The global health care sector is on fire and as much as I've written on the sector lately, the ocean of cash changing hands through merger and acquisition activity lately suggests I haven't done enough.
On Monday, Pfizer Inc. announced it would renew efforts to acquire U.K-based AstraZeneca PLC in a deal Reuters projected could reach $100-billion (U.S.). The news comes hot on the heels of an announced bid by Valeant Pharmaceuticals International Inc. worth almost $50-billion for Allergan Inc.; a $36-billion asset swap between GlaxoSmithKline PLC, Novartis AG and Eli Lilly and Co.; and orthopedic giant Zimmer Holdings Inc.'s $13-billion bid for rival Biomet Inc.
If health companies are bullish enough on the future to risk obscene amounts of cash, then investors should take note.
Last week, we screened the traditional pharmaceutical sector. Now, given the frenetic activity, we cast the net wider to uncover opportunities in all health care-related industries. With luck, one of these will be the next big takeout target.
The table ranks all member stocks in the broad S&P 500 Healthcare Index according to improvement in consensus earnings estimates for the next 12 months.
Gilead Sciences Inc. is a clear standout. The biotech firm reported a tripling of profits in the recent quarter on sales of a new blockbuster hepatitis treatment. Analyst earnings projections for the next year jumped more than 50 per cent and Gilead now trades at an attractive 12 times forward earnings.
Medical equipment maker Boston Scientific also looks attractive despite an 80 per cent stock appreciation over the past 12 months. Analysts have raised their profit forecasts by 51 per cent over the past three months. The forward price-earnings ratio of 17.1 times is not the cheapest on the list, but still below the historical average.
Thermo Fisher Scientific Inc. is a more conservative, peripheral play on the health care sector as a provider of diagnostic and lab equipment. Analysts expect year-over-year profit growth of 27 per cent in the year ahead, yet the stock trades at a reasonable 16 times forward earnings estimates.
Wall Street is clearly bullish on generic drug maker Actavis PLC: 19 of the 22 analysts covering the stock rate it "buy" (or equivalent) and have boosted profit expectations by almost 40 per cent this year. The average price target of $248 suggests a 26 per cent appreciation in the next 12 months.
After a decade where the largely health-care-free Canadian equity market outperformed most developed world benchmarks, few domestic investors have experience with the sector. That will likely change in the coming years as a combination of demographics, expanding U.S. health care coverage and new technology leads to outperformance. Investors looking to get a head start should start slowly scaling in to the sector. It's hot right now, so small positions in the more conservative areas – companies like Thermo Fisher and the hyper-diversified Johnson & Johnson – are the right way to start.
Follow Scott Barlow on Twitter at @SBarlow_ROB.