Abbott Vs. Peers: A Strong Buy Candidate

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 |  Includes: ABT, MRK, SNY
by: Ry Frank

Pharmaceuticals offer a great holding for investors who are looking for solid growth to go along with nice dividends. The pharmaceutical industry is the most profitable sector in the United States, (with over $300 billion in annual sales) and investing in these firms has allowed many to grab a piece of those profits. I will take a look at one of the top pharmaceutical companies, Abbott (NYSE:ABT), and see if it represents a better investment than two of its competitors, Merck & Company (NYSE:MRK) or Sanofi (NYSE:SNY).

Abbott offers a wide range of medicines and healthcare products, including Norvir (which helps to treat HIV), Ensure (an adult liquid nutritional supplement) and the Absolute Pro stent, which recently received FDA approval. Products like these continue to help this $90 billion company generate tremendous sales and help drive up its stock price. That push caused shares to increase 16% in the past 12 months, as the company enjoyed quarterly increases in both revenue (up 4.1%) and earnings (which climbed 12.3%).

Abbott is a well-managed company. This is evident from its reasonable debt to equity ratio of 63 and payout ratio of 62% on a $2.04 annual dividend (which produces a 3.6% yield). Management moved to spin off its pharmaceutical business, move that has calmed its volatility to very satisfactory levels (as evidenced by its low beta of 0.23). Abbott's stock has a one-year target increase of around 6%, although some valuations place its intrinsic value at more than 21% over its current price.

Although the forecast shows solid growth potential, and the company is sitting on more than $8 billion in total cash; investors should keep an eye on a developing situation involving Abbott. The company is one of eight in the US that is being sued by Community Catalyst, a consumer advocacy group, for offering coupons that lower prescription copayments. While the move does not appear to be punitive, the potential for negative publicity is present and investors should be vigilant for any momentum changes that could signal decay in share prices.

Merck is another of the pharmaceutical heavyweights who recorded a positive 2011. Riding the continued success of products like Singulair, Isentress and Remicade, the company announced double digit non-GAAP earnings per share growth in the 4th quarter, while enjoying a 2% increase in quarterly revenue and a 14.3% rise in share price over the 12-month period. The company has 17 medicines in development, underscoring its recent success with the potential for growth.

Although the numbers stack up well in favor of Merck, prices may pull back in the short-term. The company is forecasting its 1st quarter profit will not meet analysts' expectations, an announcement that is often met with a slap at the company's share price. I expect the pullback will be short-lived, and it will offer investors the chance to get a deal on a company that owes very little (it has a debt to equity ratio of 30), has a mountain of money (total cash of $15 billion) and a share price that is expected to rise 10% in the next year.

Like Abbott, Merck is involved in the coupon lawsuit along with six other pharmaceutical companies. While investors should not ignore this litigation, it shouldn't scare anyone away from investing in Merck (or any of the others involved) at the present time.

Coming off a monster 2011 with quarterly earnings that soared an amazing 229%, French pharmaceutical company Sanofi is looking for more gains this year. After purchasing the biotech company Genzyme, Sanofi starting production at its Farmingham, MA, plant, a move that offsets some of the negative news the company has recently endured.

Sanofi and Merck scrapped a joint venture in animal health due to anti-trust concerns, and the company is starting to feel the effects of losing its US exclusivity on popular medicines, Plavix and Avapro. The FDA also put a hold on REN475, a pain-killing drug co-developed by Sanofi and Regeneron Pharmaceuticals Inc. The agency took this action due to concerns of possible joint failure caused by medicines in the same class. While the company has a dividend of $1.76 (with a yield of 4.8%) and is forecasting a 15% rise in share price, such a large amount of negative publicity can dampen investor interest, especially for the risk averse.

Of these three companies, I am most excited about Abbott Labs. The company's management team has done a great job of positioning it for success, and its new FDA approvals and pharmaceutical spin off are both set to improve the bottom line in 2012. I see Abbott as a strong buy at this time.

Merck is a very good company, but I am concerned about how long a suddenly vibrant Wall Street will punish the manufacturer for not meeting expectations in the 1st quarter. Sanofi was great last year, but the loss of exclusivity on two major drugs, and a hefty dose of negative publicity will almost have an adverse reaction with the company's performance in 2012.

For these reasons, I do see Abbott as the best buy among the three. I think the company is solid, and it has the resources and product lines necessary to maintain its performance. I am paying close attention to the lawsuit that has been filed, but I recommend this stock to investors who want a pharmaceutical holding.

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