Inflation may be peaking, while growth is certainly slowing. These conditions are tough for most stocks, but pharmaceuticals are an exception. One of the top companies in the space is Vertex Pharmaceuticals (VRTX). Read on to find out why it’s our growth stock of the week.
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2022 has been a brutal year for the stock market with the S&P 500 down 19.6%. The primary impetus for this weakness was inflation and the Fed raising rates.
In contrast, earnings have continued to increase as we had 7% earnings growth for the S&P 500 with another 4% forecast in Q2. Despite inflation and changes in economic and monetary conditions, analysts continue to forecast profit margins above 12%. With long-term rates peaking and longer-term inflation expectations turning lower, the next catalyst for a market drop has to be a decline in earnings.
While, this would lead to weakness in many parts of the market which outperformed in 2022 like energy, materials, and industrials, it would likely be positive for pharmaceutical stocks. These companies’ revenues are unaffected by changes in economic or monetary conditions. Further, a meaningful decline in earnings would likely cause the Fed to start cutting which would boost pharmaceutical stocks with high growth rates.
Vertex Pharmaceuticals (VRTX) is a high-quality company with an attractive valuation and strong long-term growth prospects. Read on to find out why it’s our growth stock of the week…
VRTX discovers and develops small-molecule drugs for the treatment of serious diseases. Its key drugs are Kalydeco, Orkambi, Symdeko, and Trikafta for cystic fibrosis, where Vertex therapies remain the standard of care globally. The company also focuses on developing treatments for pain, type 1 diabetes, inflammatory diseases, influenza, and other rare diseases.
The company’s cystic fibrosis drugs are poised to continue dominating the market for the foreseeable future due to the disease-modifying potential of the drugs, consistent use by patients, and very little competition. VRTX combination therapies also have lengthy patents, which protect its cystic fibrosis portfolio from generics. There is also potential for its non-cystic fibrosis pipeline, which has exposure to promising areas, such as AAT deficiency, sickle cell disease, and beta-thalassemia.
As mentioned above, most companies’ growth prospects will deteriorate with the economy. Not the case for pharmaceutical companies like VRTX. This is because healthcare spending is related to trends like demographics and increasing government spending on healthcare.
In particular, VRTX is the only pharma company with a treatment for cystic fibrosis. And, this should continue to grow at a healthy pace as it gets approval into new markets and for younger ages. The company’s pipeline is also well-stocked with candidates for diabetes, including a treatment that would replace pancreatic cells that just delivered promising results in clinical trials.
Despite this impressive growth, VRTX is quite cheap with a forward P/E of 18 which is slightly higher than the S&P 500’s forward P/E. Yet, this is justified given that VRTX has much less risk of an earnings decline due to being in the healthcare industry and its strong pipeline of products.
The company also stands out with its 30% profit margins which are 2.5x the S&P 500’s 12.2% profit margins. Further, VRTX has more pricing power and is less subject to inflationary pressures which some expect to lead to some margin compression for many stocks.
VRTX has an overall grade of A which equates to a Strong Buy rating in the POWR Ratings service. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500’s average annual gain of 8.0%.
VRTX also has strong component grades including an A for Quality due to 11 out of 19 analysts covering the stock having a Strong Buy rating with only 2 having a Sell rating. It’s also regarded as one of the top companies in the space due to its dominance of the CF market and a strong pipeline of potential, blockbuster treatments. Click here to see more of VRTX’s POWR Ratings.
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VRTX shares . Year-to-date, VRTX has gained 25.76%, versus a -19.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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