In this article, two healthcare stocks, Illumina, Inc. (ILMN) and Stryker Corporation (SYK) with positive catalysts will be presented. Both stocks will be analyzed fundamentally and technically. Investing strategies will also be reviewed.
ILMN was up 4.17% and closed at $52.22 on March 1, 2013. ILMN had been trading in the range of $37.77-$57.00 in the past 52 weeks. ILMN has a market cap of $6.44B with a low beta of 0.58.
On March 1, 2013, UBS upgraded ILMN from Neutral to Buy with a price target of $61.00 (from $56.00). Analysts have a mean target price of $55.44 and a median target price of $55.00 for ILMN. Analysts are estimating an EPS of $0.39 with revenue of $310.82M for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.61 with revenue of $1.32B, which is 15.00% higher than 2012.
On February 21, 2013, Illumina, Inc. had completed its previously announced acquisition of Verinata Health, Inc., a leading provider of non-invasive tests for the early identification of fetal chromosomal abnormalities. As reported, Illumina now has access to Verinata's verifi prenatal test and to the most comprehensive intellectual property portfolio in the NIPT industry. The verifi test will continue to be offered through Verinata's CLIA- and CAP-accredited laboratory, and the company will continue to generate the clinical data necessary for future regulatory submissions.
There are a few positive factors for ILMN:
- Higher revenue growth (3 year average) of 19.9 (vs. the industry average of 6.3)
- Higher operating margin of 17.5% and net margin of 13.2% (vs. the averages of 15.9% and 11.6%)
- ILMN generates an operating cash flow of $291.87M with a levered free cash flow of $212.37M
Technically, the MACD (12, 26, 9) is showing a bullish trend and the MACD difference continues to diverge. The momentum indicator, RSI (14) is picking up and indicating a bullish lean at 61.71. ILMN had broken through and closed above its 50-day MA of $51.72 on the last trading day. ILMN is also trading above its 200-day MA of $46.80, as seen from the chart below.
How to Invest
For bullish investors, a credit put option spread of June 22, 2013, $45/$47 put can be reviewed. Investors can also review the following ETFs to gain exposure to ILMN:
- NYSE Arca Biotechnology Index Fund (FBT), 5.84% weighting
- Market Vectors Biotech ETF (BBH), 4.84% weighting
SYK was up 1.60% and closed at $64.90 on March 1, 2013. SYK had been trading in the range of $49.43-$65.00 in the past 52 weeks. SYK had hit new 52-week high on the last trading day. SYK has a market cap of $24.68B with a beta of 0.91.
On March 1, 2013, Stryker Corp. entered into an Accelerated Share Repurchase agreement (ASR) with JPMorgan Chase Bank, NA to repurchase an aggregate of $250M of the company's common stock. The ASR is part of SYK`s existing share repurchase authorization that was increased by the Board of Directors to $1.0B in December, 2012.
On March 1, 2013, SYK had successful completed the acquisition of Trauson Holdings Company Limited, a leading trauma manufacturer in China and a major competitor in the spine segment. With this acquisition, SYK is well positioned to broaden its presence in China and to expand into the fast growing value segment of the emerging markets. The transaction is expected to be neutral to SYK`s 2013 earnings per share excluding acquisition and integration-related charges.
Analysts have a mean target price of $65.54 and a median target price of $67.00 for SYK. Analysts are estimating an EPS of $1.01 with revenue of $2.21B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $4.33 with revenue of $9.00B, which is 4% higher than 2012.
There are a few positive factors for SYK:
- Higher revenue growth (3 year average) of 8.8 (vs. the industry average of 4.0)
- Higher operating margin of 20.1% and net margin of 15.0% (vs. the industry averages of 18.2% and 12.9%)
- Stronger ROE of 16.0 (vs. the average of 13.3)
- Lower debt/equity of 0.2 (vs. the average of 0.4)
- Lower P/E of 19.2 (vs. the industry average of 23.2)
- Lower Forward P/E of 13.7 (vs. the S&P 500's average of 14.)
- SYK generates an operating cash flow of $1.66B with a levered free cash flow of $1.18B
- SYK currently offers an annual dividend yield of 1.63%
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend, but the MACD difference continues to converge. RSI (14) is picking up and indicating a strong buying momentum at 67.90. SYK is currently trading above its 50-day MA of $60.57 and 200-day MA of $54.86. The next resistance is $65.05, the R1 pivot point, followed by $66.21, the R2 pivot point, as seen from the chart below.
How to Invest
With strong solid fundamentals and accelerated buyback, we continue to be bullish on SYK. Our last reviewed credit put option spread of March 16, 2013 $45/$50 could achieve the maximum gain of 21.95% return on margin if SYK closes above $50 on March 16, 2013. For bullish investors, a new credit put option spread of June 22, 2013 $52.5/$57.5 put can be reviewed if SYK pulls back. Investors can also review the following ETFs to gain exposure to SYK:
- Dow Jones U.S. Medical Devices Index Fund (IHI), 6.29% weighting
- SPDR S&P Health Care Equipment ETF (XHE), 2.54% weighting
- S&P Equal Weight Health Care ETF (RYH), 1.99% weighting
Note: All prices are quoted from the closing of March 1, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.