Is this the best healthcare stock money can buy after today’s update?

Should you buy this stock or a sector peer following today’s news?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today’s interim results from Midatech (LSE: MTPH) have sent its shares down around 8%. While disappointing, this could present a buying opportunity and its performance and outlook provide clues about whether it’s the right time to buy it versus healthcare peers such as AstraZeneca (LSE: AZN), Hikma (LSE: HIK) and Smith & Nephew (LSE: SN).

Midatech’s first-half performance was upbeat. It was able to successfully integrate and deliver impressive sales performance from its recently acquired US commercial business. This helped it to grow sales by over 1,000% from £0.32m in the first half of 2015 to £3.8m in the first half of 2016. Furthermore, the launch of its anti-nausea product Zuplenz in the US in April has provided a boost to Midatech’s sales and this bodes well for its future performance.

In fact, Midatech is confident on its second-half outlook and in its longer-term prospects. It’s investing heavily in a number of R&D programmes as well as in platform technologies and candidate pipelines. They have the potential to turn Midatech from a lossmaking business to a profitable one over the long run. And with the company’s pre-tax losses set to narrow from £12m to £9m between 2016 and 2017, Midatech is moving in the right direction.

Lower risk?

However,Midatech remains a small and relatively high-risk buy. Therefore, other healthcare companies offer lower risk as well as high potential rewards. Among them is Smith & Nephew. It has a very stable business model owing to its dominant position within wound care and orthopaedics, both of which are more consistent arenas than pharmaceuticals. As such, Smith & Nephew has a low risk profile and with it due to increase earnings by 13% next year, it offers sound growth prospects too.

Hikma is also expected to record upbeat financial performance over the medium term. Its earnings are due to rise by 41% in the next financial year. This puts it on a lower price-to-earnings growth (PEG) ratio than Smith & Nephew, with its PEG being 0.5 versus 1.4 for Smith & Nephew. This indicates that Hikma offers significantly greater upward rerating potential, although with Hikma forecast to record a fall in its earnings of 23% this year, its financial performance is much more volatile than its sector peer.

Think long term

One healthcare stock that offers stunning long-term growth potential is AstraZeneca. Its bottom line has come under pressure due to patent losses, but it’s expected to return to positive growth over the medium term through its acquisition programme. Despite investing billions in its pipeline, AstraZeneca’s balance sheet and cash flow are strong and lower its risk profile significantly.

Alongside this is the potential to make further acquisitions to boost future growth. Due to this, AstraZeneca’s growth potential is hugely appealing even when compared to the likes of Hikma, Smith & Nephew and Midatech.

Furthermore, AstraZeneca yields 4.3% versus 1.9% for Smith & Nephew and 0.8% for Hikma, with Midatech paying no dividend. This means that as well as a low risk profile and strong growth potential, AstraZeneca has the most income appeal of the four stocks. So, despite being attractive, AstraZeneca is the most enticing of this healthcare quartet right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »