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SI �HealthCare Sector Presentation

Spring 2021

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S&P 500 Health Care Sector Portfolio

Pros

  • Superior capture ratio. Portfolio is able to capture uptrends more often than not

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Cons

  • Consistently underperformed vs. the benchmark in P1Y and P3M
  • Significantly higher volatility due to higher tracking error
  • Negative and decreasing portfolio alpha
  • Overloading on market risk and increasing

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Portfolio Statistics

Port (3 Months)

Bench (3 Months)

Port (1 Year)

Bench (1 Year)

Return

 

 

 

 

Total Return

5.25

6.81

10.18

15.52

Maximum Return

3.61

1.96

4.04

2.21

Minimum Return

-2.06

-1.98

-4.59

-2.88

Mean Return (Annualized)

35.22

45.05

17.33

23.77

Mean Excess Return (Annualized)

-6.79

 

-5.20

 

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Risk

 

 

 

 

Standard Deviation (Annualized)

16.46

10.62

18.64

12.84

Downside Risk (Annualized)

11.16

7.65

13.56

9.77

Skewness

0.39

-0.20

-0.19

-0.66

VaR 95% (ex-post)

-1.84

-0.79

-1.86

-1.41

Tracking Error (Annualized)

9.91

 

11.96

 

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Risk/Return

 

 

 

 

Sharpe Ratio

1.37

2.72

0.54

1.13

Jensen Alpha

-14.07

 

-6.11

 

Information Ratio

-0.49

-0.31

Treynor Measure

0.18

0.09

Beta (ex-post)

1.27

1.12

Correlation

0.82

0.77

Capture Ratio

1.14

0.80

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Portfolio Returns History

  • Until recently, portfolio stays above (rides ups higher and reversion lower)
  • Higher frequency of drawdowns in past 1 year

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Portfolio Risk Analysis Summary: Factor Exposures

  • Minimal growth in total risk
  • High beta due to similarity to increasing correlation to benchmark
  • Decreasing risk contribution from US PharmBio

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Portfolio Risk Analysis Summary: Factor Exposures

  • Portfolio industry risk and style risk contribution is far than the benchmark
  • The portfolio may be overexposed to the big caps
  • This is also signaled by the Style Risk contribution
  • Portfolio can also benefit from better diversification

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Portfolio Risk Analysis Summary: Factor Exposures

  • Portfolio industry risk and style risk contribution is far than the benchmark
  • The portfolio may be overexposed to the big caps
  • This is also signaled by the Style Risk contribution
  • Portfolio can also benefit from better diversification
  • US PharmBio offers diversification effects

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Portfolio Risk Analysis Summary: Risk Bets

  • ANTHEM and CIGNA contributes 72% of portfolio risk despite being only 41.5% of portfolio weight
  • Diversification benefit offered by Zoetis and Bristol-Myers
  • Zoetis is in US PharmBio Industry Subgroup

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Summary

  • Portfolio needs to be further diversified
  • Need to reduce overload on ANTHEM Inc. and CIGNA Corp

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Recommendation

Buy 34 Shares of Zoetis at $134.82/share

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Zoetis (ZTS): Introduction

  • Zoetis Inc. is the world's largest producer of medicine and vaccinations for pets and livestock.
  • The company was a subsidiary of Pfizer, the world's largest drug maker, but with Pfizer's spinoff of its 83% interest in the firm it is now a completely independent company
  • Debt Rating: BAA1 (Investment Grade)
  • $ 64.031 Billion
  • Correlation to Portfolio: 0.27

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Zoetis (ZTS): Business Overview - Offerings

Products

  • Vaccines
  • Parasiticides,
  • Anti-infectives,
  • Medicinal feed additives
  • Animal health diagnostics

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Services

  • Genetic tests and biodevices
  • dairy data management, e-learning and professional consulting.
  • Zoetis experts also provide customer service, technical education and business support to help those who raise and care for animals manage their businesses more effectively.

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Companion and Farm Animals

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Zoetis (ZTS): Business Overview – Revenue*

Source: Company Presentation

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Zoetis (ZTS): Competitive Positioning

Livestock Animals

Family Animals

The internet of animals

  • Increase in human population leading meat production to double, increasing the chances bacterial and parasitic infections.
  • Most people consider their pets as family and thus wish to give them longer, fuller and happier lives.
  • Rise in pet insurance
  • Smart technology empowers farmers with information they can use in real time, alerting them to how and when to intervene in feeding and caring for animals.

