Once again, stocks have delivered an upset. Despite the havoc wreaked by COVID-19 during the second quarter, corporate profits have generally been better-than-expected. So far, 88% of S&P 500-listed companies have reported earnings results, and of these, 58% have exceeded expectations “by more than a standard deviation of estimates,” according to Goldman Sachs strategist David Kostin.
Sure, Kostin notes the bar was set “extremely low,” but the results do warrant an estimate revision to the upside. To this end, the strategist now forecasts 2020 S&P 500 EPS of $130, up from $115, with this call still landing 21% below 2019 earnings. On top of this, Kostin believes that in 2021, EPS for the index could hit $170, which is above the consensus estimate and would reflect a 30% gain from 2020.
Taking this into consideration, we took another look at three stocks Goldman Sachs is bullish on, with the firm’s analysts projecting at least 30%-worth of upside potential for each. After running the tickers through TipRanks’ database, we found out that all three have also received Buy ratings from other Street analysts as well.
Axcella Health Inc. (AXLA)
We’ll start off with Axcella Health, which applies a unique approach involving Endogenous Metabolic Modulators (EMMs) to treating complex diseases and supporting health. Following the release of promising data for one of its candidates, Goldman Sachs is pounding the table on this healthcare name.
AXLA recently published positive topline data for its therapy, AXA1665, in patients with mild/moderate hepatic insufficiency. In the study, AXA1665 was able to produce an improvement in neurocognitive function, amino acid metabolism, ammonia handling and muscle structure/function.
Goldman Sachs’ Paul Choi does acknowledge that the study was on the smaller side and was meant to evaluate safety and tolerability, but points out “it also demonstrated a sustained and dose dependent improvement in the Fischer Ratio (FR) that indicates improvement in amino acid metabolism in spite of additional nitrogen.” It should be noted that low FR is associated with poor clinical outcomes and mortality in patients with end-stage liver disease.
“Moreover, we highlight dose-dependent improvement in three separate measures of cognitive function (PHES, Stroop EncephalApp, and critical flicker frequency),” Choi added. If that wasn’t enough, consistent with other AXAs being developed, AXA1665 “was well-tolerated with most adverse events mild/moderate and not associated with study drug.”
What does all of the data mean? Choi explained, “This evidence of multifactorial activity and safety in patients treated with AXA1665 supports AXLA’s plans to initiate a Phase 2 study of AXA1665 in patients with advanced liver disease following greater than one prior overt hepatic encepolapathy (OHE) event, a more severe population compared to today’s data.”
Adding to the good news, the company’s plans are on track for the Phase 2b study of AXA1125 in adult NASH, which is expected in 1H21 pending an agreement with the FDA. A full AXA1125-003 data readout could come this quarter at the Digital International Liver Congress (EASL). Topline data from Cohort 1 of its study of AXA4010 in patients with sickle cell disease is slated for release in Q4 2020.
Based on all of the above, Choi rates AXLA a Buy along with a $9 price target. This figure implies shares could jump 72% in the year ahead. (To watch Choi’s track record, click here)
It’s not often that the analysts all agree on a stock, so when it does happen, take note. AXLA’s Strong Buy consensus rating is based on a unanimous 5 Buys. The stock’s $17.60 average price target suggests a whopping 235% upside from the current share price of $17.60. (See AXLA stock analysis on TipRanks)
Sarepta Therapeutics (SRPT)
The next stock on our list, Sarepta Therapeutics, has already brought two products to market (Exonyds 51 and Vyondys 53) for Duchenne muscular dystrophy (DMD). With it also boasting a solid development pipeline, it’s no wonder Goldman Sachs gives the company a thumbs up.
Looking at Exonyds 51 and Vyondys 53, Q2 2020 net product sales came in at $111.3 million, beating the Street’s expectation. Even though SRPT didn’t provide individual product revenue, management stated that the pandemic has had a relatively limited impact as 85-90% of patients are receiving home infusions. It should also be noted that the supply chain is very much intact, and the company has completed its rolling NDA submission for casimersen, with the PDUFA slated for Q1 2021.
Turning now to its candidates in clinical development, Goldman Sachs’ Salveen Richter tells clients that in line with her expectations, SRPT successfully completed GMP runs for SRP-9001, its DMD micro-dystrophin gene therapy, using the commercial process.
“With commercial drug material in hand, SRPT is on track to initiate the pivotal commercial supply trial (study 301) in 2H20. In order for the trial to begin, SRPT must now: (1) engage with clinical trial sites and obtain IRB approvals (note potential COVID-19 delays at trial sites); and (2) gain alignment with the FDA on using the GMP material (expected to occur in Q3 2020). We note SRPT also plans to use this time with the agency to seek concurrence on the use of material for a non-ambulatory study,” the five-star analyst stated.
