Life-science stocks have struggled this year, with the iShares Biotechnology ETF suffering a negative return of 0.64%.
The stocks’ struggles have put them on average at a discount to Morningstar’s fair-value estimate for the first time in five years.
But “Morningstar expects profit growth to begin to normalize in late 2023 and beyond,” Susan Dziubinski, an investment specialist for the firm, wrote in a commentary. “And we think life-science stocks are likely to rebound once that happens.”
The outlook for the industry is bright as biotechnology is a potent force to fight serious diseases. So it pays to take a look at life-science equities.
Dziubinski created a list of four life-sciences stocks that Morningstar’s analysts favor.
The Case for Illumina and Agilent
Illumina (ILMN). Morningstar moat rating, which measures durable competitive advantages: narrow. Morningstar fair-value estimate: $269. Recent share price: $200.
“Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications,” Morningstar analyst Julie Utterback wrote in a commentary.
“The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations.”
Also, “the scale of these projects can be wide, such as population genomic initiatives, or narrow, such as noninvasive prenatal screening,” Utterback said.
Agilent Technologies (A). Morningstar moat: wide. Morningstar fair-value estimate: $151. Recent quote: $119.
The company focuses on providing tools to analyze the structural properties of various chemicals, molecules and cells.
“Agilent is one of the leading providers of chromatography and mass spectrometry tools, which have applications in a variety of end markets, including health care, chemicals, food, and the environment,” Utterback wrote.
“While health-care-related applications, including clinical diagnostics, remain Agilent’s largest end market, it generates about half of its sales from non-health-care fields.”
The Case for Waters and Sartorius Stedim Biotech
3. Waters (WAT). Morningstar moat: wide. Morningstar fair-value estimate: $323. Recent quote: $265.
It specializes in liquid chromatography and mass spectrometry products, which are used primarily by pharmaceutical companies to analyze a molecule’s structure during the drug, discovery, development and production process.
“The firm's strategy revolves around placing instruments, including pre-installed software, providing various services throughout each system's useful life, and selling related consumables,” Utterback said.
Those consumables include chromatography columns and sample preparation kits and tools. About half of Waters' sales are considered recurring.
4. Sartorius Stedim Biotech (SRTOY) of Europe. Morningstar moat: wide. Morningstar fair-value estimate for shares traded in Europe, 287 euros ($316). Recent quote: 233 euros ($256).
Most of the company’s tools focus on large molecule (or biologic) drug manufacturing.
“While profits are resetting for Sartorius AG and its bioprocessing subsidiary Sartorius Stedim after the heady growth experienced during the pandemic years, we suspect share performance may eventually improve if their growth trajectories normalize after a tough 2023,” Utterback said.
“For example, both management teams reduced their guidance for 2023 substantially but maintained their 2025 goals” in their most recent earnings report.
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