Which healthcare stock could offer better returns?
Jhe S&P 500 (SPX) is down 21.3% year-to-date and finally fell into bearish territory after last week’s higher-than-expected inflation report. Markets are now pricing in aggressive interest rate hikes as part of the Fed’s efforts to control inflation. In these uncertain and challenging times, investors are looking for stocks with strong fundamentals that can fare better than the broader market.
Generally, healthcare companies are more resilient in times of recession than companies in several other industries, as they provide many services and products that are essential even in a tough macro market.
Using the TipRanks stock comparison tool for healthcare stocks, we placed Abbott, Eli Lilly and CVS Health against each other to choose the stock that Wall Street analysts believe should generate better returns.
Abbott Laboratories (New York Stock Exchange: ABT)
Healthcare giant Abbott recently made headlines for issues with its infant formula. Earlier this year, the company recalled its baby formulas following complaints of illnesses caused by consuming its products. Unsanitary conditions at Abbott’s factory in Sturgis, Michigan led to the contamination of baby formula, and the factory was subsequently closed in February amid an investigation by the US FDA (Food and Drug Administration).
At a time when supply chain issues were already impacting infant food availability, Abbott’s Michigan plant closure exacerbated the situation and caused a massive nationwide shortage.
Earlier this month, Abbott resumed infant formula production at its Michigan plant after meeting initial requirements under the consent decree reached in May with the FDA.
In terms of positive developments, Abbott recently received FDA clearance for its FreeStyle Libre 3 continuous glucose monitoring (CGM) system. Rival Dexcom is awaiting FDA clearance for its G7 CGM system.
BTIG analyst Marie Thibault considers FDA clearance of Libre 3 CGM a “significant win” for the company.
Thibault continues to be optimistic about Abbott based on its “strong medical device product portfolio and pipeline, expanded presence in diagnostics, underlying core business growth, efforts to maintain strong EPS growth and strong cash generation.”
Thibault also highlighted Abbott’s focus on high-growth areas, such as diabetes, structural heart and diagnostics, and its strong pipeline of new products. The analyst reiterated a buy rating on Abbott with a price target of $140.
Overall, Abbott earns a consensus Strong Buy rating backed by eight Buys and one Hold. Abbott’s average price target of $140 implies upside potential of 32.19% from current levels. Shares are down 25% since the start of the year.
Eli Lilly is one of the leading diabetes healthcare companies, with drugs like Trulicity, Humalog, Jardiance, Basaglar and Humulin. It also has a strong portfolio of oncology and immunology drugs. Eli Lilly recently announced favorable developments in several key treatments in its pipeline.
Recently, JP Morgan analyst Chris Schott raised his price target for Eli Lilly stock to $355 from $340 and reiterated a buy rating. Schott increased its estimates following US FDA approval of Mounjaro (brand name for Tirzepatide) for type 2 diabetes and following positive results from the SURMOUNT-1 Phase 3 clinical trial evaluating Tirzepatide for the treatment of obesity. These findings were published in the New England Journal of Medicine and presented at a symposium sponsored by the American Diabetes Association.
Schott estimates that Mounjaro will generate peak sales of $12-13 billion in the diabetes segment, while he sees the product expanding the use of the GLP-1 (glucagon-like peptide-1) class to patients at a early stage. Additionally, the analyst sees a $10+ billion+ opportunity in the product for the obesity segment. This represents an increase from the previous estimate of $6 billion to $8 billion.
Overall, Schott estimates Mounjaro’s total peak sales at $25 billion and expects Eli Lilly’s EPS to grow to over $28 by 2030, from $8.80 in 2022. These figures would occur before considering any contribution from donanemab, the company’s drug candidate for Alzheimer’s disease.
Overall, the street is cautiously bullish on the stock, with a moderate buy consensus rating based on 11 buys and four holds. Eli Lilly’s average price target of $324.64 implies upside potential of 11.45% from current levels. The stock has outperformed the broader market and is up 5.5% year-to-date.
CVS has operated more than 9,000 retail pharmacies and more than 1,100 walk-in medical clinics, as well as a health insurance business since its acquisition of Aetna in 2018.
CVS recently reaffirmed its full-year guidance, which it raised last month following better-than-expected first-quarter results. First-quarter results benefited from the strength of the company’s insurance unit and retail operations despite a slowdown in revenue from COVID-19 tests and vaccinations administered in its stores.
CVS is closing 300 stores this year as part of its plan to close 900 locations by the end of 2024. It is focusing on a digital-first approach to meet customers’ need to shop online. By the end of the first quarter, CVS had served nearly 44 million digital customers.
Recently, Bernstein analyst Lance Wilkes downgraded CVS to Hold from a Buy, and lowered the price target to $112 from $122. Wilkes is positive on the US healthcare services group in general and believes it is well positioned in an inflationary environment. Coming to CVS, Wilkes still likes his long-term strategy of transitioning to a government MCO (Managed Care Organization) and a risky care delivery company with a retail presence.
However, in the current environment, Wilkes sees the CVS stock multiple increasing once the VBC (Value-Based Care) delivery segment is established and begins to reflect revenue and earnings traction.
Overall, the consensus among analysts is a moderate buy rating based on six buys and five holds. The average CVS price target of $116.80 implies an upside potential of 28.51% in the next 12 months. Shares are down nearly 12% since the start of the year.
Analysts currently appear to be more bullish on Abbott than Eli Lilly and CVS Health, and see greater upside potential for Abbott shares from current levels.
Despite recent pressures and expected declines in COVID-19 testing revenue, Wall Street remains bullish on Abbott based on its diverse portfolio and strong pipeline.
Read full disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.