On top of this, the initial data readout for the Phase 2 placebo-controlled DMD gene therapy trial (study 102) using Nationwide’s clinical-grade drug product is on track for Q1 2021, reflecting a potential catalyst, according to Richter. She added, “At this time, SRPT expects to have three-month biopsy expression data from the commercial supply trial (study 301) to serve as the basis of comparability (a key event) to support BLA filing.”
After impressive data from the Phase 1/2 SRP-9003 trial in limb-girdle muscular dystrophy type 2E (LGMD2E) was released, Richter added the program to the firm’s model, giving it a 75% probability of success, in line with DMD gene therapy. She estimates global peak sales of $750 million.
Expounding on this, the analyst commented, “The two gating items for the LGMD2E program include: (1) completing assay development and obtaining the release of GMP material (expected by YE20); and (2) completing a dialogue with the FDA on the appropriate regulatory and development pathway forward. Note, the latter will also provide insight into the development pathway for SRPT’s other five LGMD candidates.”
While DMD gene therapy remains Richter’s focus, she is also looking forward to “initial Ph2 MOMENTUM SRP-5051 (PPMO) dosing and safety data (2H20), where we see potential for the platform to cannibalize the existing PMO franchise (and note opportunities outside of DMD and muscle diseases exist).”
All of the above keeps Richter with the bulls. As a result, the analyst continues to assign a Buy rating to the stock along with a $209 price target. Should her thesis play out, a potential twelve-month gain of 32% could be in the cards. (To watch Richter’s track record, click here)
In general, other analysts are also optimistic about the drug maker. SRPT’s Strong Buy consensus rating breaks down into 14 Buys and a single Hold. The $197.15 average price target puts the upside potential at nearly 25%. (See Sarepta stock analysis on TipRanks)
ADT Inc. (ADT)
Offering security, fire protection and other alarm monitoring products and services, ADT helps people all over the U.S. protect their homes and businesses. Given its solid Q2 performance and the potential tailwinds, this company has earned the coveted Goldman Sachs stamp of approval.
Analyst George Tong tells clients ADT’s Q2 print revealed that revenue, margins and free cash flow (FCF) surpassed his initial expectations thanks to reduced attrition rates and improved subscriber acquisition cost efficiency. “We believe ADT is uniquely positioned to weather COVID-19 and macro related headwinds given the defensiveness and growing importance of home security, fewer home relocations during the pandemic and increasing suburbanization that can drive unit adds,” the five-star analyst commented.
What’s behind this bullish take? ADT’s improved attrition and subscriber acquisition efficiency strengthen Tong’s “outlook of the underlying health of the company’s residential monitoring business, which comprises 80% of total revenue.” He added, “We believe attrition improvements won’t necessarily be linear going forward, but expect the broad-based strengthening of attrition and SAC efficiency to drive improving revenue, profitability and FCF trends in ADT’s residential business.”
When it comes to FCF, Tong stated, “We expect FCF over the near-term to benefit from improving subscriber acquisition cost efficiency, as well as rising retention rates, as it’s more cost effective to retain a customer than it is to acquire a new one. Additionally, we believe ADT’s consumer financing program will drive upsell, contributing to better FCF trends. Over the intermediate-term, we look for a return of commercial growth to lift FCF performance, given commercial customers pay a greater proportion of their installation costs upfront.”
Additionally, the increasing importance of home security and suburbanization as a result of COVID-19 could act as tailwinds that spur growth in FCF. Also standing to benefit FCF is its long-term partnership with Google, announced on August 3.
This move increases its exposure to the smart home industry and bolsters the long-term FCF outlook, in Tong’s opinion. The collaboration will combine Google Nest’s hardware and services with ADT’s installation, service and professional monitoring network, with both companies making a $150 million commitment to support training, marketing and technology solutions.
“We believe ADT will begin to see material financial benefits from the partnership in 2022 when the joint professional install platform is launched… In connection with this partnership, Google also announced that it will make a $450 million equity investment in ADT, which increases our confidence in the companies’ commitment to the alliance,” Tong said.
It should come as no surprise, then, that Tong stands squarely with the bulls. To this end, he rates ADT a Buy and gives it a $17 price target, implying 45% upside potential. (To watch Tong’s track record, click here)
Based on 3 Buys and 5 Holds, the word on the Street is that ADT is a Moderate Buy. At $14.38, the average price target suggests 22.5% upside potential from current levels. (See ADT stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.