Do today’s updates from healthcare companies Shire (LSE: SHP) and Smith & Nephew (LSE: SN) make them star buys for long-term investors?
Shire
Shire’s first-half results show that the pharmaceutical company is making excellent progress and has a bright long-term future. It has posted double-digit sales growth and the most impressive aspect of this is that it has done so across all of its business segments. This shows that Shire not only offers strong growth potential, but is also a relatively consistent business.
Looking ahead, Shire’s combination with Baxalta has the potential to boost its top line yet further. Although some investors have expressed doubts regarding whether the two companies will prove to be a good fit, Shire today increased the synergies it expects the deal will deliver. In fact, $700m in synergies are now being pencilled-in, which is a 40% rise on previous expectations.
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Shire’s pipeline remains enticing and while it perhaps lacks the diversity of other major pharmaceutical companies, it nevertheless could act as a positive catalyst on Shire’s earnings. On this topic, Shire is forecast to raise net profit by 87% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of only 0.2, which indicates that it has significant upward rerating potential.
Certainly, the Baxalta deal is likely to cause a degree of uncertainty in the eyes of many investors. And while this could lead to short-term pressure on Shire’s share price, it continues to be an excellent buy for long-term investors.
Smith & Nephew
Also releasing news today was Smith & Nephew. The wound care and orthopaedic specialist has announced the completion of the divestiture of its gynaecology business to Medtronic for $350m. The company states that the sale provides evidence of its disciplined strategic approach to capital deployment. Around $300m of the proceeds from the sale will be used to fund a share buyback programme over the coming months.
Looking ahead, Smith & Nephew is expected to report a rise in earnings of 13% next year. This is an impressive rate of growth and shows that as well as being a relatively reliable business with a stable operating model, Smith & Nephew offers strong long-term growth potential. In fact, it trades on a PEG ratio of 1.4, which indicates that its growth prospects are reasonably-priced and that its shares could continue to beat the FTSE 100 following their 125% rise over the last five years.
Furthermore, Smith & Nephew is forecast to raise dividends by over 11% next year. This would leave it yielding just 2% at its current price level. But with dividends being covered 2.7 times by profit, there’s significant scope for a rapidly rising dividend over the medium-to-long term, which could mean that Smith & Nephew gradually become an appealing income play.
