AstraZeneca plc vs Smith & Nephew plc vs Indivior PLC: Which Healthcare Stock Should You Buy?

If you could only choose one healthcare company to add to your portfolio, should it be AstraZeneca plc (LON: AZN) Smith & Nephew plc (LON: SN) or Indivior PLC (LON: INDV)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When it comes to healthcare stocks, there is a huge difference in earnings stability and consistency between pharmaceutical companies and healthcare equipment/devices providers. In the case of the former, earnings are likely to be far more volatile, as they depend upon new drugs constantly being developed to replace those going off patent, while for the latter there is much more consistency due to relatively stable demand for products and a slower changing industry.

Track Records

This difference is evidenced by the bottom lines of pharmaceutical company, AstraZeneca (LSE: AZN) (NYSE: AZN.US), and healthcare equipment/devices provider, Smith & Nephew (LSE: SN) (NYSE: SNN.US). For example, during the last five years AstraZeneca has seen its earnings decline by an incredible 33%, as it has been unable to replace a number of key, blockbuster drugs that have lost their patent protection. Meanwhile, Smith & Nephew has delivered earnings growth in four of the last five years, with its net profit being 26% higher in 2014 than it was in 2009.

Looking Ahead

Of course, AstraZeneca is due to return to growth in 2017 and, as a result of an aggressive acquisition programme, has a pipeline that looks set to offer a purple patch over the medium term. However, in the next two years it is expected to post a fall in earnings of 6%, as further sales falls are anticipated. This contrasts markedly with Smith & Nephew, which is expected to see its bottom line flat line this year, before growing by an impressive 13% next year.

However, AstraZeneca’s near term potential seems to be much more appealing than pharmaceutical peer, Indivior (LSE: INDV). Sales for its main drug, suboxone, are falling due to a loss of patent protection and the company is expected to see its bottom line fall by 59% this year and by a further 21% next year. Certainly, it has the potential to deliver other drugs and has an impressive pipeline, but investor sentiment could shift downwards unless it makes progress in this regard during the next couple of years.

Valuation

The main downside of buying Smith & Nephew is its valuation. It currently trades on a price to earnings (P/E) ratio of 21 which, despite its greater stability and consistency, lacks appeal when you consider that AstraZeneca has a P/E ratio of 17.2. And, with Indivior’s P/E ratio set to rise to 16 next year, it may offer better value than AstraZeneca but has a less diverse pipeline and higher risk future.

Therefore, AstraZeneca seems to offer the best mix of risk and reward of the three companies, with it occupying a middle ground in terms of having long term growth potential via its upbeat pipeline, but also offering diversity so as to reduce the risk of further challenges moving forward.

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.

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

More on Investing Articles

Young Caucasian man making doubtful face at camera
Investing Articles

My Diageo shares stink! What should I do with them?

Diageo shares are having a negative impact on Edward Sheldon’s investment portfolio at the moment. Should he cut his losses…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

5 things that make me nervous about Barclays shares!

After more than doubling over the past year, Barclays shares are riding high. But the road ahead could be bumpy…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

3 reasons the NatWest share price could keep climbing

The NatWest share price has almost doubled in the last 12 months. But Stephen Wright thinks it might not be…

Read more »

Investing Articles

Billionaire’s hedge fund bets big against the GSK share price!

After years of limping along, the GSK share price has leapt 11% in one month. But one of America's richest…

Read more »

Investing Articles

Now at a 52-week high, can the Scottish Mortgage share price go even higher?

The Scottish Mortgage share price is firing on all cylinders, driven higher by outstanding progress at many of the trust's…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

FTSE shares: the perfect ‘get rich slow’ idea?

As a long-term investor, Christopher Ruane reckons the FTSE 100 could offer him the foundations to create stock market wealth.…

Read more »

Investing Articles

Here’s how an investor in their 30s could aim to turn a £10k ISA into £132,676 by retirement

Christopher Ruane explains how someone with a 30-year investing timeframe could aim to increase an ISA stuffed with blue-chip shares…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have made a lot of investors very rich as they push to new heights. Dr James Fox explores…

Read more »