Morningstar is bullish on these health care stocks in the second half of 2021.
The global health crisis has made health care a key theme on Wall Street during the past year and a half. However, aside from a handful of vaccine makers and specialty health care stocks, the overall health care sector has performed relatively poorly, lagging the S&P 500 in the past 12 months. Fortunately, the Morningstar analyst team says there are plenty of opportunities for investors to scoop up attractive health care stocks as the economy and the health care field recover from the crisis. Here are eight of Morningstar’s health care stock ideas for the second half of 2021.
Merck & Co. Inc. (ticker: MRK)
Merck is one of the world’s largest drug companies. Analyst Damien Conover says Merck has both a diversified portfolio of high-margin drugs and an impressive pipeline of new drug candidates that should ensure investors continue to generate solid returns in the long term. Conover says the divestment of Organon in June has left Merck with a remaining portfolio that has a much higher percentage of drugs with significant patent protections. Merck has successfully mitigated generic competition by launching new drugs, led by blockbuster cancer drug Keytruda. Morningstar has a “buy” rating and $94 fair value estimate for MRK stock.
Gilead Sciences Inc. (GILD)
Gilead Science is a drug company that develops treatments for infections, respiratory disorders, cancer and cardiovascular conditions. Analyst Karen Andersen says Gilead’s dominance of the human immunodeficiency virus (HIV) and hepatitis C virus (HCV) markets helps it generate high-margin cash flow given these two businesses require minimal sales teams and involve inexpensive manufacturing processes. In addition, Andersen says Gilead is building an impressive oncology portfolio via targeted acquisitions. After its 2017 acquisition of Kite Pharma, Gilead announced buyouts of Forty Seven and Immunomedics in 2020. Morningstar has a “buy” rating and $81 fair value estimate for GILD stock.
Cigna Corp. (CI)
Cigna is one of the largest U.S. managed care organizations (MCOs) and pharmacy benefit managers (PBMs). Analyst Julie Utterback says Cigna’s impressive first-quarter numbers and guidance hike demonstrated strength in the company’s Evernorth PBM business, which is benefiting from its new Prime Therapeutics relationship. Utterback says Cigna’s goal of reducing rising health care costs could help the company generate more business from existing customers and attract more clients in the future. The company also has plenty of opportunities to cross-sell services between its PBM and MCO customers. Morningstar has a “buy” rating and $274 fair value estimate for CI stock.
Becton, Dickinson & Co. (BDX)
Becton, Dickinson produces medical devices and diagnostic tools used by hospitals, doctors’ offices and research labs. Analyst Alex Morozov says demand for the company’s Veritor handheld testing machine remains strong, and Becton is expected to release a new combination flu and COVID-19 test in time for the winter flu season. Even though case numbers have dropped significantly from pandemic peaks, Morozov says Veritor sales should continue to benefit from ongoing asymptomatic COVID-19 screening. Looking ahead, Morozov is anticipating a rebound in the company’s surgery and vascular businesses. Morningstar has a “buy” rating and $296 fair value estimate for BDX stock.
Vertex Pharmaceuticals Inc. (VRTX)
Vertex Pharmaceuticals is a biopharmaceutical company focused primarily on treating cystic fibrosis. Vertex shares took a big hit in June when the company shelved experimental drug VX-864, which it had been testing for treatment of Alpha-1 antitrypsin deficiency. However, analyst Rachel Elfman says VX-864 has minimal impact on the company’s overall business, and the stock remains undervalued. Elfman says Vertex’s cystic fibrosis business has “megablockbuster potential,” and its portfolio of Kalydeco, Orkambi, Symdeko and Trikafta could treat up to 90% of the total cystic fibrosis patient population. Morningstar has a “buy” rating and $259 fair value estimate for VRTX stock.
Centene Corp. (CNC)
Centene is a health plan provider that specializes in government-sponsored health care programs, including Medicaid. At its June investor day event, Centene guided for 3.3% adjusted net margins by 2024, up from its targeted range of 2.6% to 2.7% in 2021. In addition, the company plans to launch a share buyback program in 2022. Utterback says Cenetene is growing organically at a solid pace, but its 2020 acquisition of WellCare demonstrates its commitment to becoming the top government-sponsored health plan provider. Morningstar has a “buy” rating and $91 fair value estimate for CNC stock.
Zimmer Biomet Holdings (ZBH)
Zimmer Biomet produces orthopedic and musculoskeletal implants. Zimmer has lagged the S&P 500 since the beginning of the pandemic as voluntary procedures and other non-essential surgeries were postponed. However, analyst Debbie Wang says the rebound in large joint replacement procedures in 2021 has been better than she initially expected, and the large backlog of patients should carry over into 2022. In addition, Wang says the launch of next-generation knee implant Persona IQ and the ongoing replacement cycle for Rosa surgical robots should serve as bullish catalysts. Morningstar has a “buy” rating and $192 fair value estimate for ZBH stock.
AmerisourceBergen Corp. (ABC)
AmerisourceBergen is the second-largest U.S. pharmaceutical distributor. Andersen says generic drug price deflation will likely continue, but AmerisourceBergen’s high specialty drug mix will help the company mitigate that decline. She estimates specialty drugs account for roughly 20% of AmerisourceBergen’s overall revenue. Andersen says the company will maintain its current margins and continue to grow annual revenue in at least the low-single-digit percentage range. Following the June acquisition of Alliance Healthcare, investors should expect AmerisourceBergen to continue to pursue additional acquisitions to supplement organic growth. Morningstar has a “buy” rating and $135 fair value estimate for ABC stock.
Eight of the best health care stocks to buy:
— Merck & Co. Inc. (MRK)
— Gilead Sciences Inc. (GILD)
— Cigna Corp. (CI)
— Becton, Dickinson & Co. (BDX)
— Vertex Pharmaceuticals Inc. (VRTX)
— Centene Corp. (CNC)
— Zimmer Biomet Holdings (ZBH)
— AmerisourceBergen Corp. (ABC)
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