By Jacob Sonenshine
It has been a shaky time for healthcare stocks, but that only presents a buying opportunity.
The Health Care Select Sector SPDR Fund, which owns shares of major U.S. health insurers, medical device makers, and drugmakers, has dropped about 7% since hitting a record high in mid-September. Investors have been selling healthcare stocks, buying up more economically-sensitive ones instead, as the Federal Reserve has cut interest rates and the market accounts for the positive economic consequences from Republicans winning the White House and both chambers of Congress.
Now, healthcare stocks look cheap -- and many names could rise significantly in the long term.
On average, stocks in the fund trade at about 18 times analysts' expected aggregate earnings for the coming 12 months, versus the S&P 500's 22.4 times. In the past decade, they have often traded at just one or two points below the index. When they're in favor with investors, they tend to trade in line with the broader market.
Broadly speaking, healthcare multiples are unlikely to fall much further -- so as their earnings and dividends payments grow, stock prices will move higher, too.
Several names standout to Barron's, including Eli Lilly, whose stock is down 17% from a record high in late August. Lilly stock trades at 38 times earnings, down from 58 times earlier this year, and a much slimmer premium versus the S&P 500's.
That premium exists because the future looks promising: analysts tracked by FactSet expect Lilly's earnings per share to grow by 32% annually over the next four years to about $40 by 2028. Analysts are forecasting 17% sales growth to $88.5 billion by 2028, led by sales of Lilly's weight loss drug Zepbound, which could eventually comprise a massive chunk of total spending on weight loss. Because the drugs are becoming so well-branded and effective, management won't have to increase its spend on them too much, so analysts expect rising profit margins and soaring earnings.
Those earnings should take the stock higher. Shares currently trade at about $801, or 19 times expected EPS for 2028. But by the end of 2027, the forward earnings multiple could easily remain above the S&P 500's. Even a multiple in the mid-20s, which could easily prove too low, would bring the stock price to above $1,000.
Biogen, meanwhile, may have fallen out of favor with investors, but it's potentially undervalued. The stock is down more than 50% to $163 from a multiyear high hit in the middle of 2021.
Biogen hopes it can remain one of the leaders in treating Alzheimer's disease. Total spending for Alzheimer's treatments from healthcare companies could reach $15 billion by 2030, according to Grandview Research. The market, however, questions how large the business can truly become amid concerns over treatment side effects.
Biogen has to share the Alzheimer's market with its partner Eisai and other pharmaceutical companies. However, if Biogen and Eisai get approval for their Alzheimer's drug, Leqembi, in Europe and improve the drug's cost-to-benefit ratio for patients, the opportunity could be lucrative.
That could translate into billions of dollars in annual sales for Biogen -- a more than 10% lift to the company's expected $9.6 billion in 2024 sales. If margins improve, that could mean even faster EPS growth and a boost for shares, which trade at less than 10 times earnings, versus 21 times in 2021.
There's also Amgen, Merck, and Pfizer. These companies stocks' have dropped 12%, 16%, and 9%, respectively, since the Health Care Select Sector SPDR Fund's September high. Their price/earnings ratios are also below that of the fund's.
Buying all three of these names makes sense instead of betting the farm on one to hedge your bets. Merck said on its latest earnings call that it has dozens of drugs in its pipeline with "blockbuster" potential. Amgen will soon release phase two trial results for an obesity drug called MariTide, which could spur stock gains.
Even if not all new drugs pan out, Amgen, Merck, and Pfizer are attractive because their combined dividends for the next year equate to a yield of 3.6%. But that figure is a bit misleading: with their consistent free cash flow, these companies dividends' grow annually, so the annual yield would be higher than that . Buying more Pfizer stock than the other two names makes sense since Pfizer's forward dividend yield is 6.5%.
Expect this group of stocks to provide healthy returns over the long term.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 14, 2024 13:53 ET (18:53 GMT)
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