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Bronte Capital
Gordan Pape

Healthcare Winners: Stryker Corp., UnitedHealth Group Inc.

Two ideas for healthcare stocks

August 29, 2016 | About:

It hasn't been a great year for health care stocks.

In Toronto, the TSX/S&P Health Care index is off more than 31% year-to-date (to Aug. 25), mainly due to the miserable performances of Valeant Pharmaceuticals (VRX), which has lost more than 70% of its value since Jan. 1, and Concordia International (TSX: CXR), which is down almost 80%.

The sector has fared a better in the U.S. due to its broader diversification. However, on the surface at least, no one is getting rich. The S&P Health Care Index is up only 1.6% year-to-date while the Nasdaq Health Care Index is down 11.9%. The iShares U.S. Healthcare ETF, which tracks the performance of American stocks across the entire sector, was down 2.25% for the year as of the end of July.

However, this is one case in which the indexes and the ETFs don't tell the whole story. In fact, there are several U.S. health care stocks that are doing very well. For this year at least, investors have done a lot better by selecting individual companies than by investing in a broadly based ETF.

Here are two health care winners from our Recommended List, from different segments of the industry.

Stryker Corp. (NYSE: SYK)

Background: Stryker Corp. is one of the world's leading medical technology companies, selling its products and services in over 100 countries. An inventive Michigan doctor founded the company in 1941 to sell the products he created. The company went public in 1979. It now employs more than 25,000 people and owns 5,200 patents. It is a member of the Fortune 500.

Stock performance: I introduced the stock in the IWB a little over two years ago, when it was trading at $80.44. Except for a brief dip early this year, it has gradually moved higher, reaching an all-time high of $123.55 in mid-July. The shares have since slipped back to the current level but are ahead 21.9% for the year.

Recent developments: Stryker reported solid second-quarter results (to June 30), with sales increasing 16.8% to $2.8 billion. Excluding the impact of acquisitions, organic net sales were ahead by 6.6%. The company reported sales increases from all its operating divisions: Orthopaedics, MedSurg, and Neurotechnology and Spine.

Adjusted net earnings, which strip out the effects of one-time items, were $525 million ($1.39 per share, fully diluted), up 15.8% from the prior year.

For the first six months of fiscal 2016, net sales were ahead 10.9% to $5.3 billion. Net earnings were up 26.9% to $782 million ($2.07 per share).

Looking ahead, the company increased its full-year guidance. Organic sales growth is now expected to be in the range of 6.0% - 6.5% compared to the prior target of 5.5% - 6.5%. Adjusted net earnings per diluted share will be in the range of $5.70 - $5.80 compared to the previous target of $5.65 - $5.80.

Acquisitions: This is a company that has grown both organically and by acquisitions over the years. The latest purchase was Stanmore Implants Worldwide Ltd. of Britain in a deal worth £35.6 million.

"The acquisition of Stanmore Implants provides Stryker with differentiated technologies designed to provide the most effective solutions for orthopaedic oncology surgeons," said David Floyd, Group President, Stryker Orthopaedics. "This addition underscores Stryker's commitment to our core joint replacement business and expands our presence in the global orthopaedic oncology market."

Earlier, Stryker announced the closing of a deal to acquire Physio-Control International, Inc. for $1.28 billion. The company develops, manufactures and markets monitors/defibrillators, automated external defibrillators, and CPR-assist devices along with data management and support services.

Other recent corporate additions include the Neuro Portfolio of Synergetics USA and Sage Products (oral and skin case products).

Dividend: The shares pay a quarterly dividend of $0.38 ($1.52 per year) to yield 1.3% at the current price. The company has raised its dividend every year since 2009.

Action now: Buy.

UnitedHealth Group Inc. (NYSE: UNH)

Background: UnitedHealth Group is one of the largest health care insurers in the U.S. It also provides information and technology-enabled health services through its Optum division.

Stock performance: Retired contributing editor Tom Slee recommended this stock in March 2014 at $76.01. It was last updated in May when it was rated a Buy at $132.04. The stock has gained 16.7% so far in 2016.

Recent developments: In my last update, I reported that UNC had announced that in 2017 it would withdraw from most of the state Obamacare exchanges, where Americans register for health coverage. At the time, it said participation in the program would cost $650 million this year. Investors have responded positively to the decision, driving up the share price.

The company added more positive momentum with a strong second-quarter report. Revenue came in at $46.5 billion, a 28% year-over-year increase. Cash flow from operations was up 45% to $1.7 billion.

Net earnings attributable to shareholders were $1.75 billion ($1.81 per share, fully diluted). That compared to $1.6 billion ($1.64 per share) last year.

For the first six months of fiscal 2016, the company reported earnings of $3.4 billion ($3.48 per share), up from $3 billion ($3.10 per share) in 2015.

Analysts believe there is a lot of upside left in this stock. According to Yahoo! Finance, the stock is rated by 23 analysts at 1.6 on a scale of one to five, with one being the strongest buy. Their median target price for the stock is $160.87.

Dividend: The quarterly dividend was increased by 25% effective with the June payment to $0.625 ($2.50 per year). The shares yield 1.8% at the current price.

Action now: The stock is still a Buy.

Rating: 0.0/5 (0 votes)


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