Healthcare Stocks That Will Generate Strong Returns

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

After the enforcement of the Patient Protection and Affordable Care Act (PPACA) or Obamacare, investors are boosting their positions in Healthcare stocks covering insurance providers, drug-makers and hospitals. PPACA aims at giving every US citizen health care insurance by 2014. Eventually, what that means is, it will also create new revenue streams for the Healthcare companies. I believe that the health-care sector will significantly grow due to the increase in Healthcare spending.

Just to give an idea of its impact, this spending will increase by ~70% to $4.8 trillion by 2021 from the current level of $2.8 trillion. Keeping this in mind, I have screened three healthcare stocks that will benefit in the long term via Obamacare. One more reason for my affinity towards these stocks is that they have strong business fundamentals and have the potential to generate returns via both domestic and international business expansion. 

Let's have a detailed look at each of these stocks 

Stryker Corporation (NYSE: SYK) 

Stryker declared its fourth quarter and full year results for 2012 last month. It posted full year net income of ~$2.7 billion, which was up by around 4% y/y. The topline drivers for this growth were its Neurotechnology and Spine business segments, that grew by 9.7% y/y to ~$414 million. For 2013, the company is projecting a sales growth of 3%-5.5%. 

Emerging markets have been a cause for pain for Stryker. The emerging markets currently contribute only 6% to its overall sales. In order to boost up its overall market share especially in China, Stryker has agreed to acquire Hong Kong's Trauson Holdings for $764 million. Trauson had reported $60 million of sales in 2011. Orthopedic sales in China will grow massively to $2.7 billion by 2015 and $4.5 billion by 2017. Via this acquisition, Stryker will take advantage of this growth opportunity in the coming years. This acquisition will further bolster its revenue by ~4% y/y in 2013. 

Focusing on investors

Stryker's solid balance sheet and its ability to generate huge free cash flow ($1123 million in 2012) shall allow the company to pay higher dividends, and to go for acquisitions and buybacks of its shares. Stryker has recently announced that it will buyback additional shares worth $405 million in the coming years, though the management has not yet declared the price and timing of this buyback plan. 

Expansion in its global market share due to the recent acquisition along with its buyback strategy will bring long-term revenue growth for Stryker and therefore, I recommend a buy for Stryker Corporation. 

UnitedHealth Group Incorporated (NYSE: UNH) 

UnitedHealth Group came up with solid 4Q12 results. The total revenue for the quarter grew drastically by ~11% to $28.8 billion y/y. Growth in Q4 revenue was backed by consistent expansion in its care management, Medicare, and international business. The company also saw 6% growth in its membership, which resulted in around 83 million customers.  

During the fourth quarter, UnitedHealth Group had bought 65% of the Brazilian company- Amil Participacoes for $3.5 billion. This investment has helped UnitedHealth group to boost up its international revenue to $1 billion during the 4Q. Keeping the potential growth prospects in mind, UnitedHealth Group will increase its holding in Amil Participacoes by 25% during the first couple of quarters of 2013. Via this investment, I expect tremendous growth opportunities for the company in the future.

Apart from this, I believe UnitedHealth Group will also take the advantage of Tricare investment. UnitedHealth Group has won Tricare’s contract for coming five years in order to provide Healthcare services to millions of beneficiaries in 21 states of the western region. UnitedHealth will start its operations in April 2013 serving more than 3 million people. Furthermore, Tricare will also invest ~$20.4 billion over the contract period on health benefits. This contract will fetch ~$1.4 billion for UnitedHealth during the period by managing the regional network.

Looking at the strong fundamentals, I expect the company to be on a growth track in upcoming years. This growth will be definitely reflected in its stock price in the future. Therefore, I recommend a buy for this stock.  

WellPoint (NYSE: WLP)

WellPoint quarter four earnings reported 38.4% increase in revenue to $464.2 million as compared to last year. This earnings growth was in line with market expectations. The company’s management is expecting further growth in the coming years due to future acquisition plans. 

WellPoint has recently announced its full acquisition of Amerigroup Corporation for ~$4.9 billion. This acquisition has enhanced its operations in 20 states of the US and boosted up its total number of beneficiaries to 36 million. A total of 4.5 million beneficiaries have been added due to this acquisition. This expansion will continue to lift WellPoint's earnings in the coming years.

With the strong cash flow figures, WellPoint may also initiate its capital restructuring program in order to maintain its financial flexibility. I expect, WellPoint may spend around $2 billion on dividends and share repurchases during financial year 2013. Apart from share repurchases, WellPoint will also utilize its strong cash flow to repay outstanding bonds of Amerigroup worth $600 million. In spite of this repurchase/dividend and debt retirement, WellPoint will have around $700 million left for further expansion plans in 2013. 

Along with possible growth from the new acquisition, WellPoint will spend around $300 million on its future expansion. Keeping its expansion in mind, I think, the company’s per share earnings to grow from $7.60 to $7.80 in 2013. Therefore, I recommend a buy for this stock. 

Conclusion

All the three stocks discussed above have posted good quarterly results. Moreover, their strong future fundamentals make them an attractive option for investors. Expansion of the global healthcare industry particularly the expected growth in the United States and many other emerging markets including the BRIC countries should further provide upside to these stocks. All the three companies have been performing tremendously in the US and growing globally well over the market expectations. Expecting a long-term continuous growth, I recommend a buy for all the three stocks.


madhudube has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. 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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