The healthcare industry has been witnessing rising capital inflows and investor attention over the past year, as evident from the Health Care Select Sector SPDR ETF’s (XLV) 18.2% returns over this period. The discovery of new COVID-19 variants and the rising demand for the diagnosis and treatment of other critical diseases is incentivizing companies to develop advanced and integrated medical devices and solutions, virtual consultations, and therapies.

Given the historically high inflation, supply chain constraints, and ongoing volatility in the broader market, investors and analysts are anticipating a market correction in the near term. However, the inelastic demand for healthcare products should help the industry participants to deliver substantial returns and hedge the current market risks. Global healthcare spending is expected to reach $10.06 trillion by 2022.

Given this backdrop, we believe it is wise to bet on quality healthcare stocks Merck & Co., Inc. (MRK), Novartis AG (NVS), Zoetis Inc. (ZTS), and Cerner Corporation (CERN) that have the potential to deliver solid returns and dodging the market fluctuations.

Merck & Co., Inc. (MRK)

MRK offers health solutions through its prescription medicines, vaccines, biologic therapies, and consumer care products. The company operates through two segments — Pharmaceutical and Animal Health. Its products are marketed directly and through its joint ventures to drug wholesalers and retailers, hospitals, government agencies, and managed health care providers. It has a 0.47 beta.

On November 30, 2021, the U.S. Food and Drug Administration’s (FDA) Antimicrobial Drugs Advisory Committee (AMDAC) approved the emergency use authorization application (EUA) for Molnupiravir, an investigational oral antiviral medicine developed by MRK and biotech company Ridgeback Biotherapeutics, for the treatment of mild to moderate COVID-19 in high-risk adult patients who are within five days of symptom onset. Backed by the compelling data from its Phase 3 MOVe-OUT clinical trial that demonstrated a significant reduction in hospitalizations and deaths, the companies expect this EUA is a critical step for gaining reach in the markets.

For its fiscal third quarter, ended September 30, 2021, MRK’s sales increased 20.4% year-over-year to $13.15 billion. The company’s non-GAAP pre-tax income from operations came in at $5.11 billion, representing a 24% rise from the year-ago period. MRK’s non-GAAP net income came in at $4.44 billion, indicating a 27.3% rise from the prior-year period. Its non-GAAP EPS increased 27.7% year-over-year to $1.75. The company had $10.02 billion in cash and cash equivalents as of September 30, 2021.

Analysts expect the stock’s EPS to increase 28.5% year-over-year to $5.82 in the current year. The consensus revenue estimate of $48.86 billion for the current year represents a 1.8% rise from the prior-year period. MRK’s EPS is expected to grow at a rate of 15.3% per annum over the next five years.

Over the past nine months, the stock has gained 3.2% to close yesterday’s trading session at $74.91. Over the past three years, the stock’s EBITDA and levered free cash flow have grown at CAGRs of 14.2% and 3.7%, respectively.

MRK’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Growth and a B grade for Stability, Value, and Quality. Click here to see the additional ratings for MRK’s Sentiment and Momentum. 

Of the 197 stocks in the Medical – Pharmaceuticals industry, MRK is ranked #4.

Novartis AG (NVS)

NVS is a Switzerland-based pharmaceutical company that researches, develops, manufactures, and markets branded and generic prescription drugs, active pharmaceutical ingredients, biosimilars, and ophthalmic products worldwide. The company uses science and digital technologies for treatments in the disease areas of immunology, dermatology, cancer, ophthalmology, neuroscience, respiratory, cardiovascular, renal, and metabolism. It has a 0.53 beta.

On November 8, 2021, NVS announced new analyses from the two-year positive Phase III JUNIPERA study, which demonstrated the treatment response of Cosentyx in children and adolescents with enthesitis-related arthritis (ERA) and juvenile psoriatic arthritis (JPsA). The results demonstrated that patients with active ERA and JPsA, treated with Cosentyx had a significantly longer time to flare, showing a 72% reduction in the risk of flare versus placebo. After filing regulatory submissions for Cosentyx, NVS is awaiting authorization from the FDA and EMA to become the first biologic treatment for children living with an ERA in the US.

For its fiscal third quarter, ended September 30, 2021, NVS’ net sales to third parties increased 6.3% year-over-year to $13.03 billion. The company’s gross profit came in at $9.43 billion, marking a 7.3% rise from the year-ago period. NVS’ operating income of $3.23 billion for the quarter indicates a 34% rise from the prior-year period. Its net income came in at $2.76 billion, representing a 42.8% year-over-year improvement. Its EPS increased 45.2% year-over-year to $1.22. The company had $7.21 billion in cash and equivalents as of September 30, 2021.

The consensus EPS estimate of $6.32 for the current year represents a 9.3% rise from the prior-year period. Analysts expect NVS’ revenue to improve 7.2% year-over-year to $52.15 billion for the current year. Its EPS is expected to grow at a 7% rate per annum over the next five years.

NVS has lost 7.2% in price over the past nine months and ended yesterday’s trading session at $79.70. However, the stock’s EBITDA and levered free cash flow have increased at CAGRs of 13.9% and 15.2%, respectively, over the past three years.

