Two Robust Defensive Plays to Consider

 | Oct 26, 2012 | 2:30 PM EDT  | Comments
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Stock quotes in this article:

tmo

,

teva

Market darlings Apple (AAPL) and Amazon (AMZN) both submitted quarterly earnings reports that disappointing investors and missed both top and bottom line estimates after the bell Thursday. In addition, Standard & Poor's (S&P) downgraded French banks this morning, which is likely adding to the volatility in the equity market.

Continuing yesterday's theme around adopting a defensive stance in allocating new money into equities for the moment, I have taken a hard look at the defensive stocks that serve the healthcare sector. Here are two companies that are well positioned in this stable industry, have cheap valuations and should be good places to ride out the current volatility in the overall market.

Thermo Fisher Scientific (TMO) provides analytical instruments, consumables and services for research, manufacture, analysis, discovery, and diagnostics.

Four reasons TMO is a solid, if unexciting, pick at $61 a share:  

  1. Consensus earnings estimates for both fiscal 2012 and fiscal 2013 have risen in the last month. More importantly, the company reported earnings and revenues that beat estimates this week. Its earnings per share (EPS) came in $0.06 a share above consensus and management raised guidance as well.
  2. TMO is seeing more positive comments in October from analysts. Oppenheimer initiated coverage on the shares with an Outperform rating earlier this month and RW Baird just upped its price target to $70 from $67 a share. Credit Suisse also just raised its price target to $71 from $65 a share, S&P followed by bumping its price target to $72 from $68 a share.
  3. The stock has a lower beta (0.79) than the overall market. It also sports a reasonable five-year projected PEG (1.11) for such a stable grower. The company made $1.77 a share in fiscal 2007 and is on track to make over $4.80 a share this fiscal year.
  4. The stock sells for 11.5x forward earnings and the majority of its sales are to the healthcare sector, which has less volatility in demand than other industries.

Teva Pharmaceutical (TEVA) is one of the largest generic drug makers in the world. It also sells branded drugs (Copaxone for multiple sclerosis is by far its largest contributor to revenue).

Four reasons TEVA is a value pick at under $41 a share:

  1. The company delivers steady earnings increases year-in and year-out. It made just under $5 a share in fiscal 2011 and is on track to earn more than $5.35 in fiscal 2013. Consensus EPS for fiscal 2013 is around $5.70 a share.
  2. The company provides a solid yield (2.1%), very low beta (0.34) and has more than doubled its revenues since fiscal 2007 both by organic growth and strategic acquisitions.
  3. The stock is trading at the very bottom of its five-year valuation range based on P/E, P/B, P/S and P/CF. TEVA trades for just over 7x times forward earnings.
  4. The median analysts' price target on TEVA -- held by the 22 analysts who cover the company -- is $49 a share. It also has a five-year projected PEG of under 1 (0.99).


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