JP Morgan is optimistic on healthcare stocks for the first time since March 2009. In a new report JP Morgan analysts cite five main reasons for the upgrade to ‘overweight’ from ‘neutral’.
- Strong fundamentals – Healthcare companies have an 86% ratio of beating estimates, above the 69% average of all sectors. Free cash flow in the sector that reached $121 billion, which allows the company to pursue opportunities that can boost shareholder value. That reflects 11.3% compound annual growth since Q3 2006.
- Cash return – In the past year, healthcare companies returned $78 billion to shareholders via dividends and stock buybacks. Dividends are at an all time high though buybacks are lower than then 2008 peak. Significantly a larger per cent of companies are increasing their dividend payouts.
- Increasing M&A – The sector is expected to see increased M&A activity in 2010 with deals amounting to $40 billion in the second quarter alone. This follows Sanofi-Aventis’ $24.5 billion acquisition of Genzyme in April this year. Healthcare is expected to outperform and benefit from few regulatory changes this year.
- Higher earnings – During the early part of the recovery in healthcare earnings underperformed the overall S&P 500, but as earnings began to slow, the relative earnings growth in the Health Care has become favourable. Health Care earnings are 37% higher than in 2007 while overall S&P 500 earnings are only 8% higher for the same period. A point to note however is that this hasn’t necessarily meant higher stock prices for healthcare companies.
- Valuation – Healthcare companies have seen their best valuations in about 15 years. There are also more low P/E healthcare stocks compared to the overall S&P 500.
Photo: JP Morgan
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