The health care sector can be a scary place. Pre-revenue biotechs rally and crash on approvals and rejections, and are sometimes impossible to measure on a fundamental basis. For investors who can't stomach that kind of volatility, four large pharmaceutical companies -- Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK), and GlaxoSmithKline plc (ADR) (NYSE:GSK) -- could be worth a look.
The Foolish fundamentals J&J and Pfizer have notably outperformed the S&P 500 over the past 12 months, while Merck and GlaxoSmithKline have lagged the market. Why have these two larger companies fared better than the two smaller ones? First, let's compare their basic fundamentals.
|Company||Forward P/E||5-Year PEG||Price to Sales||Debt to Equity||Profit Margin||Fwd. Dividend Yield|
Based on analyst projections reflected in its PEG ratio, J&J has the highest potential for growth. However, since J&J is heavily diversified across consumer health care, pharmaceuticals, and medical devices, its margins are not as robust as those of Pfizer, which is primarily focused on pharmaceuticals. Pfizer is also considered the cheapest stock based on its forward P/E valuation.
GlaxoSmithKline has the highest forward dividend yield and the most undervalued price-to-sales ratio, but it also has the highest levels of debt. Merck, on the other hand, doesn't stand out in any particular category, but its five-year PEG ratio of 5.08 indicates sluggish growth compared to its peers.
Moreover, the top and bottom line growth of these four companies, (last quarter), reveals why J&J and Pfizer have been outperforming Merck and GlaxoSmithKline.
|Earnings Growth (YOY)||172.20%||333.30%||(49.50%)||(15.60%)|
|Revenue Growth (YOY)||8.50%||(7.10%)||(10.60%)||2.40%|
However, these numbers tell half the story.
Patent cliffs and PR trouble To understand how these four companies work, investors must understand how these companies generated sales in the past and how they plan to do so in the future. Patent expirations are the main problem for large pharmaceutical companies. All four of these companies face major patent expirations, which could affect future sales.