The healthcare industry's outlook is promising this year, driven by advancements pharmaceuticals, the rise of digital biopharmaceutical sales, and an increasing demand for health insurance. In this context, value investors might consider buying strong undervalued healthcare stocks with strong upside potential: Merck & Co., Inc. (MRK), Pfizer Inc. (PFE), and The Cigna Group (CI).
The healthcare industry is flourishing, with pharma products attracting investors for their consistent profitability amid economic fluctuations due to steady demand. As the global population ages and disease prevalence rises, the need for effective modern medications and biopharma products surges. Global pharmaceutical revenues are set to grow at a 6.2% CAGR, reaching $1.47 trillion by 2028.
Consequently, the health insurance market is growing due to rising healthcare costs, increasing demand for coverage, and enhanced federal subsidies. These factors drive expansion as more individuals seek insurance amid regulatory shifts and economic pressures. By 2029, the U.S. health and medical insurance market is projected to reach $2.01 trillion, growing at a CAGR of over 6%.
Considering these conducive trends, let’s look at the fundamentals of the three healthcare picks.
Merck & Co., Inc. (MRK)
MRK operates as a healthcare company worldwide. It operates through two segments: Pharmaceutical and Animal Health. The company's offerings include global healthcare solutions in human health pharmaceuticals (oncology, immunology) and preventive vaccines. The Animal Health segment provides veterinary pharmaceuticals, vaccines, and digital health products.
On September 3, 2024, MRK announced that the European Commission approved KEYTRUDA in combination with Padcev for the first-line treatment of unresectable or metastatic urothelial carcinoma in adults. This approval offers a new potential standard of care in the European Union.
On August 26, 2024, MRK announced the European Commission’s approval of WINREVAIR (sotatercept) for treating pulmonary arterial hypertension (PAH) in adults. This marks the first activin signaling inhibitor therapy for PAH approved in Europe.
In terms of the trailing-12-month EBIT margin, MRK’s 31.64% is considerably higher than the 2.51% industry average. Likewise, its 18.88% trailing-12-month levered FCF margin is significantly higher than the 1.31% industry average. Furthermore, its 75.79% trailing-12-month gross profit margin is 32.2% higher than the 57.35% industry average.
During the second quarter that ended June 30, 2024, MRK’s total sales rose 7.2% year-over-year to $16.11 billion. MRK’s KEYTRUDA sales increased 15.9% year-over-year to $7.27 billion. Similarly, the company’s non-GAAP net income and non-GAAP EPS were $5.81 billion and $2.28, compared to a non-GAAP net loss of $5.22 billion and $2.06 per share in the same quarter of the prior year, respectively.
Street expects MRK’s revenue for the quarter ending September 30, 2024, to increase 3.6% year-over-year to $16.54 billion. Its EPS for the quarter ending December 31, 2024, is expected to grow considerably year-over-year to $1.93. It surpassed the Street EPS estimates in three of the trailing four quarters.
Over the past nine months, the stock gained 10.2% to close the last trading session at $115.80. The average analyst price target of $140.09 indicates a 21% upside potential.
MRK’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #5 out of 158 stocks in the Medical – Pharmaceuticals industry. It has an A grade for Quality and a B for Value and Stability. Click here to see MRK’s Growth, Momentum, and Sentiment ratings.
Pfizer Inc. (PFE)
PFE discovers, develops, manufactures, markets, distributes, and sells biopharmaceutical products in the U.S., Europe, and internationally.
On August 27, 2024, PFE announced the launch of PfizerForAll, a digital platform designed to simplify healthcare access for Americans, offering services like same-day appointments, home delivery of medications, and vaccine scheduling. The platform integrates with existing healthcare systems and partners to enhance convenience and care.
On August 22, 2024, PFE and BioNTech announced that the U.S. FDA approved and authorized their Omicron KP.2-adapted COVID-19 vaccine, which is recommended for individuals 6 months and older for the 2024-2025 season.
In terms of the trailing-12-month EBITDA margin, PFE’s 18.06% is 193.8% higher than the 6.15% industry average. Its 5.95% trailing-12-month EBIT margin is 137.1% higher than the 2.51% industry average. Also, its 6.24% trailing-12-month levered FCF margin is 377.1% higher than the 1.31% industry average.
PFE’s total revenues for the fiscal second quarter, which ended June 30, 2024, rose 2.1% year-over-year to $13.28 billion. Likewise, its Biopharma revenues were $12.99 billion, up 2.4% from the prior-year quarter. Moreover, its adjusted income and adjusted EPS stood at $3.40 billion and $0.67, respectively.
For the quarter ending September 30, 2024, PFE’s revenue is expected to increase 12.6% year-over-year to $14.90 billion. Its EPS for the quarter ending December 31, 2024, is expected to increase 572.8% year-over-year to $0.67. It surpassed consensus EPS estimates in three of the trailing four quarters.
PFE’s stock has gained 9.7% over the past six months to close the last trading session at $28.39. The average analyst price target of $32.77 indicates a 15.4% upside potential.
PFE’s POWR Ratings reflect a robust outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Growth, Value, and Sentiment. It is ranked #43 in the Medical – Pharmaceuticals industry. To see PFE’s additional grades for Momentum, Stability, and Quality, click here.
The Cigna Group (CI)
CI provides insurance and related services. It operates through its Evernorth Health Services and Cigna Healthcare segments. The company also offers permanent insurance contracts for financing employer-paid benefits.
In terms of the trailing-12-month EBIT margin, CI’s 3.51% is 40% higher than the 2.51% industry average. Similarly, its 1.41x asset turnover ratio is 244.1% higher than the 0.41x industry average.
CI’s adjusted revenues for the second quarter ended June 30, 2024, increased 24.4% year-over-year to $60.47 billion. Its adjusted income from operations rose 4.9% and 9.6% year-over-year to $1.91 billion, or $6.72 per share. Moreover, the company’s pharmacy revenues came in at $45.10 billion, up 32.8% over the prior-year quarter.
Analysts expect CI’s revenue for the quarter ending September 30, 2024, to increase 21.4% year-over-year to $59.56 billion. Its EPS for the same quarter is expected to grow 9% year-over-year to $7.38. It surpassed the Street EPS estimates in each of the trailing four quarters.
Over the past nine months, CI’s stock has gained 39.5% to close the last trading session at $366.64. The average analyst price target of $398.55 indicates an 8.7% upside potential.
It’s no surprise that CI has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system.
It has a B grade for Growth, Value, Stability, and Quality. It is ranked #2 out of 10 stocks in the A-rated Medical - Health Insurance industry. Beyond what we stated above, we also have given CI grades for Momentum and Sentiment. Get all the CI’s ratings here.
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MRK shares were trading at $118.99 per share on Thursday afternoon, up $3.19 (+2.75%). Year-to-date, MRK has gained 10.49%, versus a 16.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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