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Company name Alexion Pharmaceuticals, Inc.
Stock ticker ALXN
Live stock price [stckqut]ALXN[/stckqut]
P/E compared to competitors Fair
MANAGEMENT EXECUTION
Employee productivity Good
Sales growth Good
EPS growth Good
P/E growth Poor
EBIT growth Good
ANALYSIS
Confident Investor Rating Good
Target stock price (TWCA growth scenario) $125.89
Target stock price (averages with growth) $204.31
Target stock price (averages with no growth) $126.37
Target stock price (manual assumptions) $114.35

“Alexion Pharmaceuticals, Inc. (Alexion) is a biopharmaceutical company,
which is engaged in the discovery, development and commercialization of
biologic therapeutic products aimed at treating patients with severe and
life-threatening disease states, including hematologic, kidney and
neurologic diseases, transplant rejection, cancer and autoimmune disorders.
Its marketed product Soliris (eculizumab) is a therapy approved for the
treatment of patients with paroxysmal nocturnal hemoglobinuria (PNH). In
April 2009 and August 2009, the United States food and drug administration
(FDA) and the European Commission (E.C.), respectively, granted Soliris
orphan drug designation for the treatment of patients with atypical
Hemolytic Uremic Syndrome (aHUS). In December 2009, its Rhode Island
manufacturing facility received regulatory approval from the E.C. for the
production of Soliris. ”

Confident Investor comments: At this price and at this time, I think that a Confident Investor can confidently invest in this stock.

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This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

2. Free Cash Flow

Many people believe that Free Cash Flow is the most important item in an annual report. After profitability and growth, it certainly bears your attention. Free Cash can be a very important tool for evaluating the appropriate stock price of a company.

To find the Free Cash Flow look for Net Cash Provided by Operating Activities. It is usually easiest to just do a search for the term “Net Cash” (I am assuming that you are reading the Annual Report in HTML format or PDF format).

There are no firm metrics that Net Cash needs to increase a certain percentage from one year to the next. In fact, this is why I don’t measure this metric on this site for my Confident Investor Rating. Cash almost by definition needs to go up and down from one year to the next. While it is usually bad for the cash to go negative, the fact that it doesn’t grow at 10% or some other rate is not exactly a bad thing.

The big thing in this metric on a quick analysis is to understand why it changed and was the change typical of the company in former years. Typically, this analysis is embedded in Item 7 of the Annual Report and you will find several paragraphs discussing the cash from the management of the company immediately following the reporting of the cash. Read that analysis and see if you think the changes are logical and help the company grow at the desired rate.

Here are the links to all 9 posts of the series:

  1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
  2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
  3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
  4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
  5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
  6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
  7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
  8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
  9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

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I have received a few questions (which are always welcome – see my contact page) regarding the “expert” opinions that are offered on a stock. These experts suggest some information on the particular stock but many people struggle to understand the accuracy of this advice.

First, please understand that there are really smart people out there that do analysis on companies. These really smart people are constantly thinking about how to increase wealth for their clients. Also, understand that not all of these really smart people are on TV – most of them are locked in an office making really big money for very large portfolios. The biggest paycheck for these analysts is not on TV so don’t assume the best and brightest are looking at you via a camera.

Even the guys in the back rooms can be questioned regarding the logic of their suggestions.

For this conversation, lets just look at Target (TGT) [stckqut]TGT[/stckqut] and the information that is compiled by MSN Money (one of the best free financial portal sites). Go there in another window of your browser and type ‘TGT’ into the stock ticker search box (if you click on this link, I will do this for you). About halfway down the left side of that site you will see Earnings Estimates and on the resulting page you will see 4 tabs, with the 4th tab being Earnings Growth Rates (or just click on this link and go right there). As of this writing, you will see that for the last 5 years Target grew at 7.7%, the industry grew at 11.3%, and the S&P 500 grew at 3%. You will also see that the analysts are suggesting that in the next 5 years, Target will increase it’s earnings 12.4%, which is 61% higher than what it did the previous 5 years and nearly 10% better than the industry did in the previous 5 years.

The experts are also predicting that retailers in general are going to increase their growth in the next 5 years over the growth they experienced the last 5. That may be a bit logical if you assume that the economy is going to get better vs. the challenges of the immediate past. But, can you assume that Target’s share of that growth will increase as compared to its competitors, since that is the result of them achieving 12.4% growth.

