Healthcare equipment stocks seen outperforming, ‘safer' than Big Pharma: analysts

UBS analysts are 'Overweight' the healthcare equipment sector, ranking it #1 due to its historical 9% CAGR, current 10% EPS discount to trend, and perceived safety over Big Pharma amidst lower tariff risks. They favor Abbott Laboratories and Boston Scientific, with the latter offering the best value. The analysts also maintain a positive outlook on the broader pharma space, citing strong earnings momentum, historical outperformance in rising credit spread environments, and potential benefits from Generative AI.

Analysis

UBS analysts have issued an 'Overweight' rating on the healthcare equipment sector, ranking it as their top pick. This bullish stance is predicated on several key factors: the sector has demonstrated a historical 9% compound annual growth rate (CAGR), the highest of any sector excluding technology, and its earnings per share are currently trading at a 10% discount to the historical trend. Furthermore, the sector is perceived as a 'safer' investment compared to Big Pharma, primarily due to its lower exposure to tariff risks. Within this space, Abbott Laboratories (ABT) and Boston Scientific (BSX) are favored, with BSX specifically highlighted for offering the best value. The note also expresses a positive outlook on the benchmark pharmaceutical space, supported by unusually strong earnings momentum that has outpaced performance. Analysts also point to the sector's historical outperformance during periods of rising credit spreads and the potential for Generative AI to significantly reduce production costs and accelerate product development. UBS maintains 'Buy' ratings on Johnson & Johnson (JNJ) and Abbott Laboratories.

Key Decisions for Investors

• Investors should consider an overweight allocation to the healthcare equipment sector, focusing on names like Abbott Laboratories and particularly Boston Scientific, which is identified as a value play given the sector's strong growth fundamentals and current valuation discount.
• For broader healthcare exposure, benchmark pharma stocks such as Johnson & Johnson warrant consideration, as the sector has demonstrated strong earnings momentum and historical outperformance in rising credit spread environments.
• Monitor the adoption of Generative AI within target companies, as its potential to lower costs and speed up innovation is a key forward-looking catalyst identified by the analysts.