High-Yield Health Care Stocks in Europe

August 9th, 2012
in contributors

Article of the Week from Investing Daily

by Greg Pugh, Investing Daily

There’s too much investor fear surrounding Europe today.  Although the EU’s pillseconomies are collectively in a slump, many European-based companies boast strong fundamentals. Their stocks now trade at low valuations, making them a steal for long-term income investors.

These companies are seen as “European,” but they make their money throughout the world. Their stocks are being punished as the sovereign debt crisis unfolds, but it’s guilt by association, making their valuations appealing. One of the best sectors to find European bargains is health care—pharmaceuticals, in particular

Follow up:

In the U.S., big pharmaceutical companies have rallied in 2012. For example, Merck and Co (NYSE: MRK) is trading at a 52-week high with a price to earnings (P/E) ratio of 20, producing a 3.8 percent dividend yield. Merck is up 18 percent so far in 2012.

Likewise, Pfizer (NYSE: PFE) is at a 52-week high with a P/E of 20 and a dividend yield of 3.71 percent. Pfizer is up 10 percent in 2012.

By comparison, European pharmaceutical stocks are flat in price and provide high dividend yields at lower P/Es than their US counterparts. Here’s a list of the best European pharmaceutical stocks:

1. AstraZeneca PLC (NYSE: AZN), based in the UK, engages in the discovery, development and commercialization of prescription medicines for gastrointestinal, cardiovascular, respiratory, and infectious diseases worldwide. AstraZeneca reported second-quarter 2012 earnings per share (EPS) of $1.53, beating consensus estimates of $1.38.

Look for AstraZeneca to put its $11.8 billion cash hoard to good use, by acquiring some smaller biotechs to bolster its drug pipeline. AstraZeneca is trading at around 48, with a P/E ratio of 7.7. AstraZeneca has a dividend yield of 5.91 percent but is only up 1.66 percent for the year. Our 12-month price target for AstraZeneca is 52.

2. UK-based drug giant GlaxoSmithKline (NYSE: GSK) is revamping its pipeline to stay competitive. Key factors now weighing on the top line include generic erosion of its anti-viral drug Valtrex and tougher pharmaceutical pricing in Europe and the US.

GlaxoSmithKline should see pharmaceutical volume bolstered by gains in Avodart for enlarged prostates, and contributions from new products such as Benlysta for Lupus, and Potiga for epilepsy.

GlaxoSmithKline is projecting higher vaccine sales, lifted by gains in its Boostrix and Synflorix lines. The stock is trading at around 46.80 per share with a P/E ratio of 7, with a dividend yield of 4.87 percent. The stock is only up 0.9 percent for the year. Our 12-month price target for GlaxoSmithKline is 50.

3. Swiss drug maker Roche Holdings (PINK: RHHBY) has produced a strong acceleration in EPS, from $2.79 to an estimated $3.73 over the past five quarters but only trades at a P/E of 12.

Roche, the world’s largest maker of cancer drugs, is better positioned than most in the global drugs industry to weather patent expiries and government price cuts, because its top-selling cancer medicines don’t face imminent generic competition.

Roche reported that it was sticking to a strategy of looking for small to mid-sized acquisitions, after its $6.8 billion hostile takeover bid for the US gene sequencing firm Illumina (NASDAQ: ILMN) failed in April.

Roche is also investing in its own gene sequencing research. Roche is trading at around 45 with a dividend yield of 4.09 percent and is only up 1.9 percent for the year. Roche Holdings has a 12-month price target of 48.

4. Novartis (NYSE: NVS) is a Swiss drug maker whose product Afinitor is expected to become a major seller. Used to treat women with a certain type of breast cancer, Afinitor was recently approved by both the US Food and Drug Administration and European regulators.

Novartis’s drug is already approved to treat patients with four other types of cancer, including kidney and a rare type of pancreatic cancer. Novartis reported that best-selling products launched since 2007, including Afinitor, now comprise 29 percent of group net sales, up from 25 percent a year ago.

Novartis is trading at around 59 with a dividend yield of 4.2 percent and is up only 1.68 percent for the year. Novartis has a 12-month price target of 62.

What do you think of this article? Please post your feedback in either of the “comments” sections below!  (Comment via facebook or in our comment window.)

Greg Pugh, an income-investing expert, publishes a newsletter called Investing for Monthly Income.

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