GlaxoSmithKline & Abbott Labs: Nice Surprises in Health Care

Includes: ABT, GSK
by: Investopedia Advisor

Investopedia Advisor submits: The stock market has been quite difficult over the past few months. Naturally, this should lead investors to build more defensive portfolios. One sector that has, until recently, been a lagging sector is health care. According to the S&P index, the health care sector is now up (as of July 26, 2006) up 5.65% month-to-date and only 0.82% year-to-date. Many analysts have been quite negative in their expectations for these companies.

This past week however, several health care firms reported very positive surprises. One that reported earnings that beat Street expectations and raised full year guidance was GlaxoSmithKline (NYSE:GSK). Revenues rose over 10% on strong sales of its asthma and diabetes drugs and its vaccines. Net profits also rose 14%, and GSK raised growth guidance for the full year to a 12%, an increase from earlier estimates of 10%. But somehow, the stock has sold down on the news.

Once again, the Street may be creating an opportunity for investors. Let’s follow the logic. The Street underestimated GSK’s Q2 earnings. Then, when the company beat those estimates and raised the full year guidance, the Street was disappointed that the guidance was not higher. Huh? This twisted logic has pushed the stock lower and given the positive outlook an opportunity for even more positive earnings surprises.

Most management teams these days, under Sarbanes-Oxley and Reg FD rules, tend to be conservative on their estimates whenever possible. GSK has a solid management team and, given the recent results from the analyst community, have a better handle on their fortunes of the company than the Street.

And for additional positives, consider that it might be able to produce a human vaccine for H5N1 bird flu in large quantities by 2007. Currently GSK is not owned in large amounts by institutions and the stock price could benefit from portfolio managers rotating into this sector. GSK also pays a nice 2.80% dividend yield for your trouble.

Another health care company that is turning its fortunes around is Abbott Labs (NYSE:ABT). Although they reported lower year-over-year earnings, they too beat Street estimates for the second quarter. ABT also raised full year guidance to $2.49-2.53 from $2.44-2.50. Not an amazing jump, but certainly a positive one. The company is also doing a fine job of digesting its recent acquisition of Guidant’s vascular business. ABT’s medical products group is enjoying strong growth and this acquisition will fit nicely in helping to restore higher levels of growth for ABT.

With the market looking like it will continue its recent bout of sluggishness, these stalwart health care companies could be just the prescription your portfolio needs for a clean bill of health.

GSK 1-year chart:

ABT 1-year chart:

By Edward Stavetski, Contributor - Investopedia Advisor

At the time of release Edward Stavetski owned shares in GSK and ABT.