Health-Care Sector Looks Fit

3/7/2011


Health care's mix of growth and defensive characteristics has historically equated to solid stock returns.

In rolling 12-month periods since the start of 1995, the average health-care stock in the S&P 1500 Index has returned 14.9%, well above the broader index's 12.7% average return and higher than nine of the index's 10 sectors. The same trend holds true for capitalization-weighted indexes, with the S&P 1500 Health Care Sector Index averaging a 12-month return of 10.6% since the start of 1995, versus 9.5% for the broader S&P 1500.

While we can't promise that health care will continue to outperform, we like a lot of what we see in the sector. S&P 1500 health-care stocks average Quadrix® Overall scores of 62 and are expected to grow per-share profits 8% in the current fiscal year, followed by 14% next year.

Check out the table below for a list of all the health-care stocks we cover. Bard ($96; BCR) is reviewed in Analysts' Choice, and three other recommendations are reviewed in this story.

NOT ALL HEALTH GROUPS CREATED EQUAL
The average S&P 1500 Index health-care stock earns a Quadrix Overall score of 62, with the managed-care and distribution industries earning the strongest scores. Our sector-specific scores rank stocks relative to other stocks in the sector. All numbers other than company count and stock-market value represent group averages.
Total
Stock-
Market
Value
($Bil.)
Trailing 12-Mo.
--- Growth ---
Est. EPS
---- Growth ----
-- Total Return --
Quadrix
----- Scores * -----
Sector-Specific
-------- Scores * --------
Health-Care Group (No. of Cos.)
Div.
Yield
(%)
Sales
(%)
EPS
(%)
Curr.
Year
(%)
Next
Year
(%)
Last 12
Mos.
(%)
Last 5
Years
(Ann.)
(%)
Value
Overall
12-
Factor
Sector
Reranked
Overall
Entire Health Sector (163)
1,491
0.5
11
15
8
14
18
6
59
62
50
50
   Equip. & Services (113)
592
0.4
9
15
7
14
19
6
59
63
53
50
      Equip. & Supplies (49)
264
0.4
8
16
9
16
17
4
51
56
43
39
         Equipment (39)
248
0.4
8
16
8
17
17
4
51
55
42
39
         Supplies (10)
17
0.6
10
19
12
15
17
5
52
59
46
39
      Providers & Svcs. (59)
311
0.3
9
12
4
12
20
7
68
68
62
62
         Distributors (9)
60
0.9
7
5
9
13
19
8
66
62
69
55
         Facilities (12)
22
0.1
5
14
12
8
28
10
63
60
60
57
         Services (25)
104
0.3
14
11
2
14
8
9
62
66
49
54
         Managed Care (13)
126
0.1
3
20
(4)
11
36
0
86
84
84
87
      Technology (5)
16
0.8
14
31
24
22
23
24
24
62
51
29
   Drugs/Biotec/Life Sci. (50)
899
0.7
16
17
11
12
15
5
59
60
42
49
      Biotechnology (14)
166
0.0
23
14
14
15
15
8
51
57
27
46
      Life Sci. Tools/Svcs. (18)
82
0.3
8
15
10
19
13
-6
52
53
46
39
      Pharmaceuticals (18)
651
1.9
18
20
9
4
17
14
71
68
50
60
* Quadrix scores are percentile ranks, with 100 the best.    Note: Averages exclude growth rates or returns of more than 100%.

Agilent Technologies' ($41; A) portfolio of testing equipment straddles the health-care and technology sectors. About half of revenue comes from electronic measurement instruments — devices that design and test semiconductors, smartphones, and consumer electronics. The segment also relies on the aerospace and defense industry for a portion of its business, and management says it still sees strong demand from government researchers.

Agilent's remaining revenue is split fairly evenly between chemical analysis and life sciences. The company manufactures equipment used to study diseases and test the safety of drug candidates. Agilent expects more drugmakers to begin replacing capital equipment in the year ahead.

The consensus estimate for April-quarter profits is on the rise, now projecting 51% growth. Revenue is expected to grow 26%, helped by the May acquisition of Varian, a scientific-instrument maker. Agilent is a Focus List Buy and a Long-Term Buy.


St. Jude Medical ($48; STJ) makes medical devices such as pacemakers. The weak job market continues to depress demand for elective procedures, weighing on results in the atrial-fibrillator and pain-management businesses. But St. Jude's long-term outlook remains intact. Management expects to gain share in implantable defibrillators as doctors begin to replace aging equipment. St. Jude said its line of new products — including stented tissue valves and a device designed to treat migraine headaches — will help support “sustained double-digit” sales growth in coming years. Analysts predict annual profit growth of 12% over the next five years.

