Health and Healthcare

Why Merrill Lynch Sees Health Care Sector Offering Solid Growth, and as Value and Defensive

Jon C. Ogg

Published: August 15, 2018 11:50 am

Last Updated: January 11, 2020 7:21 pm

Each month brings new views from firms on Wall Street. This includes the actively followed RIC Report from Merrill Lynch, showing views on many sectors and many markets for the firm’s clients. The monthly RIC Report is quite favorable on the health care sector as an opportunity for investors.

The first consideration about health care is that not all these companies and subsectors are created equal. Health care is also considered to be a defensive sector, one investors count on through periods of market and economic volatility. Here we have identified some of the top health care picks that are rated Buy at Merrill Lynch.

According to the RIC Report, health care in general is an underloved group, but Merrill Lynch sees the group as cheap and delivering the goods that investors need. The sector now trades at 15.9 times forward earnings, and that price-to-earnings (P/E) ratio is roughly a 7% discount to its historical average. It is also about one point lower than the average of the broader the S&P 500, which of course includes many companies that trade at 30, 50 and more times expected earnings.

Merrill Lynch does point out that health care’s net income growth has decelerated the past couple of years. That said, the firm also pointed out that the growth appears to be gaining momentum again and that health care companies have delivered a record high number of sales and earnings beats during the second-quarter earnings
reporting season. The RIC Report said:

Health Care’s 2Q earnings growth has been accelerating for 3 quarters to its highest rate since early 2015, and 2Q sales growth has accelerated to its highest levels since early 2016. Fund manager positioning has also improved over the last several years, albeit remains a modest overweight. Drug pricing is the key risk for the sector but low levels of ownership and a discounted multiple appear to reflect this, in her view.

Merrill Lynch has many companies in each sector rated as Buy, Neutral or even Underperform. We have pulled a sampling of their Buy ratings and shown the implied upside.

Merck & Co. Inc. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) were named in an August 3 Merrill Lynch report in which the firm rebalanced its income portfolio. It increased its portfolio position in Merck to 3.0% from 2.0% and in Pfizer to 3.0% from 2.5%. AbbVie Inc. (NYSE: ABBV) and Amgen Inc. (NASDAQ: AMGN) were also kept in the portfolio, with weights of 1.5% and 2.0%, respectively.

Agilent Technologies Inc. (NYSE: A) was just freshly reiterated as Buy at Merrill Lynch, with an $80 price target (versus a $65.00 current share price). Agilent shares were lower with the broader market, and it falls outside of being solely tied to health care, but the earnings report was viewed positively.

Other targets and views taken from the larger list from Merrill Lynch’s health care team of analysts with solid Buy ratings included the following:

• AbbVie has a $105 price objective and a current share price near $96.50. It also has been buying back stock, and it yields almost 4%.
• Amgen has a $220 price objective and a $194.50 current price. The biotech giant has a dividend yield of 2.7% that rivals some of the Big Pharma players.
• Biogen Inc. (NASDAQ: BIIB) has a Buy rating and a $400 price objective (versus a $341 price).
• Boston Scientific Corp. (NYSE: BSX) has a $38 price objective and compares to a $34 share price. It has acted as though it is set to challenge multiyear highs, and Merrill Lynch raised its numbers based on the return of its Lotus Edge.
• Intuitive Surgical Inc. (NASDAQ: ISRG) is a top name, and the $600 price objective at Merrill Lynch compares with a $521 current share price. The firm saw Intuitive Surgical’s earnings report as above expectations, and it also sees a full pipeline.
• Pfizer has a $43 price objective and a $41 current price, as well as a 3.3% dividend yield.
• Medtronic Inc.’s (NYSE: MDT) $98 price objective is against a current price of roughly $90. Medtronic has a 2.2% dividend yield, and the firm is positive on its earnings.
• Merck has a $74 price objective, versus a $66.50 price current. The dividend yield is 2.9%.
• Radius Health Inc. (NASDAQ: RDUS) has a $47 price objective and a $21 current price. That is based on a probability-adjusted net present value of the company’s lead pipeline asset, abaloparatide, at $26 per share, RAD1901 at $18 per share, and $3 in cash per share.
• Zimmer Biomet Holdings Inc.’s (NYSE: ZBH) Merrill Lynch price objective of $158 compares with a $121.50 current share price. Its dividend yield is about 0.8%.

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