I take a closer look at three healthcare companies that are rated a "buy" or better on the Street (ratings source: T1 Banker). I compare two medical equipment companies to one pharmaceutical company in order to showcase my belief that the latter offers better risk/reward. Of the three companies, Covidien (COV) is most preferred due to the momentum it has experienced in emerging markets, as also due to its accretive spinoff.
Covidien is rated a "strong buy" and trades at a respective 13.3x and 11.4x past and forward earnings, with a dividend yield of 1.7%.
Consensus estimates for Covidien's EPS forecast that it will grow by 7.8% to $4.28 in 2012, and then by 7.5% and 8.7% in the following two years. Assuming a multiple of 14.5x and a conservative 2013 EPS of 4.57, the rough intrinsic value of the stock is $66.27, implying 26.7% upside.
The company delivered excellent results in the fourth quarter, beating consensus for EBITDA and operating margins. Double-digit momentum in Latin America, Europe, and Asia are further driving investor confidence. Management has also improved transparency and focus by spinning off its ~$2B pharmaceuticals business.
Medtronic (NYSE:MDT) is rated a "buy" and trades at a respective 12.6x and 10.8x past and forward earnings, with a dividend yield of 2.4%.
Consensus estimates for Medtronic's EPS forecast that it will grow by 2.4% to $3.45 in 2012, and then by 7.5% and 6.2% in the following two years. Assuming a multiple of 13.5x and a conservative 2013 EPS of $3.64, the rough intrinsic value of the stock is $49.14, implying 23% upside.
Medtronic has both a strong balance sheet and an impressive pipeline that will drive sustainable streams of free cash flow. With a leading market share in most of its segments, Medtronic is also well positioned to penetrate high-growth emerging markets through re-investments. On the other hand, margin trends have been weak for the firm and competitive pressures are mounting in CRM devices from Boston Scientific (NYSE:BSX) and St. Jude Medical (NYSE:STJ).
Pharmaceuticals giant Novartis (NYSE:NVS) is rated a "buy" and trades at a respective 14.9x and 10x past and forward earnings, with a dividend yield of 4.4%.
Consensus estimates for Novartis' EPS forecast that it will decline by 1.6% to $5.48 in 2012, and then grow by 3.1% and 12.7% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $5.57, the rough intrinsic value of the stock is $77.98, implying 37.8% upside. The market has exaggerated the impact of competitive pressures from Sandoz and the U.S. Diovan patent expiration.
Improving an already excellent operational record, Gilenya will help boost the firm's margins and top-line momentum. As concerns over the termination of the Tekturna ALTITUDE study dissipate, investors could the firm's aggressive capital allocation policy increasingly attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The distributor of this research report is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence. We seek business relationships with all of the firms in our coverage, but research covered in this note is independent and prospectively commissioned. Always discuss investments with a licensed professional before making any financial decision. Statements made within this report may include “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.