The late comedian Rodney Dangerfield was famous for his catchphrase, "I don't get no respect." Does Dangerfield's line apply to some stocks today? Absolutely.
Three Motley Fool contributors think they've found surprisingly underrated pharmaceutical stocks to buy right now. Here's why they picked AstraZeneca(NASDAQ: AZN), Pfizer(NYSE: PFE), and Viatris(NASDAQ: VTRS).
A healthcare behemoth that's trading at a discount
David Jagielski(AstraZeneca): You wouldn't expect that one of the largest healthcare stocks in the world would be an underrated buy, but AstraZeneca definitely falls into that category.
Despite its mammoth $250 billion market cap, the stock trades at a fairly light valuation. Based on analyst estimates, it's trading at just 19 times its estimated future profits. By comparison, the average healthcare stock in the Health Care Select Sector SPDR Fund trades at a multiple of 21.
AstraZeneca is no average healthcare stock, however. It's a growth machine with some impressive prospects. This year, it acquired multiple healthcare businesses, including rare-disease company Amolyt Pharma and cancer company Fusion Pharma, which develops radioconjugates (more-targeted cancer treatments than chemotherapy).
Through its acquisitions and in-house development, AstraZeneca expects to generate as much as $80 billion in annual revenue by the end of the decade. That is massive growth when you consider that last year, its top line came in at just under $46 billion.
And if the company can maintain its current 13% profit margin, its earnings could top more than $10 billion by then -- up from $6 billion in 2023.
AstraZeneca looks like a cheap buy today, and with a lot of earnings growth coming in the next five years or so, buying shares of the business right now could look like a downright steal in the future.
More to the story with this big drugmaker
Keith Speights (Pfizer): I fully understand why many investors don't have a favorable opinion of Pfizer. The stock has been a dud in recent years and is still around 50% below its peak set in late 2021.
Its COVID revenue has sunk like a brick. The company also faces the losses of patent protection for several blockbuster drugs over the next few years.
But I think there's more to the story with this big drugmaker. And the story could very well have a happy ending.
First, we've probably seen the worst for Pfizer's COVID franchise. I suspect most of the people who received vaccines last year will do so again. Even better, the company shouldn't be too far away from launching a combination COVID-flu vaccine that could provide a catalyst.
Second, Pfizer has executed what I view as a solid strategy to handle its looming patent cliff. The company has invested heavily in research and development and now has a promising group of new products. It has also made multiple smart acquisitions that beefed up its lineup and pipeline further. I expect this strategy will enable the company to offset the impact of its patent expirations and deliver solid growth later this decade.
Pfizer has a strong head start on delivering attractive total returns. Its forward dividend yield currently tops 5.5%. Management remains committed to prioritizing the dividend program, too, while reducing its debt and investing in future growth.
The stock trades at only 13 times forward earnings. This low multiple tells me that many investors are underestimating Pfizer's potential.
A deeply discounted dividend play
Prosper Junior Bakiny (Viatris): The average forward price-to-earnings (P/E) ratio for the S&P 500 is nearly 21. The healthcare industry's forward P/E is close to 19.
Any company trading below that could be considered undervalued and, thus, underrated, making it a great candidate. The company's forward P/E is a measly 4.3 as of writing.
In fairness, the market is undervaluing Viatris for a reason. The maker of generic drugs has not impressed with its financial results, even considering all the changes and divestitures. In the first quarter, the company's net sales of $3.7 billion were down by 2% year over year. Taking into account recent divestitures, revenue was up by 2% compared to the year-ago period -- that's better, but still not phenomenal.
Still, there is much to like about the business, particularly for long-term, income-seeking investors looking for a great value play. Viatris is one of the largest manufacturers of generics and biosimilars. Its portfolio features famous, well-known brands that likely won't fall out of favor with the public anytime soon: Think Viagra, Xanax, and several others.
These names should generate steady revenue for a long time. Viatris' goal is to become a thinner, leaner company focused on higher growth opportunities, hence the divestitures, which recently ended with the company finalizing the spin-off of its over-the-counter business (Viatris is keeping the rights to famous brands, including Viagra).
Revenue should start moving in the right direction again. Meanwhile, management is committed to rewarding shareholders with regular payouts. It currently offers a forward yield of 4.17% and a conservative cash payout ratio of just under 29%.
At its current levels, dividend investors should seriously consider purchasing Viatris' shares.
Should you invest $1,000 in AstraZeneca Plc right now?
Before you buy stock in AstraZeneca Plc, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and AstraZeneca Plc wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $688,005!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 22, 2024
David Jagielski has no position in any of the stocks mentioned. Keith Speights has positions in Pfizer and Select Sector SPDR Trust-The Health Care Select Sector SPDR Fund. Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends AstraZeneca Plc and Viatris. The Motley Fool has a disclosure policy.
