The doomsayers have been warning of a recession for years, but they keep on calling it too early. However, it pays to have a few defensive stocks in your portfolio, and the pharmaceutical sector is a good place to find them. People still fall ill in an economic downturn, possibly even more so. Here are two FTSE 100 pharma stocks I’d consider buying.
Hikma Pharmaceuticals (LSE: HIK) develops, manufactures, and markets across the US, Europe, Middle East and North Africa with a presence in more than 50 countries.
The Hikma share price has done well lately, climbing 80% in the last couple of years, although performance before that was volatile. It is down around 2% after today’s trading update, which saw CEO Siggi Olafsson reiterating full-year guidance as “all three of our businesses continue to deliver good organic growth and profitability in line with our expectations”. That is especially positive given that management raised those expectations in August.
The £4.8bn group’s global injectables business is performing well with revenues heading for between $870 and $900m as expected, and core operating margins at 36% to 38%. Generics revenue is at the top end of its $690 to $720m guidance with margins between 16% and 18%, while strong growth in Egypt and Saudi Arabia offset lower Algerian sales for its branded business.
Hikma has regularly posted strong sales growth while generating plenty of cash, and although the forecast yield of 1.6 is low, cover of 3.5% should offer scope for growth. Earnings are predicted to grow a steady 3% this year and 6% in 2020. The group is investing heavily in research and development and partnerships to drive sustainable long-term growth, both from its own portfolio of branded treatments and generic versions of popular medicines.
My only concern is that the stock is priced for growth at 18.3 times forecast earnings. However, it looks on course to achieve those expectations.
AstraZeneca (LSE: AZN) is big pharma on a different scale, with a market cap nearing £100bn, helped by its share price soaring by a third in the last six months.
CEO Pascal Soriot is starting to deliver on his turnaround plans, rewarding investors who put their faith in his promise of jam tomorrow, with profits and dividends ploughed into developing its future drugs pipeline.
Last year, fallen star fund manager Neil Woodford was selling down his stake in AstraZeneca, while building up positions in the likes of Provident Financial and PurpleBricks. He should have stuck to his old faves, like this one.
Sensible investors like to have major pharmaceutical stocks like AstraZeneca in their portfolio, and hold onto them through thick and thin. Although mostly thick, in this case, with the stock trading around 160% higher than 10 years ago.
After five years of flat or negative earnings growth (mostly negative) AstraZeneca is now forecast to deliver 3% this calendar year and 19% in 2020. That jam may be on its way.
The big problem is that you pay a whopping premium, as the AstraZeneca share price trades at 27.2 times forecast earnings. Its forecast yield is 2.9%, below the FTSE 100 average of around 4.5%. This is a premium stock, and that’s why you pay a premium price.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.