Three health care stocks to weather market weakness

In addition to providing steady growth, these companies also offer attractive income opportunities through healthy dividends.

Vikram Barhat 24 November, 2015 | 6:00PM
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Health care stocks may not replicate the blockbuster returns they posted last year, but as a sector these companies remain among the fastest growing despite participating in the overall market correction.

No matter what happens in the global economy, as part of a non-cyclical sector some health care companies tend to perform well as increased access to health care and medical needs of the aging baby-boomer population continue to fuel the underlying demand for their products.

The S&P 500 Health Care (Sector) Index, which measures the aggregate performance of the 55 U.S. health care stocks included in the S&P 500 Index, gained more than 25% in 2014. For the year to date as of Nov. 17, the gains in the U.S. are more modest, at 4.5% for the sector index, though this is considerably higher than the 1.45% growth for the S&P 500 over the same period.

In addition to providing steady growth, these companies also offer attractive income opportunities through healthy dividends. For long-term investors looking for high-quality health care stocks, this may be a good time to consider some buying opportunities with sustainable, multi-year growth prospects.

GlaxoSmithKline PLC ADR
Ticker GSK
Current yield 6.07%
Forward P/E 15.6
Price US$40.65
Fair value US$47
Data as of Nov. 17, 2015

One of the largest pharmaceutical companies, by market capitalization,  GlaxoSmithKline (GSK) develops, manufactures and markets therapeutic vaccines, prescription and over-the-counter medicines, as well as consumer products.

The drugmaker has used its vast resources to develop innovative health-care treatments and an expansive list of patent-protected drugs, building a strong competitive advantage, according to a Morningstar report.

The firm's product portfolio spans several therapeutic categories, which "insulates the company from problems with any single product," said Damien Conover, sector director at Morningstar.

Glaxo is diverging from its past strategy of product enhancements toward true innovation. The benefits of this shift are particularly visible in the company's strong pipeline of respiratory drugs, which Conover said "will improve both approval rates and pricing power."

The British pharma giant has also been strategically expanding its geographic footprint to fast-growing emerging markets where brand names are important. The move will help support long-term growth and diversify cash flows beyond developed markets, said Conover.

Morningstar forecasts average annual sales growth of 3% during the next decade and more than 300 basis points of operating margin expansion over the next five years as Glaxo integrates the Novartis assets it acquired earlier this year.

Pfizer Inc.
Ticker PFE
Current yield 3.38%
Forward P/E 13.5
Price US$32.87
Fair value US$38
Data as of Nov. 17, 2015

 Pfizer (PFE) is one of the world's leading drug developers and producer, with annual sales close to US$50 billion, of which 90% is generated by prescription drugs and vaccines. Most noted for its erectile dysfunction drug Viagra, Pfizer's product portfolio includes top sellers such as meningitis vaccine Prevnar 13, and Lyrica for epilepsy and neuropathic pain. The company sells these products globally, with international sales making up nearly 60% of the total.

The firm's basket of diverse drugs generate strong cash flows that help fund the average US$800 million required for a new drug, according to a Morningstar report. Conover says Pfizer's strong foundation and large size prove advantageous in developing new drugs, which, combined with the existing portfolio of patent-protected drugs, creates a wide economic moat, or competitive advantage, around its business.

Also, Pfizer is launching several potential blockbusters in cancer, heart disease and immunology, prompting Conover to raise the stock's fair value estimate to US$38 from US$36 per share.

Teva Pharmaceutical Industries Ltd. ADR
Ticker TEVA
Current yield 2.31%
Forward P/E 10.8
Price US$59.94
Fair value US$70
Data as of Nov. 17, 2015

Israel-based  Teva Pharmaceutical (TEVA) is the world's largest generic pharmaceutical manufacturer. It also develops and sells branded drugs to treat conditions related to the central nervous system, oncology, respiratory failure and women's health.

Sales of generic drugs account for more than 70% of Teva's total revenue, while branded drug and international over-the-counter (OTC) revenue make up the rest.

The firm's slim-but-strong competitive advantage stems from its decision to acquire Allergan's generics division. With the acquisition, Teva has scooped up one of the best generic drug portfolios in the industry where a select few firms control the lion's share of worldwide production, says Michael Waterhouse, Morningstar equity analyst, who raised the stock's fair value to US$70 per share from US$58.

Although the generic segment growth has slowed in the U.S., the business is expected to remain stable. Teva's US$2 billion cost-savings plan and "expansion into emerging markets and the company's joint venture with Procter & Gamble in branded OTC drugs should also help overall performance," he added.

Waterhouse forecasts a 2.5% organic five-year average growth for Teva's generic drug segment and high-single-digit growth for its OTC segment, and expects operating margins to remain above 25%.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
GlaxoSmithKline PLC ADR45.00 USD0.56Rating
Pfizer Inc53.41 USD1.00Rating
Teva Pharmaceutical Industries Ltd ADR8.45 USD0.00Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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