As Healthcare Demand Rises, So Will This Company's Profits

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The aging population as well as the higher number of people who will receive benefits under new healthcare laws should combine to produce rising profits for a variety of companies with exposure to the sector. My favorite way to play this upcoming trend is through the drug companies, which should benefit from the significantly increased need for prescription medications that will result from the aforementioned causes. There are many good options in the sector, with my current favorite being Pfizer (NYSE: PFE). With the company set to report its second quarter earnings on Tuesday, July 30, now is a good time to take a look at the company and where it may be headed.

A little about Pfizer

Pfizer has possibly the most diverse portfolio of prescription drugs in the industry. To name a few, Pfizer produces Lipitor ($3.9 billion in 2012 sales), Norvasc ($1.3 billion), Lyrica ($4.2 billion), Enbrel ($3.7 billion), and Celebrex ($2.7 billion). In total, Pfizer’s sales were just under $59 billion last year, with over 60% coming from overseas. 

The company’s sales declined in 2012 from the year before, and are projected to do the same this year, mainly as a result of patents expiring on several key products. I view this as an opportunity as opposed to a weakness, as Pfizer is investing a tremendous amount of money in R&D spending, and new products should take the place of old ones as the company’s leaders. In fact, Pfizer currently has 25 drugs in the latter stages of development, with 2012 being a particularly good year for the company in terms of FDA approvals of new drugs.

Cheap or not?

Despite the falling revenues, Pfizer trades just below its 52-week high and is on an uptrend in the current month. Pfizer is projected to earn $2.17 this year, meaning that shares are trading for 13.5 times the current year earnings. The consensus calls for Pfizer to earn $2.32 and $2.42 in 2014 and 2015, respectively, mainly on the overall strength in the sector. However, investors must bear in mind that the pharmaceutical industry carries certain inherent risks, such as drug approvals, which can wreak havoc on profitability. 

Also worth mentioning is Pfizer’s 3.3% dividend yield, which is above-average for the sector and has been raised fairly consistently over the years. Pfizer is also a very cash-rich company, with about $32.7 billion on its balance sheet.

Similar (but different) choices

There are plenty of choices in the sector that would make excellent investments; I simply prefer Pfizer because of the sheer breadth of its product offerings, which provides a certain degree of stability. Other favorites include Merck (NYSE: MRK), which reports its earnings on the same day as Pfizer, and Novartis (NYSE: NVS).

Merck is just a little smaller than Pfizer in terms of market cap, and is experiencing some of the same patent-expiration woes. Merck produces such prescription drugs as Januvia, Singulair, Remicade, and Vytorin to name a few. Unlike Pfizer, Merck has a substantial OTC and consumer products business, which includes medications such as Claritin and personal care products such as Dr. Scholl’s foot care products and Coppertone suntan lotion. Although Merck looks just a little more expensive on paper at 13.8 times 2013’s projected earnings, the company also pays a higher dividend yield of 3.6% that can make a big difference over a long period of time.

Novartis produces such drugs as Diovan, Lucentis, and Gleevac, but prescription drugs account for just 57% of the company’s sales. A substantial portion (18%) comes from the Alcon vision care product line, and generics and consumer products (22%). Novartis is the most “expensive” of the group at 14.1 times this year’s earnings and also pays a slightly lower yield of 2.96%. However, the company has perhaps the most diverse product line of the group, which is certainly worthy of consideration when valuing the company as an investment.

Final thoughts

Any one of these would make a great addition to a portfolio in need of healthcare exposure. Pfizer does lack diversification in its business (Prescription drugs and vaccines make up over 90% of the company’s revenue) but makes up for it with diversification within their drug portfolio. As the cheapest stock of the three, I give it a slight edge over the other two, but as I said, any of these should profit as healthcare demand increases in the coming years.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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