Healthcare Stocks That Will Generate Strong Returns: Stryker Corporation (SYK) and More

After the enforcement of the Patient Protection and Affordable Care Act (PPACA) or Obamacare, investors are boosting their positions in Healthcare stocks covering insurance providers, drug-makers and hospitals. PPACA aims at giving every US citizen health care insurance by 2014. Eventually, what that means is, it will also create new revenue streams for the Healthcare companies. I believe that the health-care sector will significantly grow due to the increase in Healthcare spending.

Just to give an idea of its impact, this spending will increase by ~70% to $4.8 trillion by 2021 from the current level of $2.8 trillion. Keeping this in mind, I have screened three healthcare stocks that will benefit in the long term via Obamacare. One more reason for my affinity towards these stocks is that they have strong business fundamentals and have the potential to generate returns via both domestic and international business expansion.

Let’s have a detailed look at each of these stocks

Stryker Corporation (NYSE:SYK)

Stryker declared its fourth quarter and full year results for 2012 last month. It posted full year net income of ~$2.7 billion, which was up by around 4% y/y. The topline drivers for this growth were its Neurotechnology and Spine business segments, that grew by 9.7% y/y to ~$414 million. For 2013, the company is projecting a sales growth of 3%-5.5%.

Emerging markets have been a cause for pain for Stryker. The emerging markets currently contribute only 6% to its overall sales. In order to boost up its overall market share especially in China, Stryker has agreed to acquire Hong Kong’s Trauson Holdings for $764 million. Trauson had reported $60 million of sales in 2011. Orthopedic sales in China will grow massively to $2.7 billion by 2015 and $4.5 billion by 2017. Via this acquisition, Stryker will take advantage of this growth opportunity in the coming years. This acquisition will further bolster its revenue by ~4% y/y in 2013.

Focusing on investors

Stryker’s solid balance sheet and its ability to generate huge free cash flow ($1123 million in 2012) shall allow the company to pay higher dividends, and to go for acquisitions and buybacks of its shares. Stryker has recently announced that it will buyback additional shares worth $405 million in the coming years, though the management has not yet declared the price and timing of this buyback plan.

Expansion in its global market share due to the recent acquisition along with its buyback strategy will bring long-term revenue growth for Stryker and therefore, I recommend a buy for Stryker Corporation.

UnitedHealth Group Inc. (NYSE:UNH)

UnitedHealth Group came up with solid 4Q12 results. The total revenue for the quarter grew drastically by ~11% to $28.8 billion y/y. Growth in Q4 revenue was backed by consistent expansion in its care management, Medicare, and international business. The company also saw 6% growth in its membership, which resulted in around 83 million customers.

During the fourth quarter, UnitedHealth Group had bought 65% of the Brazilian company- Amil Participacoes for $3.5 billion. This investment has helped UnitedHealth group to boost up its international revenue to $1 billion during the 4Q. Keeping the potential growth prospects in mind, UnitedHealth Group will increase its holding in Amil Participacoes by 25% during the first couple of quarters of 2013. Via this investment, I expect tremendous growth opportunities for the company in the future.