If they can pull that AMAZING turnaround off, that is great. But, can you be confident that Target is going to do that much better than it was doing historically? I know that I can’t; therefore, I rarely give too much credence to what the “experts” are saying about a company’s growth prospects.

Please understand that there are a lot of good people that try to come up with these numbers, but let’s think about how they are doing it. They are going to trade shows, visiting with the company in question, and the company’s competitors. Everyone at these meetings has a significant vested interest to paint a rosy picture about the future.  They may not be wrong, but I doubt you can be confident that they are correct. As I state by the title of this site, I am a confident investor – I only do things that I am reasonably confident will play out in my favor.

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To be honest, I never considered this approach before.

I typically do not like paying fees to fund managers. I am especially skeptical of standard mutual funds when their track record can be worse than the market almost as frequently as above the market.  According to that great champion of individual investors, Motley Fool:

The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general.

Most of my advice is to pick great companies and invest in them with caution, taking profits when the market moves against the company’s stock. I do suggest that a certain portion of your portfolio reside in index funds – I typically tell people to pick their favorite broker and buy a DOW index fund, a S&P index fund, and at least one international index fund.  I rarely care about the brand since we are just trying to match whatever the market is doing.

Crossing Wall Street just did a great post describing a fairly mathematically correct method of creating your own S&P Index fund.  This would allow you to avoid any fees leveraged by the index fund management company.  Not a bad idea.  Note though that not all of these companies are Good Companies (in fact at least one of them is a Poor Company) but that is okay since you are only investing in these companies because they are your own home-grown index fund.

Looking to build a quick-and-easy index fund? Of all the stocks in the Dow, United Technologies [stckqut]UTX[/stckqut] has had the strongest daily correlation with the S&P 500 going back to the beginning of 2005. Each day’s UTX gain or loss has a 69.7% correlation with the S&P 500.

If add in Dupont [stckqut]DD[/stckqut], the correlation jumps to 80.5%. (Note this is average daily change, so it assumes you invest equal amounts each day.)

If you add is Disney [stckqut]DIS[/stckqut], the correlation rises to 85.4%.

Now the extra correlation really is hard to come by. If you add ExxonMobil [stckqut]XOM[/stckqut], the correlation rises to 88.9%.

Still more?

If we add American Express [stckqut]AXP[/stckqut] the daily correlations rises to 90.6%.

Verizon [stckqut]VZ[/stckqut] brings it up to 92.6%.

If you want to go for seven stocks, IBM [stckqut]IBM[/stckqut] will bring you up to 94%.

Now we’re almost out of room. Wal-Mart [stckqut]WMT[/stckqut] will bring our eight stock index fund up to a 95% daily correlation with the S&P 500. This is, of course, an equally weighted fund.

Obviously, you will spend $15-$20 per stock as you buy and eventually sell each stock (I assume you know where to buy or sell a stock for $7-$10). this may make this strategy not work for you depending on the amount that you invest in your “fund” so do the math before you get online with your favorite broker.

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The money that you invest in stocks needs to be money that you don’t need immediately. This does not mean that it is not necessarily money that you won’t need for 20-30 years. If you have money that you are confident that you will not need for decades, you should probably invest that money in your own home. Follow the old Benjamin Franklin saying “A penny saved is a penny earned.”

If you currently pay 7% interest on your home loan, any extra money that you apply to your mortgage will immediately give you a 7% return for the balance of your mortgage time. Therefore if you pay a one-time extra $1,000 on a 7% mortgage that has 23 years left on it, then it will result in $5,002.04 that you didn’t have to pay over the course of the 23 years. This is an absolutely guaranteed return – over the course of 23 years you will be over $5,000 wealthier due to that one-time investment.

Your home mortgage is the safest “buy and hold” investment that you can make! You already know that you pay a certain percentage. If you pay the loan off early, you effectively make that loan percentage as an investment return.

Also, the same logic goes for your car loan and definitely your credit cards. This is typically more short-term debt than your home. Quick payoff on any short-term debt will guarantee you the quickest and best investment strategy simply because you do not spend those pennies, you save them. Benjamin Franklin will be proud of your efforts to quickly and efficiently pay off your short-term and long-term debt.