The first quarter earnings season is drawing to a close with 90.8% of S&P 500 stocks having reported results as of May 12, 2017. 13 of the 16 Zacks sectors recorded earnings growth with total earnings increasing 13.9% from the year-ago period on revenue growth of 7.9%. While 72.2% beat earnings estimates, 66.1% topped revenue expectations with 51.8% surpassing both.
The Medical sector is among the sectors that has consistently been recording earnings growth over the last few quarters. The sector, which had recorded earnings growth of 4.5% on revenue growth of 5.2% in Q4, has recorded earnings growth of 5.6% on the back of revenue growth of 6% so far in Q1. A look at the beat ratio shows earnings beat of 85.7% and revenue beat of 69.4%.
The pharma sector specifically had a mixed quarter with most companies topping earnings expectations but missing on revenues. The first quarter is usually a slow one for pharma and biotech companies for reasons like inventory destocking, fewer shipping days and the Medicare donut hole. Higher discounting in managed care and government channels for preferred access physicians, lower prices for certain drugs, softer scrip growth in the U.S., and higher sales occurring in the Medicaid channel are some of the factors that affected drug sales of pharma and biotech companies. Unfavorable currency movement also played a role.
Over the last three years, revenues in the large cap pharma sector have been on an upward trajectory after being impacted by several factors including the genericization of key blockbuster drugs. Evolving pipelines, increasing contribution from new drugs and the approval of breakthrough treatments are some of the factors that has put this sector back on the growth trajectory.
Moreover, the Zacks-categorized Large-Cap Pharmaceutical industry is among the top 14% of the 256 Zacks-ranked industries. The industry has outperformed the broader market (S&P 500) year-to-date (YTD) as well.
Here is a look at 4 large-cap drug stocks that delivered positive earnings surprises in the first quarter and are witnessing upward revisions in earnings estimates for 2017. All these companies are either Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) stocks -- you can see the complete list of today’s Zacks #1 Rank stocks here.
Bayer AG (BAYRY - Free Report) : Germany-based Bayer has a strong presence in the Life Science fields of health care and agriculture. The company reported better-than-expected results in the first quarter of 2017 -- in addition to delivering a positive earnings surprise of 16.7%, Bayer also raised its outlook for the year on the back of Covestro’s performance. Earnings estimates for 2017 are up 8.2% over the last 30 days. Estimated earnings growth for the current year is 7.6%. Bayer has surpassed earnings estimates in three of the last four quarters with a positive surprise of 10.25%. YTD, Bayer has outperformed the Zacks-categorized Large-Cap Pharmaceutical industry with shares gaining 23% compared to the industry gain of 9.5%. In addition to being a Zacks Rank #1 stock, Bayer has a VGM Score of “B”. Our research shows that stocks with a VGM Score of “A” or “B” when combined with a Zacks Rank #1 or #2 offer the best upside potential.
H. Lundbeck A/S (HLUYY - Free Report) : Denmark-based Lundbeck specializes in psychiatric and neurological disorders. YTD, the company has outperformed the Zacks-categorized Large-Cap Pharmaceutical industry with shares gaining 25.4%. In addition to delivering a positive earnings surprise of 64.52% in the first quarter, Lundbeck raised its outlook for the year. Lundbeck is also a Zacks Rank #1 stock with a VGM score of “B”. 2017 earnings estimates are up 2.9% over the last 7 days.
Merck & Co., Inc. (MRK - Free Report) : Kenilworth, NJ-based Merck is known for its strong presence in the pharmaceuticals and vaccines market. The company also has a presence in the animal health segment. Some of the better known products in Merck’s portfolio include Keytruda, Gardasil, Januvia/Janumet, Isentress, Vytorin/Zetia and Remicade among others. Merck, a Zacks Rank #2 stock, has consistently surpassed earnings expectations over the last four quarters with an average surprise of 4.36%. In addition to delivering a positive earnings surprise of 6.02% in Q1, Merck narrowed and raised its outlook for the year. Earnings estimates for 2017 are up 0.3% over the last 30 days. Estimated earnings growth for the current year is 1.7%. New product launches especially Keytruda as well as the strong performance of the base business including the animal health segment should help the company combat the impact of generic competition.
Zoetis Inc. (ZTS - Free Report) : Parsippany, NJ-based Zoetis is a leading animal health company focused on the discovery, development, manufacturing and marketing of veterinary vaccines and medicines, complemented by diagnostic products, genetic tests, and biodevices. YTD, the company has outperformed the Zacks-categorized Medical-Drugs industry with shares gaining 11.6% compared to the industry gain of 8.1%. The Zacks Rank #2 stock surpassed earnings expectations in each of the last four quarters with an average positive surprise of 9.82% while estimated earnings growth for the current year is 19.2%. Earnings estimates for 2017 are up 0.9% over the last 30 days.
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