Two Steady-Eddie Earners

12/22/2008 1:00 pm EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of Personal Finance, says health care companies have predictable earnings, making them ideal stocks to own now.

Health care is expected to post the strongest growth of any sector in the Standard & Poor’s 500 index next year.

And predictability is every bit as important as growth. The lower the standard deviation [of earnings estimates], the more predictable the earnings growth. Health care ranks second lowest to consumer staples in [that measure] for each of the S&P economic sectors.

Switzerland-based pharmaceutical giant Novartis (NYSE: NVS) has the strongest growth prospects of any of the big drug companies.

For Big Pharma, patent expirations and pipeline potential are the two most important factors. When branded drugs lose patent protection, generic competition erodes profit margins; if a pharmaceutical company doesn’t have new drugs in the pipeline to offset those expirations, earnings take a hit.

Novartis scores well on both counts. Several of its major drugs lost patent protection in 2007, including antifungal Lamisil and epilepsy drug Trileptal. But there are no additional expirations until 2012 and 2013, when Novartis’s blockbuster hypertension drug Diovan goes off patent.

Better still, the firm has plenty of promising new drugs in late-stage clinical trials. Particularly promising is an oral multiple sclerosis medication known only as FTY720; Phase III trial results are due to be announced in the first half of 2009. And sales of Gleevec continue to ramp up as the drug is approved to treat more types of cancer.

And Novartis has two smaller business units: vaccines and Sandoz, the company’s generic drugs operation. The latter allows Novartis to benefit from drugs coming off patent. And Novartis has few sizeable competitors in vaccines. Its vaccines business is growing at 20% annualized.

Trading at its lowest valuation in a decade, I’m adding Novartis as a Buy under $55. (It closed below $47 Friday—Editor.)

Baxter International (NYSE: BAX) specializes in treatments derived from plasma, the liquid portion of blood. Baxter’s Advate is the world’s leading treatment for hemophilia, a disorder that prevents blood clotting. Unlike early hemophilia drugs, Advate is completely synthetic.

In addition to Advate, Baxter makes plasma-based and recombinant drugs designed to treat immune system deficiencies, blood-related disorders, and to promote tissue regeneration.

The US market for Baxter’s key drugs is maturing, so investors can expect steady annualized sales growth in the 5% to 10% range.

The real engine of growth will be international sales, which now account for over half of Baxter’s business. Advate sales grew 7% in the US in the most recent quarter compared to 30% internationally. And in plasma-derived treatments, sales surged 59% overseas compared to just 7% in the US.

Baxter’s business mix also includes renal care and medication delivery segments.
The firm’s renal-care unit markets dialysis equipment and treatments designed for hospital and at-home applications.

And the medication-delivery segment focuses on injectable drugs; this segment constitutes essential, disposable products used at hospitals. Buy Baxter International under $62. (It closed under $54 Friday—Editor.)

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