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5 Large-Cap Drug Stocks Well Poised to Beat on Q3 Earnings

Zacks Equity Research
RLI Corp. (RLI) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

The biotech industry has witnessed a great turnaround this year after the drug pricing issue crippled its performance last year. After declining 5.2% last year, the Large Cap Pharma industry has risen 18.9% so far this year, outpacing 14% gain for the S&P 500 in the same time frame.

The NASDAQ Biotechnology Index is up almost 28% year to date after sliding 19.1% in 2016. The NYSE ARCA Pharmaceutical Index has risen 15.4% year to date (YTD) after declining almost 10% last year.

The pharma/biotech sector has a number of things going in its favor. Strong quarterly results, new product sales ramp up with rising demand, successful innovation and product line expansion, strong clinical study results, more frequent FDA approvals (11 new drugs approved in Q3 alone) and continued strong performance from legacy products have played a pivotal role in bringing the sector on track this year. Another factor that has contributed to the sector’s surge is that President Trump's expected action on drug prices may not be as onerous as previously feared.

These factors are likely to drive the sector through the rest of this year and probably the next despite challenges like rising competition, pipeline setbacks, slowdown in growth of mature products and generic competition for certain key drugs.

On the broader macro front, the proposed tax reforms, if approved, will leave more cash in the hands of these companies. The cash can be invested for mergers/acquisitions, which have been relatively fewer this year compared with the last.

Meanwhile, the outlook for the upcoming third quarter results looks bright. Per the Earnings Trends article, the broader Medical sector (includes drug, biotech as well as Medical Device companies) is expected to record year-over-year growth of 4.7% in revenues and 0.8% in earnings in Q3.

How to Pick Likely Q3 Winners

Given the enormity of the healthcare space, selecting stocks that have the potential to beat estimates could appear to be quite daunting. But our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP. More often than not, a positive earnings surprise delivered by a company leads to stock price appreciation.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of delivering a positive surprise in their upcoming earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.  You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Here are five large-cap pharma stocks that are poised to beat estimates in the third quarter according to our methodology. Investing in stocks with large market cap is a much more reliable investment because of the fact that they control a large portion of their given industry. Also companies with a larger market cap have performed well throughout 2017.

Our first pick is Eli Lilly & Company (LLY). This Indianapolis, IN based company has an Earnings ESP of +1.59% and a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for the third quarter is $1.03 per share. The company has a mixed earnings surprise record. In fact, Lilly’s earnings surpassed expectations in two of the last four quarters, with an average negative surprise of 0.89%.

Lilly is scheduled to report results on Oct 24.

Our next choice is Pfizer, Inc. (PFE). Carrying a Zacks Rank #3, the stock has an Earnings ESP of +0.97%. The Zacks Consensus Estimate for the third quarter is pegged at 64 cents per share. New York-based, Pfizer has a mixed earnings surprise track record. The average negative earnings surprise over the four trailing quarters is 0.39%.

Pfizer is scheduled to announce results on Oct 31.

AstraZeneca plc (AZN) too has an impressive track record with the company consistently beating earnings expectations. The company’s earnings surpassed estimates in each of the last four quarters, with an average positive surprise of 146.25%. It looks poised to beat expectations in the third quarter as well. This London, UK based company carries a Zacks Rank #3 and has an Earnings ESP of +4.43%. The Zacks Consensus Estimate is pegged at 53 cents per share.

AstraZeneca is scheduled to report results on Nov 9.

Bristol-Myers Squibb Company (BMY) is another solid bet. This Zacks Rank #3 stock has an Earnings ESP of +2.33%. This New York-based company delivered an average positive earnings surprise of 7.99% over the trailing four quarters.

Bristol-Myers is scheduled to release results on Oct 26, with the Zacks Consensus Estimate for the third quarter pegged at 75 cents per share.

Brentford, UK based GlaxoSmithKline plc (GSK) makes it to our list of likely outperformers in the third quarter by virtue of its Zacks Rank #3 and an Earnings ESP of +6.30%. The Zacks Consensus Estimate is pegged at 85 cents per share. Glaxo is expected to report its results on Oct 25.    

Bottom Line  

Challenges in the form of competitive and pricing pressure will remain. However, a number of companies in the healthcare space have fared well. Picking some outperformers from the space, backed by a solid Zacks Rank and a positive Earnings ESP, could lead investors to gain this earnings season.

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