Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking several high-profile Wall Street picks and putting them under the microscope...
Investment banker Goldman Sachs plunged back into the world of big pharma stocks this morning. Initiating coverage of seven biotech and pharmaceutical companies running nearly the length of the alphabet -- from AbbVie all the way to Pfizer (NYSE: PFE) -- Goldman Sachs had good news for investors:
Three of these stocks -- Johnson & Johnson (NYSE: JNJ), Eli Lilly (NYSE: LLY), and Bristol-Myers Squibb (NYSE: BMY) -- are buys, and a fourth looks like such a great bargain that the analyst actually calls it a "Conviction Buy."
Here they are for you -- and here's what Goldman has to say about each of them.
Johnson & Johnson
Easily the largest of Goldman Sachs' pharma picks today, Johnson & Johnson tips the scales at $370 billion in market cap and $81.6 billion in annual revenue. (J&J is also the most expensive, with a price-to-earnings ratio of 25.8.)
But Johnson & Johnson is worth the price premium, argues Goldman Sachs in a note covered today on StreetInsider.com (subscription required). Although earnings declined 14% last quarter, the company is poised to turn around its fortunes on the strength of its diversified portfolio of consumer and medical products and devices.
What's more, in contrast to other large pharmaceutical companies, Goldman Sachs sees Johnson & Johnson as having the least exposure to government Medicare and Medicaid spending of any big pharma stock the analyst covers. As the 2020 presidential race gets underway, and Medicare for All proposals get put under the spotlight, Goldman Sachs worries that discussions of changes to healthcare policy (and cuts to healthcare spending) could pressure healthcare stocks. In such an environment, diversification away from government healthcare programs could become a big plus for Johnson & Johnson.
In contrast to Johnson & Johnson and its 25-plus P/E ratio, Eli Lilly looks like a relative bargain at just 19 times trailing earnings. Less than one-third J&J's size in both market cap and sales, Eli Lilly also arguably has more room to grow.
Indeed, growth prospects are key to Goldman Sachs' investment thesis. In a note covered on TheFly.com, the analyst argues that Eli Lilly has new product cycles underway in four separate categories: Cancer, pain management, immunology, and diabetes. Goldman Sachs says the company's growth prospects in diabetes treatment are particularly undervalued by the market right now, and argues that rather than trading at a discount to peers like Johnson & Johnson, Eli Lilly stock should actually trade at a premium.
The smallest of Goldman Sachs' four big pharma companies scoring buy ratings today, Bristol-Myers Squibb tips the scales at a svelte $76 billion market cap -- even though its $23.2 billion in trailing sales aren't that much less than Eli Lilly's $24.7 billion!
So why is Bristol-Myers Squibb stock selling for such a large discount to its peers -- less than 15 times trailing earnings? Some investors worry that it's a "value-trap," reports StreetInsider, with the company having just anted up $74 billion to acquire Celgene -- just as the latter is facing the prospect of its Revlimid patent expiring. Goldman Sachs, however, is looking forward to Bristol-Myers' Opdivo lung cancer treatment becoming a "front-line" drug in the war against cancer, and predicts positive data from clinical trials will emerge later this summer.
Pointing out that Bristol-Myers stock sells at a "significant discount" to other big pharma companies, Goldman argues that it's too cheap, and its multiple to earnings is bound to expand -- transforming from $47 a share to $54 within a year.
Each of the three stocks named above won a buy rating from Goldman Sachs this morning, but the analyst's most coveted rating -- "Conviction Buy" -- went to only one stock in the pharmaceuticals sector: Pfizer.
Selling for under $42 a share today, Goldman Sachs believes Pfizer can soar 17% to hit $49 over the next 12 months as expectations for the company's growth rate (earnings up 9% last quarter, but sales up less than 2%) begin to "inflect" as investors look ahead to 2021. The analyst highlights sales prospects for Pfizer's Tafamidis, Ibrance, and Xtandi drugs, which Goldman Sachs believes the Street is underestimating, as key to the company's ability to grow its $53.9 billion revenue stream to $57.4 billion over the next two years -- 6.5% total sales growth.
On top of that, the analyst predicts that Pfizer's operating profit margin on these sales will expand. According to data from S&P Global Market Intelligence, the drugmaker earned a very respectable 29.8% operating profit margin over the last 12 months -- its best margin in the last four years. But Goldman Sachs believes we'll see this margin soar as high as 40.6% by 2022 on the back of faster sales growth and restrained cost growth.
What it means for investors
Now be warned: As optimistic as Goldman Sachs is about the prospects for each of these four companies, its predictions are far off the beaten track on Wall Street, where most analysts expect to see no more than single-digit earnings growth for most of them (Eli Lilly is said to be the fastest grower, with consensus estimates predicting earnings growth of about 10% annually over the next five years).
If Goldman Sachs is right about Pfizer, however, growing sales at 3% or better over the next few years and expanding its operating profit margin by more than a third, Pfizer may in fact be the best bet of the bunch.
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