to sales, non-GAAP net income, ROEs & PEs. We don't advocate adding back R&D to profits, as much R&D is maintenance R&D, required to support existing profits into perpetuity, but where R&D is high and ROE is high, we think a significant part of the R&D is value enhancing investment that warrants a PE multiple well above steady-state (1/real CoE). S&P industries and stocks where R&D & ROE are high and the PE is under 22 S&P industries that stand out with high R&D/sales and high ROE include: Biotech, Pharmaceuticals, HC Tech, HC Equipment & Supplies, Life Science Tools, Software, Internet Services, IT Services, Internet Retailing, Auto Components, and Aerospace & Defense. On page 7, we provide a basket of 28 stocks (DBUSHRRD) with: R&D > $3bn or R&D/sales > 6%, ROE > 18%, PE < 22, 2016 EPS growth > 0%, 2016 sales growth > 0%, debt/mkt cap < 50%. Unless tax cuts appear on the horizon, we favor Health Care & Tech (GARP) Despite higher Dec Fed rate hike chances, Banks 2017 EPS outlook continues to deteriorate given the further fall in expected 2017 avg FF rate and —1.6% 10yr yield. Existing and potential oil supply suggests that prices struggle to avg above $50/bbl in 2017. Energy is trading at —25x its likely EPS at $55-60/bbl oil. Recent macro data suggests growth will be very slow at both S&P Consumer sectors and Industrials in 2H16. Unless large fiscal stimulus w/- tax cuts appears on the horizon, we favor growth stocks at a reasonable PE over cyclicals. David Bianco +1 212-250-8169 - david.bianco@db.com Ju Wang +1 212-250-7911 - ju.wang@db.com EFTA01426796 Winnie Nip +1 415-617-3297 - winnie.nip@db.com Please visit our group webpage at https://gm.db.com/welcome.html?/ger/- analyst/Analyst.eqsr?analystlD=39531 {Autobahn Mobile - now available on iPhone and iPad. Click here to download 'Deutsche Bank Autobahn' in the App Store: https://itunes.apple.com/gb/app/- deutsche-bank-autobahn/id646407534} Autobahn Mobile - now available on iPhone and iPad. Click here to download 'Deutsche Bank Autobahn' in the App Store: https://itunes.apple.com/gb/app/- deutsche-bank-autobahn/id646407534 Click/ copy this link into a browser to access the report: http://pull.db- gmresearch.com/p/2003-9E1F/96505735/0900b8c08bc6470e.pdf. If you have any difficulty accessing the report, please forward this email with the word 'PDF' in the subject line to GMResearch.Subscriptions@db.com. After 90 days you can access the report on our web site: http://gm.db.com. You have received this mail because you have subscribed to David Bianco For changes to your current research subscription, visit https://gm.db.com/- rsm or email GMResearch.Subscriptions@db.com. Please refer to the applicable legal disclaimers in the full report. Mail Reference:0900b8c08bc6470e/stewart.oldfield@db.com This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA01426797