1、M.WDavid.R.LDavid.RMatthew.HRicky.GMark.PSameer.BSean.LAdam.VAndrew.PMichelle.M.WMORGAN STANLEY&CO.LLCMichael J WilsonEQUITY STRATEGIST+1 212 761-2532David R.LewisEQUITY ANALYST+1 415 576-2324David RisingerEQUITY ANALYST+1 212 761-6494Matthew HarrisonEQUITY ANALYST+1 212 761-8055Ricky R GoldwasserEQ
2、UITY ANALYST+1 212 761-4097MORGAN STANLEY&CO.INTERNATIONAL PLC+Mark D PurcellEQUITY ANALYST+44 20 7677-8557MORGAN STANLEY INDIA COMPANY PRIVATE LIMITED+Sameer Baisiwala,CFAEQUITY ANALYST+91 22 6118-2214MORGAN STANLEY AUSTRALIA LIMITED+Sean LaamanEQUITY ANALYST+61 2 9770-1559MORGAN STANLEY&CO.LLCAdam
3、 Virgadamo,CFAEQUITY STRATEGIST+1 212 761-1376Andrew B PaukerEQUITY STRATEGIST+1 212 761-1330Michelle M.WeaverEQUITY STRATEGIST+1 212 296-5254US Equity StrategyUS Equity Strategy|North America North AmericaGlobal Health Care Conference:Strategy Sector Views+AnalystStock PicksSlowing growth and margi
4、n pressures keep us cautious onequities;we see downside risk should labor markets weaken.Despite supportive earnings revisions and valuation,we remainequal weight Health Care due to political risk.Our HC analystshighlight ALC,HZNP,HUM,VRTX,ROG.S,SHL.AX,SUNP IN.Our US Health Care analysts highlight a
5、 few of their high conviction stock picks:Alcon(Medical Technology,ALC,OW,$71 PT):Alcon,spun off from Novartis AGin April 2019(see our Initiation here),is the largest medical device ophthalmologycompany in the world with$7bn in revenues.Sales and margins are set toinflect in 2020 and beyond as PanOp
6、tix(the first US-approved trifocalintraocular lens,used in cataract surgery)and PRECISION1(mass market dailysilicone hydrogel contact lens)leverage significant reinvestment.We see high-teens EPS growth(an upper-tier medtech return profile)emerging over time.Horizon Therapeutics(Pharma,HZNP,OW,$32 PT
7、):This is a multiple call.Webelieve that the market continues to undervalue HZNP ahead of a positive mixshift to orphan/rheumatology diseases and accelerating growth early nextdecade.Humana(Managed Care,HUM,OW,$342 PT):We highlight HUM as one of thetop stock picks over the next couple of months due
8、to the companys ongoingexecution in growing Medicaid organically while continuing to expand MedicareAdvantage market share(we estimate 12%y/y growth in 2020).Over the long-term,the company has favorable positioning under any Medicare expansionscenario(see report here)that more than offsets near term
9、 risk associated withfederal health insurance fee or HIF related headwinds in 2020.Vertex Pharmaceuticals(Biotech,VRTX,OW,$240 PT):Our Overweight thesison Vertex is driven by Vertexs dominant position in the treatment of CysticFibrosis(CF)and its strong pipeline with multi-billion in peak sales oppo
10、rtunity.We estimate total WW peak sales of CF products of$9B in 2030,driving a15%revenue and 25%EPS CAGR from 2019-2023.In addition,Vertexs diseasemodifying treatment for alpha-1 antitrypsin deficiency or AATD(in PhII)couldyield$3B peak sales in 2035 if successful,driving revenue upside anddiversifi
11、cation.This upside potential coupled with significant downside protectionfrom a largely derisked CF pipeline positions Vertex well even in volatile markets.In addition to picks from our US Health Care analysts,our international colleagueshighlight a few of their high conviction stock picks:Morgan St
12、anley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor
13、in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NA
14、SD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1September 9,2019 04:01 AM GMTRoche(Europe Pharma,ROG.S,OW,CHF315 PT):Top pick with 20%potentialupside,risk-reward skewed heavily(+49%/-21%)on emerging innovative
15、R&Dpipeline.One of the highest quality companies in our European coverage and aninnovation leader.Our QVID score analysis suggests that Roches higher qualityand innovation will drive long-term performance.The market focus is onbiosimilar erosion for key drugs Rituxan,Herceptin and Avastin.We forecas
16、t a57%decline in the combined Rituxan,Herceptin and Avastin franchise in 2017-22but see potential upside from litigation-driven delays in the US and biologicmanufacturing capacity constraints for biosimilar companies.The biosimilarthreat is a distraction from the crux of our thesis:Roches innovative
17、 pipeline of28 NMEs we see CHF9.6bn risk-adjusted sales in 2028.Emerging assetscombine high innovation with low commercial risk and address high unmet needs(Huntingtons,autism,SMA).Sonic Healthcare(Australia Health Care,SHL.AX,OW,A$32.38 PT):SonicHealthcare is a provider of diagnostic services(mainl
18、y pathology)in Australia,US,Germany,Switzerland and the UK.SHL offers the most palatable valuationrelative to other large cap Australia health care for(i)relatively low-risk 3-yearEPS CAGR of 7%;(ii)a dividend yield of 3%;(iii)A$1bn of balance sheetcapacity to be deployed in M&A;and(iv)10%potential
