The pharmaceutical industry is expected to expand rapidly due to rising global medical needs, population growth, advances in healthcare technology, and a demand for innovative medications.
However, while I think one could consider investing in Zoetis Inc. (ZTS), Verano Holdings Corp. (VRNOF) might be best kept on hold, and Canopy Growth Corporation (CGC) and SNDL Inc. (SNDL) are best avoided now, given their weak fundamentals.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the pharma industry.
The worldwide pharmaceutical industry is resilient due to rising chronic diseases, an aging population, increased health awareness, and investments in research and development. Technological breakthroughs have accelerated drug discovery and created new opportunities for customized medicine and targeted therapy.
According to Statista, worldwide pharmaceutical revenues are expected to grow at a CAGR of 6.2% to reach $1.47 trillion by 2028. In addition, the growing acceptance of medical cannabis, particularly in the United States, is attracting more seniors to treat pain, anxiety, and insomnia, as it may provide health benefits as our bodies age.
Investors’ interest in pharmaceutical stocks can be gauged from iShares U.S. Pharmaceutical ETF’s (IHE) 16.2% returns over the past three months.
However, the pharmaceutical industry in the United States is encountering challenges as restrictions and pricing demands increase. These challenges have reduced profitability and limited the industry’s ability to research and create new drugs.
Also, the US cannabis industry faces financial challenges as a result of government regulation, high costs, and limited financing, limiting profitability and sustainability despite growing demand.
Let us dive deeper into the fundamentals of the featured stocks:
Stock to Buy:
Zoetis Inc. (ZTS)
ZTS discovers, develops, manufactures, and commercializes animal health medicines, vaccines, and diagnostic products in the United States and internationally.
ZTS’ trailing-12-month EBIT margin of 36.53% is significantly higher than the industry average of 0.54%. Its trailing-12-month levered FCF margin of 13.75% is significantly higher than the industry average of 0.14%.
For the fiscal third quarter that ended September 30, 2023, ZTS’ revenue and non-GAAP gross profit increased 7.4% and 8.5% year-over-year to $2.15 billion and $1.52 billion, respectively. Also, for the same quarter, its non-GAAP net income attributable to ZTS and non-GAAP earnings per common share attributable to ZTS increased 11.1% and 12.4% from the year-ago quarter to $629 million and $1.36, respectively.
As of September 30, 2023, its total current liabilities stood at $1.61 billion, compared to $3.17 billion as of December 31, 2022.
The consensus revenue estimate of $9.21 billion for the year ending December 2024, increased 8.1% year-over-year. Its EPS is expected to grow 11.1% year-over-year to $6.02 for the same period. It surpassed EPS estimates in three of four trailing quarters. ZTS’ shares have gained 23.5% over the past three months to close the last trading session at $192.76.
ZTS’ POWR Ratings reflect this promising outlook. The stock has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
ZTS also has a B grade for Stability and Quality. It is ranked #13 out of 162 stocks in the Medical - Pharmaceuticals industry. Click here for the additional POWR Ratings for Growth, Value, Momentum and Sentiment for ZTS.
Stock to Hold:
Verano Holdings Corp. (VRNOF)
VRNOF is a vertically integrated cannabis company. It engages in the cultivation, processing, wholesale, and retail distribution of cannabis across several states. The company sells artisanal cannabis products for both medical and adult-use markets under Encore, Avexia, MUV, Savvy, BITS, and Verano brands.
VRNOF’s trailing-12-month EBIT margin of 15.23% is significantly higher than the 0.54% industry average. Its trailing-12-month gross profit margin of 50.52% is 11.3% lower than the 56.94% industry average.
In the third quarter that ended September 30, 2023, VRNOF’s revenues, net of discounts increased 5.5% year-over-year to $240.09 million, while its gross profit rose 8.3% from the year-ago value to $133.22 million.
However, the company’s total operating expense increased 8.4% year-over-year to $92.89 million. Also, its adjusted net loss attributable to VRNOF came in at $17.84 million.
Street expects VRNOF’s revenue to increase 5.7% year-over-year to $988.09 million for the fiscal year ending December 2024. Its EPS is expected to grow 36.4% year-over-year to negative $0.08 for the same period. Shares of VRNOF have gained 117.3% over past six months to close the last trading session at $6.04.
VRNOF’s mixed outlook is reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system.
VRNOF has a C grade for Growth, Stability and Sentiment. It ranks #15 in the same industry. Click here to access additional VRNOF ratings (Value, Momentum and Quality).
Stocks to Sell:
Canopy Growth Corporation (CGC)
Headquartered in Smiths Falls, Canada, CGC engages in the production, distribution, and sale of cannabis and hemp-based products for recreational and medical purposes, primarily in Canada, the United States, and Germany. It operates through two segments: Global Cannabis and Other Consumer Products.
CGC’s trailing-12-month gross profit margin of 4.76% is 91.6% lower than the industry average of 56.94%. Its trailing-12-month CAPEX / Sales of 2.05% is 51.7% lower than the industry average of 4.24%.
CGC’s net revenues for the second quarter of fiscal 2024 decreased 20.8% year-over-year to CAD69.60 million ($51.63 million). However, its operating loss stood at CAD7.01 million ($5.20 million). Moreover, the company’s net loss attributable to CGC widened 6.1% over the prior-year quarter to CAD310.02 million ($229.97 million). Also, its loss per share came in at CAD0.43.
Analysts expect CGC’s revenue to come in at $247.48 million for the year ending March 2024, decreased 19.2% year-over-year. Its EPS is expected to come in at negative $2.86 for the same period. It failed to surpass the EPS estimates in three of the trailing four quarters. The stock has lost 83.5% over the past year to close the last trading session at $4.83.
CGC has an overall D rating, equating to a Sell in our POWR Ratings system. It has an F grade for Stability, Sentiment and Momentum and a D for Quality. It is ranked #143 in the same industry.
Beyond what is stated above, we’ve also rated CGC for Growth and Value. Get all CGC ratings here.
SNDL Inc. (SNDL)
Headquartered in Calgary, Canada, SNDL is a private-sector liquor and cannabis retailer with retail banners that include Ace Liquor, Wine and Beyond, Liquor Depot, Value Buds, and Spirit leaf. It operates through four segments: Liquor Retail; Cannabis Retail; Cannabis Operations; Investments and Corporate.
SNDL’s trailing-12-month gross profit margin of 19.61% is 65.6% lower than the industry average of 56.94%. Its trailing-12-month CAPEX / Sales of 1.08% is 74.6% lower than the industry average of 4.24%.
For the fiscal third quarter that ended September 30, 2023, SNDL’s gross margin declined 3.4% year-over-year to CAD 48.61 million ($35.45 million). Also, the company’s net loss for the period stood at CAD 21.83 million ($15.92 million).
As of September 30, 2023, SNDL’s cash and cash equivalents amounted to CAD 201.98 million ($147.33 million), compared to CAD 279.59 million ($203.94 million) as of December 31, 2022.
SNDL’s shares have slumped 37.9% over the past year to close the last trading session at $1.41.
SNDL’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has a D grade for Stability, and Quality. Within the same industry, it is ranked #147. Click here to see the other ratings of SNDL for Growth, Value, Momentum and Sentiment.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
ZTS shares were unchanged in premarket trading Tuesday. Year-to-date, ZTS has declined -2.11%, versus a 3.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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