Abbott Ind, Merck, Wyeth to rally 35% higher: LKP Shares

S Ranganathan , Head-Research, LKP Shares is positive on Abbott India , Merck and Wyeth . He has set a target of 35-40% appreciation from current levels, for all three companies. He thinks that Abbott has has successfully completed its share buyback at a much higher price. Regarding Merck, he said that the company has a strong branded portfolio. On Wyeth, he added that the company has high operating leverage on new products in production.

Excerpts from CNBC-TV18’s exclusive interview with S Ranganathan:

Q: Let us start up with Wyeth - why do you like that company and what's your price target on it?

A: This company is a company which is in the domestic branded space and it has got very strong brands operating in areas with are fast growing like vaccines and the other brands which are in the gastrointestinal segment because these are acute therapies where in a country like India, we see a lot of volume growth happening. What we like about the company is the fact that the company already has a 6% dividend yield at these prices. They are sitting on high levels of cash and cash equivalent.

Essentially why we choose these three companies is that these are India-centric companies with a minimum or zero exposure to the US and other developed countries. They have not really gone through any fundamental change in their business - when I say business, it means their cost structure also.

Typically, the promoters hold more than 50% of these companies and because of the fact that they are trading at the lower end of their price to earnings multiple over the last 3-4 years. So basically, you have companies like Wyeth where they are expected to grow their forward earnings at rates, which are higher than the Sensex growth on a valuation basis and they are compelling valuations in the sense that they trade substantially lower than Sensex valuations.

Q: What about Abbott India and Merck?

A: Abbott again in the recent past has conducted a share buyback at prices which are substantially higher than the current market price. Again they are sitting with huge cash and cash equivalents. Probably they are doing all it takes to add shareholder value, because typically if you see a company like an Abbott, the kind of free cash flow that it generates and the fact that most of the three companies that we are talking about have just one manufacturing facility from where they operate, they are quite keen to effectively utilise that cash to probably return that excess cash to shareholders. So, valuations again, its is trading at 10 times. We do believe that there is substantial value because the market is hunting for value at this point in time because this is the best way to play these markets during such uncertain times.

Q: With respect to Merck?

A: Merck - we find that it holds cash and cash equivalents, which is more than Rs 200 per share. The stock is going at around Rs 325, for a company that has an earnings per share of Rs 40. We have reasons to believe that the company is doing just about the right things to really have the advantage of higher operating leverage due to new brand introductions and the fact that it continues to trade at such lower multiples because all this mind you is happening at a time when in the last couple of years the market has been chasing high growth.

All these three companies may not be very high growth companies but typically, these companies can deliver substantially higher returns in terms of earnings growth much better than the Sensex. 

Q: What is your price target individually for all these three stocks?

A: Over a period of one-year, we do expect and believe that all these three stocks should give returns upwards of 35% for investors.

Disclosure:

We and our clients hold beneficiary interest in the stocks.