Healthcare Business

2 Deutsche Bank Health Care Focus Stocks Have Big Upside Potential

Lee Jackson

If any arena has taken a beating for no real reason, it is all of the subsectors of the medical arena. Whether it is drugs or devices, populist political chatter from candidates vowing to get tough has led many investors to flee to the exits. A new report from Deutsche Bank makes the case that the selling is way overdone, and the proverbial baby is being tossed out with the bath water.

Deutsche Bank points out that since the end of July the S&P 500 Healthcare Index is down a whopping 16%, versus 11% for the S&P 500. The report highlights companies to buy that have been hit hard despite delivering solid earnings in the first half of the year. The analysts have two focus stocks to buy that offer substantial upside: Abbott Laboratories (NYSE: ABT) and Medtronic PLC (NYSE: MDT).

Abbott Labs

Abbott Laboratories is a leading diversified global health care company that develops, manufactures and markets branded generics, medical devices, nutritional products and diagnostic solutions. The company recently agreed to acquire the equity in Minnesota-based Tendyne Holdings that it does not already own for $250 million plus future payments tied to regulatory milestones. Many analysts on Wall Street have applauded the purchase and the way the company is putting its substantial balance sheet to work.

The company also offers a diversified large cap play, as earnings are split between five well-positioned business segments: Nutritionals (31.0% of revenues), Vascular (13.0%), Generic Pharmaceuticals (20.0%) and Diagnostics (25.5%) and Diabetes (10.5%).

Abbott Labs investors are paid a 2.42% dividend. The Deutsche Bank price target for the stock drops from $57 to $53, and the Thomson/First Call consensus target is $54.41. Shares closed Tuesday at $39.50.

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Medtronic

Medtronic is now based in Ireland after the gigantic combination with Covidien. Many on Wall Street see this historical merger, probably one of the largest in the industry, as a momentous event, leading to the creation of a unique company that combines the extensive and innovative abilities of both Medtronic and Covidien. The combined company, with officially joint forces of over 85,000 employees present in more than 160 countries and annual revenues of $27.4 billion in 2014, will now expedite Medtronic’s three fundamental strategies of therapy innovation, globalization and economic value.

The Deutsche Bank team points out that the stock has been under pressure, first due to emerging markets concerns, then after earnings, which they believe the market misunderstood. The analysts note Medtronic had a strong quarter of top line growth driven by the pipeline that they believe can continue, maybe not at the same level every quarter going forward, but in a solid mid-single-digit range.

Furthermore, the company just announced a huge new restructuring move that is expected to free up $8.9 billion in cash, which can help pay down debt, buyback shares or maybe even help with a selective acquisition.

Medtronic investors are paid a 2.25% dividend. The Deutsche Bank price target is $90, the consensus target is lower at $86.24. Shares closed Tuesday at $66.37.

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It is one thing for small-cap biotech stocks to get mauled in a risk-off atmosphere. It is quite another when established large cap companies get crushed. Growth investors looking to add health care positions would be well served buying these two top Deutsche Bank recommendations.