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