The stock, up 12% in 2011, hit a five-year high in February. Yet its valuation remains attractive at 16 times trailing earnings, a 20% discount to the five-year average and 17% below its S&P 1500 peer-group average. In February, St. Jude initiated a quarterly dividend of $0.21 per share, payable April 29. St. Jude, now yielding 1.8%, is a Long-Term Buy.


Varian Medical Systems ($69; VAR), in controlling about 60% of the $4 billion global market for radiation oncology, is leveraged to an aging population and an increase in cancer diagnoses. Varian Medical is projected to deliver 10% sales growth in fiscal 2011 ending September. The backlog stands at $2.21 billion, up 10% from last year.

Varian Medical approved the repurchase of up to 12 million shares through fiscal 2012. That new plan, combined with 4.5 million shares left on an existing plan, could lower the share count by nearly 14%. Rising analyst estimates forecast 16% higher per-share earnings and 9% revenue growth in the March quarter. Varian has a history of positive surprises, beating the consensus profit estimate in four consecutive quarters. Varian Medical is a Buy and a Long-Term Buy.

HEALTH-CARE STOCKS
Below are all 25 health-care stocks on our Monitored List. An A rating means above average, B average, and C below average. Among the A-rated stocks, those presented in bold are components of our buy lists.
Stock-
Market
Value
($Bil.)
Trailing 12-Mo.
---- Growth ----
Est. EPS
---- Growth ----
Quadrix
----- Scores -----
Sector-Specific
------ Scores ------
Company (Price; Ticker)
Div.
Yield
(%)
Sales
(%)
EPS
(%)
Curr.
Year
(%)
Next
Year
(%)
Value
Overall
12-Factor
Sector
Reranked
Overall
Industry
Rating
Abbott Laboratories
($48; ABT)
73.5
3.7
14
11
10
8
91
75
29
69
Drugs
A
Agilent Technologies
($41; A)
14.2
0.0
27
205
32
13
60
96
86
88
Life Sciences
A
AmerisourceBergen
($37; ABC)
10.2
1.1
6
18
11
14
64
68
90
63
Distributors
A
Amgen ($52; AMGN)
49.0
0.0
3
6
(1)
9
93
75
51
73
Biotech
B
AstraZeneca ($48; AZN)
67.5
5.0
3
7
0
(8)
91
90
72
89
Drugs
B
Bard ($96; BCR)
9.0
0.7
7
10
14
10
64
88
87
82
Equipment
A
Baxter International
($52; BAX)
30.4
2.4
4
4
6
10
77
61
14
54
Equipment
B
Biogen Idec ($70; BIIB)
16.9
0.0
8
43
13
4
83
97
77
96
Biotech
A
Bristol-Myers Squibb
($26; BMY)
43.5
5.0
4
22
0
(7)
80
69
21
60
Drugs
B
Eli Lilly ($34; LLY)
39.7
5.7
6
11
(11)
(13)
94
85
44
83
Drugs
B
Express Scripts
($56; ESRX)
29.4
0.0
82
34
29
21
64
69
67
48
Services
A
Gilead Sciences
($39; GILD)
30.9
0.0
13
20
11
11
95
93
23
91
Biotech
A
Hospira ($52; HSP)
8.7
0.0
1
5
19
13
57
26
7
10
Drugs
C
Johnson & Johnson
($61; JNJ)
166.7
3.6
(1)
5
2
6
78
58
31
47
Drugs
B
McKesson ($79; MCK)
20.2
0.9
1
4
8
14
66
81
96
79
Distributors
A
Medco Health Solutions
($62; MHS)
25.1
0.0
10
22
20
22
77
82
79
72
Services
B
Medtronic ($39; MDT)
42.3
2.3
2
7
5
6
84
78
26
76
Equipment
B
Merck ($32; MRK)
100.0
4.7
68
4
8
5
87
58
37
51
Drugs
B
Pfizer ($19; PFE)
153.3
3.8
36
(27)
0
2
83
61
12
70
Drugs
B
St. Jude Medical
($48; STJ)
16.5
0.0
10
20
9
11
71
89
35
85
Equipment
A
Stryker ($62; SYK)
24.4
1.0
9
13
11
11
53
86
64
77
Equipment
A
UnitedHealth Group
($42; UNH)
46.4
1.2
8
28
(10)
11
88
92
88
95
Mgd. Care
A

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