Why Exposure to Healthcare Sector Is a Must

by Mitchell Clark, B.Comm.
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Why Exposure to Healthcare Sector Is a Must

In what is on par with the course in today’s stock market, biotechnology firm Amgen Inc. (AMGN) posted double-digit revenue and earnings growth while raising its full-year outlook.

The kicker for this stock and its recent price strength was the news that the company plans to cut 12%–15% of its global workforce (2,400 to 2,900 employees) and close four of its facilities in Washington and Colorado. A lot of the job cuts will be to middle management, according to Amgen’s Securities and Exchange Commission (SEC) Form 8-K.

The company’s second-quarter sales grew 11% to $5.18 billion on strong sales and better margins on “ENBREL,” which is a treatment for arthritis. GAAP (generally accepted accounting principles) earnings grew 23% to $1.55 billion, while adjusted earnings per share grew 25% to $2.37.

On the back of such a strong earnings performance, you’d think the company would be hiring. But such is the marketplace with large corporations and large institutional investors.

Amgen has finally broken out of a 12-year price consolidation on the stock market and is set for more capital gains.

A share split wouldn’t be a surprise and the company is well positioned to provide shareholders with another dividend increase at the beginning of next year.

While Wall Street earnings estimates are going up for this company, I would say that a lot of good news (and drug development expectation) is built into the share price. Still, I don’t see Amgen as overpriced considering its business plan for the next few years. The company’s new restructuring plan is substantial and is likely to be rewarding to stockholders.

Healthcare-related stocks are proven wealth creators and are a valuable addition to any long-term portfolio. There’s a lot more risk in pure-play drug development, of course, and biotechnology stocks are pure risk-capital plays

But a company like Johnson & Johnson (JNJ) or Amgen makes for a great play on established pharmaceutical development. (See “The Big News on 2Q14 Earnings Season So Far.”)

Microsoft Corporation (MSFT) recently jumped higher on the stock market. This company also announced a restructuring of its own and an estimated 28,000 job cuts.

The current environment remains very much a Wall Street–favored economy; strong corporate balance sheets and earnings statements are still not helping Main Street incomes.

Naturally, there’s nothing new with large corporations cutting jobs on record financial results. It’s no doubt a double-whammy for any employee whose life is about to be restructured.

Earnings results continue to be pretty good with many brand-name companies reporting solid numbers and underplaying full-year guidance so as to beat the Street in the fourth quarter.

Exposure to the multifaceted healthcare sector is a must for a balanced equity portfolio. The combination of earnings growth, dividends, and capital gains potential from many healthcare companies cannot be beat by virtually any other industry.

 

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