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Next Leaders in Technology and Health Care

By Declan Fallon - Sep 11, 2013 at 3:25PM

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Health care and technology stocks are leading the earnings parade. Read about three stocks to lead the charge.

In an unusual divergence, stocks belonging to the defensive health care and cyclical technology spaces delivered some of the best responses to earnings last quarter .  Does this sector diversity indicate bullish omens in the months ahead? It's certainly a good sign, but what are the opportunities in these high-performing sectors?

Technology
Akamai Technologies (AKAM 0.07%) is pushing new 52-week highs. In its most recent quarter, the company reported revenues of $378 million, a 14% year-over-year increase with a 25% gain in net income . Better still, its fast-growing security solutions division generated nearly half of its total revenues: During Q4, the segment saw five times growth on the prior year quarter, and subsequent first and second quarters delivered growth of 17%  and 19%, respectively, in year-on-year comparisons, primarily driven by up-sales to existing clients. The company has been hiring sales staff to attract new customers, but admitted that it would take four or five quarters to get the full benefits of these hires.

In light of this, a repeat of the 7% sequential rise in security revenue from the current quarter for next quarter would add $12 million, which is the total revenue gain projected by analysts for next quarter,  excluding any gain coming from its content acceleration or services divisions. There is a good chance it could deliver another beat next quarter. 

Health care
Behemoth Merck (MRK 0.68%) may be the sleeper pick of the sector -- if such a large stock could be considered a "sleeper."  

Last year, the company lost its patent on Singulair, its second-biggest-selling drug in its pipeline after Januvia . In the most recent quarter, Singulair saw a 80% drop in sales compared to last year, which amounted to a $1 billion loss . Despite this, overall pharmaceutical sales were down just 12% for the quarter  

The more modest loss in gross pharmaceutical sales was assisted by double-digit, year-on-year quarterly growth in Merck's second-tier product line: Janumet, Gardasil, NuvaRing, Nasonex, and Simponi . Collectively, these drugs delivered $1.47 billion quarterly sales.  

Singulair sales, while a far cry from their peak, can still generate some revenue for Merck; Zocor and Fosamax once delivered peak annual sales of $4.4 billion and $3 billion, respectively , but these two drugs still together deliver more than $1 billion in sales despite patents expiring over five years ago   . 

Patents in Merck's lead pipeline are relatively secure. Januvia is the big earner with sales of $4 billion a year, and it doesn't lose its patent until 2022  ; Zetia's is secure until 2017  as is Vytorin . But continued growth in Merck's second tier product line should offset the next round of revenue losses in 2017. 

In addition, emerging markets account for 22% of all Merck's pharmaceutical sales last quarter, of which China delivered 10% growth and is considered a key market going forward.  So looking beyond the revenue loss of Singulair, there is reason for optimism.   

Another potential gem in the health care sector, occupying a space at the other end of the market capitalization spectrum to Merck, is Cyberonics (NASDAQ: CYBX)

Cyberonics is a small-cap stock with a focus on VNS Therapy treatment for epilepsy. While a relatively niche area, the epilepsy market is expected to rise to $3.7 billion in 2016 .  The company also conducts research on obstructive sleep apnea, although no mention was given in its recent call.

The company delivered an earnings beat for the first quarter with a 12% rise in sales . Europe has consistently delivered double-digit growth in revenue and sales, which has been a core reason for its success (bucking the usual trend for sluggish results from Europe). For the first quarter, international sales were up 21% . 

While replacement revenue for the quarter was in line with expectations, for 2012 it amounted to 42% of its revenue. Digging deeper, 40% of those replacements were second or more replacements , offering a solid base for repeat customers. Individual unit sales were up 15% from 2012, with 13,000 units delivered in the first quarter . This bodes well for the replacement market to follow.   

The company did note that it had added $133 million in revenue over the last five years, which was double the reported revenue for 2008. With double-digit unit sales growth and a healthy replacement market, it's hard not to see the company not doubling revenue again over the next five years. 

Summary
Akamai Technologies has enjoyed consistent (and sizable) growth in its security solutions division as it becomes an ever larger segment of its overall revenue pie; look for this to continue for the foreseeable future. What's happened at Merck isn't pretty, but the damage has been done, and it's now time to look forward and examine the potential in its pipeline. Cyberonics has a successful product and the brand loyalty to go with it -- firm foundations for expansion.  All three companies could make solid investments over the long term. 

Declan Fallon has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

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Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$87.41 (0.68%) $0.59
Akamai Technologies, Inc. Stock Quote
Akamai Technologies, Inc.
AKAM
$96.28 (0.07%) $0.07

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