We see the election providing a choice between having the government play an increased role in health-care coverage to the private sector (Democrats) or limiting the governmental role to oversight of drug and device approvals and administering existing programs such as Medicare (Republicans). From an investment standpoint, a Kerry victory would, in our view, result in a great deal of uncertainty for the sector.
That's a recipe for stock price and valuation erosion, particularly if the Democrats also control Congress. A Bush victory would probably result in at least a modest relief rally. More upside with a Republican Congress, less if Congress goes Democratic. As for specific industry groups:
Biotechnology: We think drug-price controls aren't likely to emerge as a threat to the biotech industry under a Bush Presidency. In fact, investor perception is likely to be favorable, at least in the short term, due to a potential increase in sector funding. Even though Senator Kerry appears to us to be leaning toward legislative intervention to create a pathway toward generic biotechnology drugs, we think negative investor perception could stall funding for the sector in 2005 and beyond.
Hospitals: We see a second Bush Administration resulting in more limited jury awards in medical-malpractice lawsuits, which would likely lead to lower malpractice expense for hospitals, while aiding physician recruitment and retention as physician exposure to litigation diminishes. Bush's goal of adding insurance coverage to 4.5 million people would also offer some relief to hospital exposure to uninsured patients and reduce upward pressure on bad-debt expense.
Kerry's goal of providing universal health insurance could provide increased relief to hospitals' uninsured patient mix and rising bad-debt costs. Also, tax credits to small businesses for providing employee health insurance could further alleviate hospital exposure to uninsured patients. Yet the total estimated cost of $650 billion over 10 years could result in Medicare and Medicaid funding problems, and lower hospital reimbursements. In addition, we see Kerry's opposition to malpractice lawsuit caps as a material negative for the industry.
Managed Care: We see Bush having the edge here, too. The Medicare Reform Act of 2003 encourages seniors to enter private HMO plans. Adding seniors should increase the clout of HMOs in their negotiations with providers, which could help lower medical-cost rate increases. Also, Bush supports medical-liability reform, which should ease legal costs of HMOs. And finally, he would allow associations (groups of small businesses) to pool their members to offer health insurance policies.
Kerry has placed the blame of rising health-care costs on the "greedy" HMOs and pharmaceutical companies. We see him not proposing a cap on malpractice damages, and he supports strong Patient Bill of Rights legislation. We also think he would likely reduce the reimbursement rates to Medicare HMOs.
Pharmaceuticals: If President Bush remains in office, we don't see major changes to the health-care system beyond the Medicare Drug Benefit, which is expected to commence in full by 2006. However, we think efforts to rein in budgets at the state and federal levels will inevitably result in some pricing pressure within the drug and device industry.
We also believe that pressure will continue for more equality on drug pricing around the globe and that many states will begin directly importing pharmaceuticals from Canada and Europe in an effort to lower their Medicaid costs. A revision to tax laws governing repatriation of overseas earnings is possible, in our view, with tax rates falling to about 5% from 35%. Many of the pharmaceutical companies have billions of dollars held overseas, and this change would allow for increased share buybacks, debt reductions, R&D funding, etc.
Kerry has proposed extending health-care coverage to about 27 million of the nation's 44 million uninsured, at an estimated cost of $500 billion to $600 billion over 10 years.
This would include a $500 billion expansion in programs for low-income families (Medicaid and the State Children's Health Insurance Program); a new $250 billion federal subsidy for employers hit with unusually large medical claims; $135 billion to set up a national pool of private insurance that makes it easier for small businesses and some individuals to get health-care coverage; and cost savings of up to $300 billion from greater use of information technology and better identification and prevention of chronic diseases.
To fund the program, Kerry would roll back President Bush's tax cut for families making over $200,000 per year (which would result in $800 billion in additional revenue over 10 years).
We believe share prices for the pharma group would suffer the most from a Kerry victory, as the perception remains that he would favor price controls, be more aggressive in terms of advocating drug reimportation from Canada and Europe, and seek to have the government insure a large portion of those without insurance. All of these measures would be expected to put a great deal of pressure on drug pricing.
Kerry is said to be in favor of altering the Medicare Drug Benefit to include a provision that would require the Health & Human Services Dept. to negotiate bulk discounts directly with pharmaceutical manufacturers for medicines purchased under the Medicare program. Under the existing law, the federal government is prohibited from direct involvement in drug pricing, with prices set between the private-sector pharmaceutical benefit managers and drug producers.
Kerry would attempt to close loopholes that allow branded pharmaceutical makers from using various legal tactics to block the entry of low-cost generics after patents expire.
Regardless of who wins in November, we see the pharma group remaining under pressure from patent expirations, slowing pharmaceutical price inflation, relatively lackluster product pipelines, and increased global competition.Industrials
Aerospace/Defense: We don't see much of an impact to the commercial aviation side, no matter who wins. However, we think a Bush victory would likely benefit defense stocks in the short term. Since we think most defense companies are already trading at full prices, we think the increase would be temporary. However, we see a Kerry win pushing defense stocks lower by 10% to 15%.
