George Soros's Healthcare Picks: 2 To Buy, 1 To Avoid

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In this installment of my analysis of recent purchases made by renowned investors, I will analyze three major purchases recently made by George Soros's Soros Fund Management in the healthcare sector, namely Medco Health Solutions (MHS), Express scripts (ESRX), and Amgen (AMGN).

In Q4 2011, Soros increased positions in MHS by 954% taking the fund's total position to approximately 527,000 shares. The fund's position in ESRX increased by 250%. Additionally, Soros initiated a new position in AMGN by purchasing 25,000 shares during the last quarter.

Here I will evaluate the fundamentals of these companies and perform relative valuation to determine the attractiveness of the companies at current levels. Some basic information about the companies is presented in the table that follows:

MHS and ESRX have a very similar market capitalization, and have more than doubled in price over the last 5 years. AMGN shareholders have broken even over the same time period. However, AMGN has been a strong performer over the last year, and is up 29%. AMGN is also the only dividend-paying company on the list.

Next, I observed the historical growth rates of revenue, income and book value, and the projected long term earnings growth rates. These are summarized in the table shown below:

As shown in the table above, ESRX has a very consistent historical short-term and long-term EPS growth rates, and is the only firm to grow its book value per share at a double-digit pace. While MHS grew its revenues and EPS over the last few years, the book value per share has reduced at an annual rate of 4%.

AMGN's earnings declined last year. Going forward, analysts expect the company to grow at an annual rate of 9%. MHS and ESRX are projected to grow their earnings over the long term in a narrow range of 13% to 16%.

The next step in the fundamental analysis was the evaluation of margins and operational effectiveness of the 3 companies. The table that follows presents the evaluation results.

ESRX again is the top performer when it comes to return of investments and assets. AMGN's ROI of 10% is insufficient in my opinion. However, the company does sports a respectable ROA of 8%.

Having developed a good idea about the fundamentals of the 3 healthcare companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples.

The table below presents the valuation analysis results.

As shown in the table above, ESRX is significantly undervalued at current levels and offers a return potential of 26%. MHS is also cheap and makes a good investment at current levels. AMGN is expensive, trades at a premium of 13% to fair value, and should be avoided.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.