Long-term investors looking for growth stocks trading at reasonable prices should look at the life sciences industry. Morningstar thinks these undervalued stocks are good opportunities.
Life sciences’ toolmakers enable drug production. What makes them attractive investments? First, heavy regulation of the drug manufacturing process means that switching costs for drugmakers are high—and that provides long potential revenue streams for life science toolmakers. Second, life science companies are able to benefit from growth in the biopharmaceutical industry without taking on product-specific risk.
Life science companies enjoyed robust demand during much of the past five years, which stoked profits—and stock prices. But as demand and profits have been resetting during the past year, many life science stocks have become more attractive from a valuation perspective. In fact, the life sciences industry is trading at an average discount to Morningstar’s fair value estimate for the first time in five years. Morningstar expects profit growth to begin to normalize in late 2023 and beyond, and we think life science stocks are likely to rebound once that happens.
Four life science stocks in particular look especially appealing to Morningstar’s analysts today.
4 Growth at a Reasonable Price Stocks for Long-Term Investors
Illumina ILMN
Agilent Technologies A
Waters WAT
Sartorius Stedim Biotech DIM
The first stock on our list is Illumina ILMN. Illumina is a leader in genomic sequencing. We think it’s an attractive business that has carved out a narrow economic moat. Activist investor Carl Icahn’s interest may act as a near-term catalyst to boost the stock price. Ichan wants Illumina to sell off its Grail liquid biopsy assets and concentrate solely on its legacy sequencing business. With catalysts like that potentially on the horizon, we think Illumina stock may have more upside potential than downside risk in the near term. We think shares are undervalued and worth US$269 apiece.
Next is Agilent Technologies A. Agilent is one of the leading providers of chromatography and mass spectrometry tools that have applications in a variety of end markets, including the healthcare, chemical, food, and environmental fields. Healthcare-related applications, including clinical diagnostics, remain Agilent’s largest end market. Overall, we see Agilent as one of the more nimble operators in life science, with a strong analytical instrument base business and investments in potentially high-growth fields. We assign the company a wide economic moat rating and think shares are worth US$151 each.
Next is Waters WAT. Waters also specializes in liquid chromatography and mass spectrometry products, which are used primarily by pharmaceutical companies to analyze a molecule’s structure during the drug discovery, development, and production processes. With a new management team reinvigorating operations at the company, Morningstar thinks Waters is poised to better compete in the life science end markets that it pioneered. Morningstar thinks the company has carved out a wide economic moat, and we assign Waters stock a fair value estimate of US$323.
The last stock on our list is Sartorius Stedim Biotech DIM. Most of the company’s tools focus on enabling large molecule (or biologic) drug manufacturing. Given that focus, Morningstar thinks Sartorius Stedim should enjoy relatively high growth compared with toolmakers more exposed to small molecules. Sartorius Stedim is poised to further expand its footprint in biopharma, with this type of single-use systems it produces estimated to approach one third of the total market within the next five years. We assign the company a wide economic moat rating, thanks to its durable switching costs. We think shares are worth US$306 each.