Airlines: In our opinion, the largest political impact relates to the pension issue. In general, most of the legacy airline pension plans are significantly underfunded, such as that of United's parent UAL (UAL
). The Bush Administration, through the Air Transportation Stabilization Board and the Transportation Dept., has generally not been very accommodating to the world's second-largest airline, reportedly stating that UAL needs to honor its obligations.
In addition, the Pension Benefit Guarantee Corp (PBGC) is trying to force the carrier to make its overdue pension fund payments. We're not sure where Kerry stands on this issue. If he focuses on helping United's 80,000 or so workers remain employed, which is usually the way a Democratic candidate leans, in our view, this would stretch out the industry recovery period and increase the cost to U.S. taxpayers.
Engineering & Construction: Benefits would accrue to this industry with either a Bush or Kerry victory, in our opinion. The federal budget for the Energy Dept. may be higher under a Kerry Administration for the removal of sulfur from aviation and diesel fuel. Other projects related to the reduction of air pollutants could also benefit more from a Kerry Presidency, in our opinion, with more funding allocated to the Environmental Protection Agency.
Filtration companies could benefit from additional funding for these environmental-related projects for industrial plants and commercial businesses. Finally, a private national asbestos trust fund to cover companies exposed to asbestos claims has been dragging in Congress. We think its passage is less likely under Kerry. Under a second Bush term, funding for the rebuilding of Iraq would likely continue. What's more, Bush has stated an interest in modernizing the U.S. electricity grid.
Railroads: We see labor regulation potentially influenced by politics. The rail labor force is mostly unionized and is a large part of a railroad's cost. We see Kerry as being more pro-union than Bush, but it's hard to quantify the cost impact a different President may have, if any.
Truckers: Many less-than-truckload (LTL) carriers are highly unionized by the Teamsters, so Presidential influence on labor relations could make a difference, in our view. In addition, trucking companies already are facing long-term efficiency reductions due to the planned tightening of environmental standards on truck engines. While both candidates claim to be against a higher gas tax, any such increase would be bad for truckers since it would increase operating costs.
With the IT sector a key source of innovation and a crucial contributor to U.S. productivity growth, in our view, both candidates have pretty much decided to refrain from substantive policy pronouncements on the various industries within the group. They do have something to say on one subsegment, however:
IT Outsourcing: President Bush has stated that outsourcing is good for America, since it's the natural outcome of global competition and encourages efficiency, competition, innovation, and quality. However he hasn't openly said what he would do for the IT industry.
Senator Kerry has openly spoken out against outsourcing of all sorts (not differentiating between outsourcing high-tech or manufacturing jobs). However, he has said he would end tax breaks for companies that ship jobs overseas and reward those that create and keep jobs in America. During the Democratic Convention, he said he would lower the overall corporate tax rate from 35% to 33.25% and offer a one-time tax holiday on foreign-generated profits that are reinvested stateside. However, he would end the ability to defer taxes on profits earned by a foreign subsidiary.
Telecom Services: The Federal Communications Commission provides regulatory oversight for the telecom industry, which has recently been favorable toward the Baby Bell stocks, in our opinion. Should Kerry get elected, and a Democrat assumes the helm at the FCC, we think the policies for the telecom landscape may be more competitive, thereby putting pressure on the industry.
Electric Companies: This industry would likely suffer from a Kerry victory, in our opinion, as he appears to favor stricter restrictions on sulfur dioxide emissions emitted by coal-fired plants, which generate 50% of the electric power in the U.S. Also, assuming Bush favors more deficit spending and tax cuts, which would likely result in near-term economic growth, we would expect an increase in electricity consumption and improved wholesale power margins.
Bush's dividend tax cut is clearly favorable to high dividend-paying utilities, yet this benefit may be offset by falling utility shares if interest rates rise as much as we think by the end of 2005.
And that's where we leave off. Even though S&P Economics Dept.'s election forecasting model still gives President Bush a 55% chance of being reelected, the race remains tight by a number of other indicators. We believe investors would be wise to prepare for either outcome -- and the possible effects on the sectors and industries in which they put their money to work.
As of June 30, 2004, SPIAS U.S. research analysts have recommended 35.9% of issuers with buy ratings, 52.7% with hold ratings and 11.4% with sell ratings.
5-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.
4-STARS (Accumulate): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.
2-STARS (Avoid): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.
1-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). The research and analytical services performed by SPIAS are conducted separately from any other analytical activity of Standard & Poor's. No research analyst that prepares a research report on a subject company has a financial interest in or is associated with that subject company. SPIAS is affiliated with other entities, which may receive compensation for performing services for companies covered by Standard & Poor's Equity Research Services.
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