19、upside to our A$32 pricetarget.Sun Pharmaceuticals(India Pharma,SUNP IN,OW,Rs505 PT):Suns earningsand stock price are both at multi-year lows.We expect F20 to be a transitionalyear,followed by a year of cost normalization and positive operating leverage.We expect specialty ramp-up,manufacturing rati
20、onalization,cost control,Halolcontribution,etc.to help improve F21 margins.We estimate three-year CAGRs(F20-22)of 13%in sales and 20%in net profit,vs.two-year trailing CAGRs of-4%and-21%.Valuations are now attractive at 16.7x F21 EPS.2 Health Care:Equal Weight for US StrategistMichael Wilson,Chief U
21、S Equity Strategist and CIO of Morgan StanleyInstitutional Securities and Wealth Management Part I:Market OutlookA Range Bound MarketOur call over the last 18 months has been for a consolidation during which the S&P500 would trade in a wide range between 2400 and 3000.Since then,that range hasdefine
22、d the price action well,with three highs near the top end of our range and thelows in December coming in around 2350(Exhibit 1).To believe the market can movesustainably and materially above 3000,we either need to see earnings growthreaccelerate or multiples expand,and we are skeptical of either of
23、these things comingto pass over the next few months.Earnings-Decelerating Sales Plus Margin PressuresWhile consensus is still modeling in 11%earnings growth for the S&P next year,weexpect the number will be much lower as decelerating sales growth and marginpressures weigh on earnings growth.Our top
24、down leading earnings indicator issuggesting that S&P earnings are unlikely to grow at all over the next twelve months(Exhibit 2).In our view,the weakening earnings growth comes down to a combination of1)difficult comparisons after two years(2017/18)of exceptionally strong earningsgrowth,2)decelerat
25、ing top line growth as the economy works through excess inventorybuilds and business investment in 2018 as well as ongoing trade tensions,and 3)marginpressures due to rising costs,chiefly labor.Exhibit 1:A Range-Bound S&P;3,000+Is A Hard Case to Make230024002500260027002800290030003100Jan-18Mar-18Ma
26、y-18Jul-18Sep-18Nov-18Jan-19Mar-19May-19Jul-19Sep-19S&P 500Bull Case 3000Bear Case 2400Average=2785Bull Case 3000Bear Case 2400Source:Bloomberg,Morgan Stanley Research as of September 5,2019.3Margin pressure,more than sales is driving the profit pressure.Exhibit 3 shows thatsales growth for the S&P
27、500(large caps),S&P 400(mid caps),and S&P 600(smallcaps)has been decelerating,but is still decent especially given the difficult comparisonsfrom last year.In contrast,EPS growth in 2Q19 vs.2Q18(which has a tailwind of sharebuyback accretion)is not only lower than sales growth,but actually negative,i
28、ndicatingdeteriorating margins.Another trend that is apparent the smaller the market cap,themore pronounced the margin issue.Profit pressures and negative earnings growth among smaller cap companies isworrisome as they are more reflective of the margin picture in the broader economy.Exhibit 4 shows
29、economy wide corporate margins(we use corporate profits over GDP asa rough proxy)against reported net income margins for the S&P 500(large caps),S&P400(mid caps),and S&P 600(small caps).The broader economy wide margins look tohave been generally trending lower like the small caps series;all of the S
30、&P series(which lead based on data availability)have now turned lower,a bearish signal for thebroader outlook for corporate profits.Exhibit 2:We Expect Earnings Growth To Be Near 0%Over the Next 12 Months-4.30-3.30-2.30-1.30-0.300.701.702.70-40%-30%-20%-10%0%10%20%30%40%50%19891992199519982001200420
31、072010201320162019Actual S&P 500 LTM EPS Growth Y/YMorgan Stanley Leading Earnings Indicator(leading 1 yr.)Source:Bloomberg,FactSet,Morgan Stanley Research as of August 31,2019.Exhibit 3:Negative Operating Leverage Is Increasingly Apparent Across the S&P 500/400/600Cohort1Q19/1Q18 SalesY/Y Change1Q1
32、9/1Q18 EPSY/Y Change2Q19/2Q18 SalesY/Y Change2Q19/2Q18 EPSY/Y ChangeLarge Caps(S&P 500)5.3%-0.3%4.0%-0.4%Mid Caps(S&P 400)3.2%-7.9%1.4%-8.8%Small Caps(S&P 600)3.2%-16.1%2.8%-8.6%Source:FactSet,Morgan Stanley Research as of September 5,2019.4Corporate profit cycles come and go within broader economic
33、 cycles,but in an alreadylate cycle environment,the important issue is what continued pressure on corporateprofits,particularly among small businesses,means for employment.We believe thesame falling profit trends are true among companies outside the public companyuniverse;this matters because such f
34、irms employ a material percentage of the Americanwork force(Exhibit 5).In assessing further risks to economic growth,we are watchingthis small business cohort for signs that continued pressures on profits are weighing onthe employment outlook.Job growth to date has remained solid,but some cracksarou
