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Following two years of underperformance, the life sciences tools industry is positioned to outperform the broader healthcare sector in 2024, with durable recovery primarily baked into the latter half of the year, Goldman Sachs said in a research note last week.
The analyst Matthew Sykes attributes the underperformance to continuing downward earnings revisions experienced since Q3 2020 in reaction to post-COVID headwinds such as bioprocessing inventories, emerging biotech funding constraints, and macro weakness in China.
Sykes argues that the industry saw most of the Long Range Planning (LRP) guidance introduced during the height of the pandemic when ex-COVID core growth was driven by COVID-related factors such as record levels of funding and supply chain constraints.
The underlying core growth, “while not explicitly driven by Covid revenues, was significantly influenced by the factors listed above and drove overly optimistic long-term growth rate assumptions,” the analyst wrote.
“We expect a level of reset in these LRPs over the course of next year,” Sykes added, pointing to multiple tailwinds such as the emergence of easier comps and a gradual end to bioprocessing inventory destocking as 2023 draws to a close.
Goldman projects growth in the Tools space to normalize at 5% in 2025 and 2026 and asks, “the key question in our mind is not the ultimate level of growth, but instead what is the right multiple to pay for this growth.”
As growth projections reset, the analyst anticipates the investors to concentrate on out-year valuation multiples, which, for example, on 2025 and 2026, could be compelling compared to the historical figures and the overall market.
Goldman Sachs expects companies with a relatively low focus on China and higher exposure to bioprocessing to outperform before the Tools market witnesses a recovery in capital equipment demand.
In its coverage, Goldman Sachs prefers Tools stocks with bioprocessing exposure: Avantor (AVTR) and Thermo Fisher Scientific (NYSE:TMO), instead of those with instrument exposure: Waters Corporation (NYSE:WAT), Mettler-Toledo International (MTD), and Bruker Corporation (BRKR).
However, with a $50 price target, the firm upgrades Qiagen (QGEN) to Buy from Neutral, citing the defensiveness of its end markets and favorable valuation compared to its peers.
Goldman Sachs downgrades Danaher (NYSE:DHR), one of its top picks in 2023, to Neutral from Buy with a 12-month target of $205 per share, citing more attractive opportunities elsewhere given its premium valuation.
The firm raises its 12-month price target on Agilent (NYSE:A) to $145 from $128 per share and remains Buy-rated on its top instrument name, expecting to benefit from the potential for cyclical recovery in the latter half of 2024.
Goldman Sachs has Neutral ratings on Waters (WAT) and Mettler-Toledo (MTD), with price target on the former at $275 and the latter set to $1,050 from $1,030 per share.
The firm is Buy-rated on Thermo Fisher (TMO) with its price target raised to $520 from $500 per share. Revvity (RVTY) also gets a Buy rating and a 12-month price target of $105.
Meanwhile, with its $57 per share target maintained, Bruker (BRKR) draws Goldman Sachs’ lone Sell rating in the Tools space.