GlaxoSmithKline plc And Smith & Nephew plc: Healthy Stock Stars For Your Portfolio!

Royston Wild explains why GlaxoSmithKline plc (LON: GSK) and Smith & Nephew (LON: SN) look set to deliver resplendent investor returns.

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Today I’m looking at the investment prospects of two healthcare greats.

A drugs diamond

Despite the sterling work achieved by its R&D department over the past year, drugs giant GlaxoSmithKline (LSE: GSK) is still struggling to overcome insipid investor appetite. Shares in the firm have tracked 15% lower from last April’s peaks of around £16.40 per share, but I believe this represents a great buying opportunity.

GlaxoSmithKline announced in November that it plans to file 20 new drugs with regulators by the close of the decade, seven of which are in late-stage development. And the Brentford firm expects to submit an additional 20 products for approval from 2021 to 2025. In total, GlaxoSmithKline anticipates that “approximately 80% of the medicines and vaccines… have the potential to be ‘first-in-class’.”

Of course the nature of drugs development is one that can be fraught with crushing setbacks, a scenario that can cost a fortune in lost sales, not to mention the potential for colossal R&D costs.

But GlaxoSmithKline has a strong record when it comes to moving product from lab bench to pharmacy shelf, and in the past month alone has received positive Phase III data for its rheumatoid arthritis-battler Sirukumab. The firm has also received regulatory approval for its Nucala asthma treatment in Europe.

It therefore comes as little surprise that the City expects GlaxoSmithKline to wave goodbye to the earnings troubles of recent years, a phenomenon brought on by a steady stream of patent losses. Indeed, an 11% bottom-line bump is estimated for 2016, resulting in a very decent P/E rating of 15.8 times — a reading around or below 15 times is widely considered great value.

And when you also factor-in a proposed dividend of 80p per share through to the close of 2017, a figure that yields a delicious 5.7%, I reckon GlaxoSmithKline should be on the wishlist of all savvy value seekers.

A technological titan

Like GlaxoSmithKline, I believe Smith & Nephew’s (LSE: SN) position at the top table of healthcare development provides it with terrific defensive qualities.

Smith & Nephew is involved in the manufacture of prosthetic limbs and joints, a sector that — like GlaxoSmithKline’s stable of life-improving drugs — is enjoying resplendent demand across the globe.

The business saw underlying revenues advance 4% between July and September, to $1.1bn, with further solid growth in its core US market. And even though sales in China were softer during the period, total emerging market demand soared 8% during the quarter.

And like GlaxoSmithKline, Smith & Nephew remains dedicated to making acquisitions to maintain its position at the coalface of innovation. Earlier this month the company completed the purchase of Blue Belt Technologies for $275m — a specialist in the fast-growing robot-assisted orthopaedic surgery segment — and this follows a string of other purchases in recent years.

Against this backdrop, the abacus bashers expect Smith & Nephew to punch a 10% earnings advance in 2016, resulting in a P/E multiple of 19.1 times. Sure, this figure may appear a bit pricey at first glance. But I believe Smith & Nephew’s improving position at the forefront of prosthetic and robotic technologies fully merits this slight premium.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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