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A Prudent Trio of Healthcare Picks

07/12/2013 9:45 am EST


John Buckingham

Editor, The Prudent Speculator

Within our well-diversified, value-focused model portfolios, we recently added to our positions in these three healthcare-related issues, says John Buckingham of The Prudent Speculator.

Valuations are reasonable, interest rates are very low by historical standards, corporate profits and balance sheets are healthy, sentiment is a long way from euphoric, dividend payouts are on the rise, and yields on competing investments are not very attractive.

We buy only those stocks we find undervalued along several lines relative to their own trading history, those of their peers, or that of the market in general.

Medtronic (MDT)

Medtronic is one of the largest healthcare equipment companies in the world, developing and manufacturing therapeutic medical devices for chronic diseases. Its implantable products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices.

The firm markets its products to healthcare institutions and physicians in the US and overseas, with foreign revenue accounting for more than 40% of total sales, and almost a third of non-domestic sales coming from emerging market economies.

We like that the relatively new management team continues to execute on its strategy to enhance growth via improved execution, better research, and development productivity, and ramped up globalization. We are encouraged by the recent global market share gains and the momentum in emerging markets.

Additionally, we believe the company’s pipeline and newer products offer a lot of potential. MDT has a solid balance sheet and generates very strong free cash flow, of which management expects $25 billion over the next five years, with 50% expected to be returned to shareholders via buybacks and dividends.

MDT shares are attractively valued relative to its peer group, not to mention its historic average multiples.

Pfizer (PFE)

Pfizer is one of the world’s largest research-based pharmaceutical firms, with annual sales near $60 billion. PFE discovers, develops, manufactures, and markets medicines for humans and animals.

Its products include prescription drugs, non-prescription self-medications, and animal health products such as anti-infective medicines and vaccines.

While recently approved generic forms of Lipitor will very likely knock off one of Pfizer’s key drugs, the company’s foundation remains solid, with a diverse basket of patent-protected drugs and other popular products, an appealing pipeline of new drugs, and deep pockets to offer competitive advantages in developing new drugs.

In addition to the solid balance sheet and strong free cash flow generation, we like that PFE is attractively valued against its peers and that the company continues to show its commitment to returning capital to shareholders through dividends and buybacks.

In fact, Pfizer just announced a new $10 billion repurchase authorization, adding to the $3.9 billion remaining from a prior buyback. PFE currently yields 3.4%.

St. Jude Medical (STJ)

St. Jude Medical manufactures cardiovascular medical devices, including the world’s most widely used mechanical heart valve. Its products include pacemakers, implantable cardioverter defibrillators, catheter ablation systems, tissue heart valves, and vascular closure devices for catheterization procedures.

St. Jude sells its products to hospitals and heart surgery centers around the world, with 50% of sales generated outside the US. We like that STJ has an intriguing pipeline of products and the potential to move into multiple new growth markets over the next few years.

St. Jude benefits from the industry’s high barriers to entry and has made meaningful progress in closing the gap with key rivals.

While the promising long-term outlook for the firm may be clouded by near-term issues in its cardiac rhythm management franchise, we think the inexpensive valuation and solid balance sheet, along with further clarity in regard to the potential of its product pipeline, will make STJ shares an attractive long-term investment.

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