It is no surprise that NVS has an overall A rating, which equates to Strong Buy in our POWR Ratings system.

The stock has an A grade for Stability and a B grade for Growth, Value, and Quality. Click here to see the additional ratings for NVS’ Sentiment and Momentum.  

NVS is ranked #3 in the Medical – Pharmaceuticals industry.

Zoetis Inc. (ZTS)

With a 0.66 beta value, ZTS discovers, manufactures, and markets veterinary vaccines, medicines, and diagnostic products complemented by genetic tests and a range of services worldwide. Through its sales representatives and technical and veterinary operations specialists, the company markets its products to veterinarians, livestock producers, retail outlets, and third-party veterinary distributors. 

On October 5, 2021, ZTS launched digital cytology testing to its Vetscan Imagyst platform, which provides rapid access to expert clinical pathologists to assess samples consisting of cells from blood, internal organs, or bodily fluids, in addition to AI technology. This will help enable the veterinarians to perform fast, accurate, and minimally invasive diagnoses of cancer, infection, inflammation, etc., and deliver the results within hours. ZTS is looking forward to witnessing rising demand for this technology in the upcoming months.

ZTS’ revenue for its third quarter ended September 30, 2021, increased 11.4% year-over-year to $1.99 billion. The company’s non-GAAP gross profit came in at $1.41 billion, representing a 13.2% year-over-year improvement. Its non-GAAP pre-tax income came in at $717 million, up 9.5% from the prior-year period. While its non-GAAP net income increased 13.9% year-over-year to $597 million, its non-GAAP EPS increased 13.6% to $1.25. As of September 30, 2021, the company had $3.27 billion in cash and cash equivalents.

Analysts expect the stock’s EPS to grow 20.8% year-over-year to $4.65 in the current year. The consensus revenue estimate of $7.74 billion for the current year represents a 16% rise from the prior-year period. It surpassed Street EPS estimates in three of the trailing four quarters. Analysts expect the stock’s EPS to grow at a rate of 13.6% per annum over the next five years.

Over the past nine months, the stock has gained 43% in price and closed yesterday’s trading session at $222.04. Over the past three years, the company’s EBITDA and levered free cash flow have grown at CAGRs of 12% and 3%, respectively.

ZTS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to Strong Buy in our proprietary rating system.

The stock has an A grade for Quality and a B grade for Growth, Sentiment, and Stability. Click here to see the additional ratings for ZTS (Value and Momentum).

ZTS is ranked #5 in the Medical – Pharmaceuticals industry.

Cerner Corporation (CERN)

CERN is a supplier of healthcare information technology that offers a range of intelligent solutions and tech-enabled services that support organizations’ clinical, financial, and operational needs. The company’s solutions are offered on the unified Cerner Millennium architecture and the HealtheIntent cloud-based platform. It serves integrated delivery networks, medical centers, reference laboratories, home health agencies, blood banks, imaging centers, pharmacies, pharmaceutical manufacturers, employers, governments, and public health organizations. It has a 0.73 beta.

On November 4, 2021, CERN and Transplant Connect, a medical software company, designed a new technology that is designed to help increase and expedite potential organ, tissue, and eye donor referrals to increase recipient matches, lessen missed opportunities for timely donation and reduce the number of hours caregivers spend on the donor referral process. As per the regulations from the Centers of Medicare & Medicaid Services, the need and details for good donors get important now. CERN expects these automated donor referrals are expected to witness high demand in the coming months.

CERN’s revenues for its fiscal third quarter ended September 30, 2021, increased 7.3% year-over-year to $1.47 billion. The company’s gross profit came in at $1.22 billion, representing a 7.1% rise from the prior-year period. Its non-GAAP operating earnings came in at $321.39 million, up 15.3% from the prior-year period. CERN’s non-GAAP net earnings came in at $256.19 million, indicating a 15.4% year-over-year improvement. Its non-GAAP EPS increased 16.3% year-over-year to $0.86. The company had $459.54 million in cash and cash equivalents as of September 30, 2021.

Analysts expect CERN’s EPS to rise 16.2% year-over-year to $3.30 in the current year. The consensus revenue estimate of $5.80 billion for the current year represents a 5.3% rise from the prior-year period. It surpassed the consensus EPS estimates in each of the trailing four quarters. CERN’s EPS is expected to grow at a rate of 13.5% per annum over the next five years.

Over the past nine months, the stock has gained 1.9% to close yesterday’s trading session at $70.45. Over the past three years, the company’s EBITDA and levered free cash flow have grown at CAGRs of 5.2% and 34.3%, respectively.

CERN’s POWR Ratings reflect its solid prospects. The stock has an overall B rating, which equates to Buy in our proprietary rating system.

CERN has an A grade for Quality and a B grade for Growth and Stability. In addition to the POWR Ratings grades we have just highlighted, one can see CERN’s Value, Momentum, and Sentiment here.

Of the 86 stocks in the Medical – Services industry, CERN is ranked #5. 

MRK shares were trading at $74.44 per share on Wednesday afternoon, down $0.47 (-0.63%). Year-to-date, MRK has declined -6.58%, versus a 21.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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