2 Healthcare Upgrades Investors Should Consider

Includes: ABT, MNKD, PFE, SNY
by: Matt Schilling

An analyst recommendation can mean very good things for both the short-term and long-term performance of a stock, and two of the latest recommendations shouldn't be any different. On August 10th analysts upgraded the stocks of Mankind Corp. (NASDAQ:MNKD) and Sanofi-Aventis (NYSE:SNY), and I think investors should not only consider the stocks based on the recommendations, but based on several secondary variables as well.

Mankind Corp. closed trading at $2.15/share on Friday as the company had its stock upgraded by JMP Securities to a Market Outperform from a previous rating of Market Perform. The single catalyst to consider in terms of MNKD are the company's EPS trends over the last four quarters. Surpassing analyst estimates by an average 5.8%, with its only miss coming during the March 2012 quarter when they missed estimates by $0.04/share. The company's most recent quarter was very solid as MNKD surpassed estimates by $0.02/share noting a significant decrease in cash burn. It should be noted that the company did not generate any revenues for the quarter, nor did they generate any in the year ago period. Even though the company hadn't generated any revenue I still think there is strong potential for MNKD as the company was able to add additional patients to several ongoing studies as noted in the latest MNKD conference call.

Sanofy-Aventis closed trading at $41.60/share on Friday as the company had its stock upgraded by Cowen to an Outperform from a previous rating of Neutral. There are two things investors should consider when it comes to SNY, the company's yield and the company's margins. Over the last 12 months the company has demonstrated an operating margin of 23.59% and a profit margin of 17.89%, which is pretty good considering SNY demonstrated a better profit margin than Pfizer (NYSE:PFE) which only managed to demonstrate a profit margin of only 15.76%, and a slightly better operating margin than Abbott Labs (NYSE:ABT) which demonstrated an operating margin of 22.08%. The second thing to consider in terms of SNY is the company's yield, which is currently 4.10% ($1.69), and it should be noted it is nearly 1.13 times that of Pfizer's yield of 3.6% ($0.88).

Final Analysis

For potential investors looking to establish a position in each of these stocks, I'd remain a bit cautious as EPS numbers have missed significantly in the past, even though recent numbers have been quite good. The key catalyst for both companies will be revenue generation over the next few quarters and if both companies can manage to surpass estimates there could be some very nice upside potential. As is the case with any healthcare and more specifically biotech company, and negative feedback from the FDA could result in a short-term sell-off of either security.

with that said I'd initiate a small to moderate position at current levels and keep an eye out for the continuation of positive EPS growth from both companies. Positive EPS trends and any clinical trial development demonstrating better than expected results could pop either stock in the upcoming quarters.

Disclosure: I am long VTUS.