With the second round of earnings reports heating up the markets, major pharmaceutical companies are at an important crossroad.
Pharma stocks have been riding high over the past few years, but 2015 was an uncharacteristic miss for many prominent names. Currently, the benchmark exchange-traded fund Health Care SPDR (ETF) (NYSEARCA:XLV) stands at almost 4% year-to-date. This is roughly the same return investors saw in the XLV last year.
Can things pick up for Big Pharma, or will they falter yet again?
Wall Street can’t take anything for granted. In the 2000s, a great number of pharma stocks were seemingly more interested in not losing than actually winning. Returns for the XLV averaged only 2%, thanks to macro-level events outside the domain of Big Pharma.
In contrast, things really got moving in the present decade, with the XLV averaging in the double digits. But if 2016 were to end now, returns for the past two years would net a pedestrian 7%. Therefore, if there’s any time for pharma stocks to show up, it would be now.
Luckily, help for Big Pharma might come from an unexpected source. The latest polls show that Republican presidential candidate Donald Trump has a slight lead over rival Hillary Clinton. That’s significant because Trump is proposing a 15% maximum ceiling on the corporate tax rate.
The lower rate would theoretically boost pharma stocks by eliminating the incentive for complicated and expensive tax haven “strategies.” Historically, Big Pharma has been a connoisseur of such evasive schemes.
Will that make pharma stocks great again?
All factors combined, XLV looks like a strong contender. In the past month, the ETF added 8% of market value. It’s also challenging the previous highs of last year before a late summer crash put a serious dent among many Big Pharma companies.
As long as there are no unpleasant surprises, the sector should be well received. Here are three major pharma stocks that could benefit from an earnings boost.
Pharma Stocks to Watch: AstraZeneca plc (ADR) (AZN)
AstraZeneca plc (ADR) (NYSE:AZN) is “feeling the Bern” — and not in a good way!
Called out by former presidential candidate Bernie Sanders, AZN faced a major roadblock in its bid for continued exclusive rights to cholesterol-fighting drug Crestor. Then the gavel came down, with a U.S. District judge denying AstraZeneca’s request to prevent copycat clones.
Among Big Pharma stocks, AZN has a lot to prove when it releases its second-quarter of fiscal year 2016 earnings results this Thursday.
What investors will need to see is substantive progress from last year’s disastrous Q3 report, which produced a negative surprise of 33%.
So far, results have been good, not great. As revenue growth isn’t much to write home about, the key focus will be the profit margins. Fortunately, AZN is outperforming in this arena on a quarter-over-quarter basis. Tighter financial controls have also contributed to the higher profitability rate.
Although the 76 cent consensus estimate sits on the higher end of the range of forecasts, AZN should have enough to hit it squarely.
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Technical analysts typically look for an alignment between price and volume increases to confirm a rally. One without the other could be a sign that things aren’t quite right.
Although this Big Pharma company has faced a big setback, it would be a mistake to dismiss AZN.
Pharma Stocks to Watch: AbbVie Inc (ABBV)
As is familiar territory among pharma stocks, AbbVie Inc. (NYSE:ABBV) is facing its own challenges regarding exclusivity.
ABBV produces Humira, the world’s best-selling drug, according to Morgan Stanley analysts. Unfortunately, such a lofty title attracts competitors like bees to honey. If ABBV can win some battles in court, the situation is net bullish for the Big Pharma firm.
However, analysts are hedging their bets. Several notable downgrades have occurred for ABBV, setting the stage for a critical Q2 showdown on Friday.
Here, though, AbbVie is a true outperformer. The company has beaten consensus forecast in the past 13 earnings reports.
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What’s undeniable is that AbbVie has been keeping shareholders happy at a time when there’s not much to be happy about. ABBV stock is up over 8% YTD, generally holding steady over the past seven months. Unlike speculative pharma stocks, there’s less chance of ABBV leaving you high and dry.
It may not be the day trader’s drug of choice, but the proven consistency of ABBV is well worth a second look.
Pharma Stocks to Watch: Bristol-Myers Squibb Co (BMY)
With a market capitalization of $126 billion, Bristol-Myers Squibb Co (NYSE:BMY) stands in an exclusive crowd, even among Big Pharma stocks. BMY intends to keep it that way, partnering with fellow industry giant AbbVie to explore the potential of a vastly improved therapy for late-stage small cell lung cancer (SCLC).
Due to the limited options available to current sufferers of SCLC, a breakthrough would be a major humanitarian and financial boon for BMY and ABBV.
The enthusiasm is apparently carrying over into the markets. A majority of covering analysts give BMY a “buy” recommendation, with the consensus little-changed over the past four months. That’s because it’s hard to argue with a juggernaut.
BMY revenue in Q1 was up 9% year-over-year, and in Q2, sales growth is expected to be 11% to $4.7 billion. Armed with these kinds of numbers, BMY should be able to hit its estimated earnings per share target of 66 cents.
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During the past five years, shares have steadily broken higher ground. There’s nothing in the news cycle to suggest a reversal of that trend, making BMY a reasonably safe bet.
Another consistent winner, BMY should put minds at ease regarding Big Pharma stocks.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
