Two stocks to buy in a cheap sector
There are a couple of companies in this sector that have been oversold and are being tipped to do well. Another remains one to avoid, writes Graeme Evans.
12th December 2024 15:24
by Graeme Evans from interactive investor
AstraZeneca and Novo Nordisk are the leading picks and GSK is still one to avoid after a City bank revealed its 2025 forecasts for an “inexpensive” European pharma sector.
Bank of America said the industry’s fundamentals remain strong, with the European majors set to deliver another year of market-beating earnings growth in the region of 14%.
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However, this has been offset by stock-specific issues and the potential for uncertainty over healthcare policy in the sector’s single largest and most profitable market of the US.
As a result, European pharma trades on 12 times forecast 2026 earnings. That’s a slim 3% premium to the wider market, whereas the long-term average is 12%.
The bank believes the weakness since September has been overdone and that valuations are too focused on risks rather than growth and the potential of pipelines. Its target multiple of 16 times implies a 30% total return potential if overhangs are removed.
AstraZeneca (LSE:AZN), which is one of the bank’s 25 stocks for 2025, is backed with a potential 38% upside to 14,500p.
China government investigations and disappointing data on late-stage trial results for Astra’s Dato-DXd lung cancer drug have fuelled a recent bout of selling.
The shares are now flat year-to-date, leaving Astra looking “attractive” on a valuation of 13 times forecast 2026 earnings.
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Medium-term guidance implies high-single digit sales growth, which BofA believes is supportive of a re-rating to 18 times earnings. It also noted the next 18 months sees potentially “game-changing” late-stage trial readings for five key assets.
The shares of weight loss and diabetes treatment firm Novo Nordisk AS ADR (NYSE:NVO) have fallen 25% from their recent highs, although the bank sees several catalysts for a 30% upside on current levels.
These include late-stage data on planned obesity drug CagriSema and the $16.5 billion takeover of US-based contract drugmaker Catalent, which recently got EU antitrust approval.
Its broader Buy thesis is based on Novo's forward five-year rolling sales growth rate, which has doubled from 6% to about 12% and with further upside possible. The bank said best-in-class growth deserves above a 30 times price/earnings multiple.
Despite its multiple of seven times 2026 earnings making GSK (LSE:GSK) one of the lowest-rated stocks in the sector, the bank continues to have an Underperform recommendation.
This reflects headwinds for vaccines Arexvy and Shingrix, as well as GSK having the worst post-2026 growth outlook in the sector due to the loss of exclusivity on key products.
The shares are down 9% this year, despite the company recently ending two years of uncertainty by setting aside $2.2 billion to settle 93% of Zantac litigation claims.
Third-quarter results in late October showed vaccine sales fell 15%, impacted by a tough comparative and the prioritisation of Covid vaccinations in the United States.
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Shingles product Shingrix dropped 7% as lower demand in the US more than offset stronger international uptake. And the respiratory syncytial virus vaccine Arexvy also missed City targets by some distance, with a 72% decline to £188 million.
The pressure on GSK shares and other European pharma stocks continued at the end of November after president-elect Donald Trump nominated vaccine-sceptic Robert F. Kennedy Jr as health secretary.
While this brings the prospect of four years of uncertainty over healthcare policy, Bank of America believes this is already reflected in the sector's discounted P/E multiple.
It added: “Key will be the influence of the (traditionally pharma-friendly) Republican-dominated Senate in rebutting pharma-unfriendly legislation starting with confirmation of appointments in late Jan/Feb which, although likely, are not guaranteed.”
Overall, it sees material change as ultimately unlikely and that a focus on pipelines and earnings per share growth will continue to be key to share price performance.
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