Future of the Animal Healthcare Industry

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Zoetis (ZTS): Sales Growth vs. Peers

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Zoetis (ZTS): Margins vs. Peers

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Zoetis (ZTS): EBITDA and FCF Margin

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Zoetis (ZTS): EPS Growth vs. Peers

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Zoetis (ZTS): Liquidity vs. Peers

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Zoetis (ZTS): Solvency vs. Peers

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Zoetis (ZTS): Price Ratios

Price to FCF

Price to Earning

Price to Book

Price to Sales

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Zoetis (ZTS): Valuations: DDM

Assumptions

  • Beta to Market = 0.7
  • Equity Risk Premium = 3.9%
  • Growth Years = 7
  • Transitional Years = 10
  • Growth Rate at Maturity = 3%
  • Long Term Growth Rates = 2.5%
  • Country Risk Premium = 7%
  • Risk Free Rate = 1.36%

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Historical US Equity Market Return vs. Assumption

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Zoetis (ZTS): Valuations: DCF

Assumptions

  • Historical Cost of Debt = 1.6%
  • WACC = 6.5%
  • Risk Free Rate = 1.37%
  • Revenue Growth Rate = 5 + n-year
  • Perpetuity Growth Rate = 3.5%

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Zoetis (ZTS): Valuations: DCF

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Zoetis (ZTS): Valuations: Price Target

Current Price: $134.82

$181

$165

$182

$176

DDM

DCF Perpetuity Growth Method

DCF EBIDTA

Multiple

Price Target

Upside Potential

30.54%

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Summary

  • Portfolio is now more diversified; Opportunities to diversify still exists
  • Position to capture expected growth in US PharmBio Sub-industry
  • Less volatile returns
  • Reduced Beta
  • Less cyclical loss

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Investment Risks

Interest Rate Risk (Minimal)

  • Since the bulk of company finance is from equity holders. Only 9.6% of company capital is debt financed
  • Company also has sufficient cash to invest. May have no need to raise new capital

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Political & Currency Risk (Average)

  • 50% of company revenue come from US market. Unfavorable healthcare policy may hamper business practices and reduce revenue and profitability

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Business Risk (High)

  • Competition is high in the industry and there is high need to innovate new products. Without adequate spending on R&D, Zoetis may lose market share.

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Currency Risk (Low)

  • ZTS operates globally hence reducing the impact of any single country on revenue and bottom line

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Appendix

Portfolio Statistics

Port �(3 Months)

Bench �(3 Months)

Port �(6 Months)

Bench �(6 Months)

Port �(YTD)

Bench �(YTD)

Port �(1 Year)

Bench �(1 Year)

› Return

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Total Return

5.65

6.81

17.72

15.04

1.85

1.50

11.23

15.52

Maximum Return

3.46

1.96

3.95

2.21

3.46

1.96

3.95

2.21

Minimum Return

-2.01

-1.98

-2.35

-2.32

-2.01

-1.98

-4.52

-2.88

Mean Return (Annualized)

37.94

45.05

59.99

48.72

22.29

16.57

18.78

23.77

Mean Excess Return (Annualized)

-4.91

 

7.59

 

4.91

 

-4.03

 

› Risk

 

 

 

 

 

 

 

 

Standard Deviation (Annualized)

16.07

10.62

16.59

11.76

19.09

12.32

18.29

12.84

Downside Risk (Annualized)

10.95

7.65

11.06

8.51

13.04

8.93

13.32

9.77

Skewness

0.35

-0.20

0.58

-0.25

0.35

-0.14

-0.20

-0.66

VaR 95% (ex-post)

-1.78

-0.79

-1.55

-0.91

-1.94

-0.97

-1.82

-1.41

Tracking Error (Annualized)

9.43

 

10.39

 

11.51

 

11.49

 

› Risk/Return

 

 

 

 

 

 

 

 

Sharpe Ratio

1.51

2.72

2.31

2.65

0.73

0.82

0.61

1.13

Jensen Alpha

-11.85

 

3.87

 

1.23

 

-5.03

 

Information Ratio

-0.37

0.52

0.30

-0.25

Treynor Measure

0.19

0.35

0.11

0.10

Beta (ex-post)

1.25

1.10

1.26

1.11

Correlation

0.83

0.78

0.82

0.78

Capture Ratio

1.15

1.16

1.05

0.80

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