35、nd the edges are forming.The latest data from the Bureau of Labor Statisticsshowed one of the slowest 6-month average paces of private payroll growth sinceSeptember 2012(136,000 jobs,Exhibit 6).Rapidly decelerating growth in aggregatehours worked(Exhibit 7)may indicate businesses are holding onto wo
36、rkers in a tightlabor market,but are reducing overall labor costs by cutting hours(US Economics:August Payrolls:Shifting into a Lower Gear 6 Sep 2019).The National Federation ofIndependent Business,a small business advocacy group,tracks the top problems of itsmembers over time;while labor costs are
37、not the most commonly cited number oneproblem,on a normalized basis,they are now cited as the number one problem morethan at any time in the data series(Exhibit 8).This means labor costs would likely be afocus of corporate managers should the profit outlook continue to darken.Exhibit 4:Public Compan
38、y Profit Pressures Suggest The Broader Economy Is Seeing the SameIssueSource:Bureau of Economic Analysis,FactSet,Morgan Stanley ResearchExhibit 5:Small Businesses Employ the Majority of the US LaborForceSource:Bloomberg,Morgan Stanley Research.Exhibit 6:Job Growth Has Been Slowing0501001502002503003
39、5020112013201520172019Change in US Non-Farm Payroll:3MMAChange in US Non-Farm Payroll:6MMASource:Haver,Morgan Stanley Research.5A slowing outlook for employment,stock market volatility,and incremental tariffs areall already affecting forward looking indicators of consumer confidence.If consumerconfi
40、dence and spending weaken,we would expect top line growth for US corporateswill further decelerate,or go outright negative,magnifying the difficulties ahead forearnings growth.Higher Risk Premium Will Limit Multiple ExpansionWith the broader economic growth and earnings outlook uncertain,we think it
41、 will bedifficult for P/E multiples to expand as investors demand a higher equity risk premium.A common point of pushback to our cautious view is that lower rates should producehigher equity market multiples,thus allowing for positive price returns even as earningsgrowth disappoints.In theory,lower
42、interest rates are a positive for equity prices as alower discount rate means a higher net present value of future cash flows,e.g.a highermultiple.Theory relies on an assumption of lower rates all else equal,which typicallydoes not hold in practice at the extremes.At the low end of historical rate r
43、egimes,ratesare sending a signal about the outlook for growth,meaning investors may require ahigher ex-ante equity risk premium(ERP)due to higher uncertainty around futureearnings and cash flows(Exhibit 9).As rates have moved lower,the equity risk premium has been moving higher this mayprovide some
44、downside support,but unfortunately,its not a strong case for upside.Rates are now approaching the low end of their range which tends to line up with lowerequity market multiples and true to form,the equity risk premium has moved higher asExhibit 7:Aggregate Hours Worked Are Also Materially Slowing-2
45、%-1%0%1%2%3%4%-10%-5%0%5%10%15%19891993199720012005200920132017Real Private Fixed Investment(%Y,SAAR)Hours Worked:Private Nonfarm Employees(%Y,RS)Source:Haver,Morgan Stanley Research.Exhibit 8:Cost of Labor Is Being Called Out As An Issue By SmallBusinessesSource:Haver Analytics,Morgan Stanley Resea
46、rch.Exhibit 9:Were At the Point Where Lower Rates Tend to Line Up with Lower MultiplesSource:Bloomberg,Morgan Stanley Research.Yellow=Current real rates range.6the market has started to price in some additional risks to the growth outlook.Sittingnear 450 bps(Exhibit 10),the equity risk premium has a
47、lready moved considerablyhigher in the last month and to a level which has generally held during growth scaresover the last few years.If rates continue to head lower,we think growth worries willpush the equity risk premium even higher.Over the last 20 years,in periods where theERP has had a rapid mo
48、ve higher over the prior month(top 10%move)and sits at anelevated level(top 10%over the last 3 years)S&P forward returns on 3M/6M/1Yhorizons look modestly lower than all period averages and the frequency of positivereturns is greatly reduced.Among the smaller data set that looks like today where the
49、trailing 1 month move in the ERP was driven primarily by lower rates(as opposed tohigher earnings yield/lower price),the returns are more frequently below 0,have muchwider standard deviations,and look to be statistically significant in their averagedifference from all period S&P returns(Exhibit 11).
50、Based on our ERP/rates framework,we think the equity market multiple is at the highend of its fair value range,and struggle to see material upside.At the same time,anERP that is around 50 bps below levels seen in the global recession of late 2015/early2016 should help to mitigate downside from multi
