What follows is a list of healthcare companies that are attractive defensive plays. From low betas to high dividend yields and the potential for blockbuster products, healthcare provides an ideal sector to invest in. While The Street like Abbott Laboratories (NYSE:ABT) the least, I prefer it the most, due to the fact that it is the most stable and has an irrational spread between past and forward multiples. All ratings are sourced from T1 Banker.
Merck & Co. (NYSE:MRK)
Merck & Co. is rated a "buy" on The Street and trades at a respective 18.4x and 10x past and forward earnings, with a dividend yield of 4.5%.
Consensus estimates for Merck's EPS forecast are that it will grow by 1.1% to $3.81 in 2012, decline by 1.8% in 2013, and then grow by 9.4% in 2014. Assuming a multiple of 13x and a conservative 2013 EPS of $3.66, the rough intrinsic value of the stock is $47.58. Merck has a reputation for having a weak pipeline, but it still has 17 potential launches under development. I am particularly optimistic about MK-6096, which has demonstrated strong efficacy and has less exposure to generics.
Johnson & Johnson (NYSE:JNJ)
J&J is rated a "buy" on the Street and trades at a respective 18.5x and 11.9x past and forward earnings with a dividend yield of 3.5%.
Consensus estimates for J&J's EPS forecast are that it will grow by 2.2% to $5.11 in 2012 and then by 6.3% and 7.7% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $5.37, the rough intrinsic value of the stock is $69.81. Xarelto has shown signs of being weaker than what some have hoped, and the decency on Europe isn't helping. J&J has a lack of product diversity, overall, and little R&D to fund innovation.
Abbott is rated a "hold" on the Street and trades at a respective 18.8x and 10.6x past and forward earnings with a dividend yield of 3.6%.
Consensus estimates for Abbott's EPS forecast that it will grow by 7.7% to $5.02 in 2012 and then by 6.4% and 5.2% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $5.28, the rough intrinsic value of the stock is $68.64. I like how management is spinning off its pharmaceuticals business. Complications at Humira have discounted the business overall and its split from more visible lines has been well received. The stock is 70% less volatile than the broader market and thus represents an attractive defensive play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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