Despite COVID-19’s devastating impact on the economy, Goldman Sachs’ chief U.S. equity strategist David Kostin believes 2020 earnings might not be as bad as previously expected. Kostin gave his estimate for S&P 500 earnings per share in 2020 a lift, from $110 to $115. For 2021, the forecast remains at $170, which is 4% above 2019’s realized level, with the figure landing at $188 for 2022.
That said, management commentary will be an essential factor in gauging the outlook. “Given the heightened investor focus on the earnings outlook in 2021 and 2022, we expect management commentary will prove more valuable than backward-looking results,” Kostin wrote in a recent note.
As for his stock picks, the strategist argues that given the low interest rate environment, names with the longest-duration cash flow are “what you want to own.” These companies include those in the technology and healthcare sectors.
Bearing this in mind, we used TipRanks’ database to take a closer look at two stocks that just received Goldman Sachs’ stamp of approval, with the firm projecting upside potential of at least 50% for each.
ACM Research Inc. (ACMR)
Specializing in wet processing technology, ACM Research has an impressive product lineup designed for a range of applications. Based on its technology, Goldman Sachs sees plenty of growth on the horizon, recently adding the company to its Conviction List.
Representing the firm, analyst Allen Chang reminds investors that the company is one of the top wafer cleaning tool makers. Wafer cleaning is done at multiple points during wafer fabrication such as post-etch, post-photoresist and post-CMP, some of the most repeated processes in wafer fabrication.
It should be noted that there are some serious heavyweights in this space, namely SCREEN Holdings, Lam Research and Applied Materials. However, ACMR “is the leader among domestic peers in China with 20% of share allocation in YMTC’s cleaning tool purchase.”
Chang also mentions that over the past few quarters, it has placed a significant focus on expanding its product offerings and launched a new line of semi-critical cleaning tools, copper plating equipment and furnaces. “These product additions provide scope to expand ACMR’s SAM (serviceable available market) from US$1.5 billion (single wafer cleaning tools only) to US$5 billion per year,” he added.
What exactly is driving Chang’s bullish thesis? “Our constructive view on ACMR is based on: 1) its technological strength and proven track record with a high-quality customer base (e.g. SK Hynix), allowing the company to capture more share of local fabs; 2) increasing demand driven by China’s massive investment into semiconductor manufacturing,” he commented. As a result, the analyst expects net profits to increase at a 63% CAGR in 2020E-25E.
Even though ACMR’s earnings growth profile is in line with the sector, the stock is trading at 31x/20x the 2021/22E EPS estimates (vs. its China A-Share local SPE peers at above 100x/50x for 2021/22E), making the valuation compelling, in Chang’s opinion.
Due to all of the above, Chang rates ACMR a Buy along with a $150 price target. This figure implies shares could surge 76% in the next year. (To watch Chang’s track record, click here)
Turning now to the rest of the Street, opinions are split almost evenly. 3 Buys and 2 Holds add up to a Moderate Buy consensus rating. At $87.50, the average price target brings the upside potential to 3%. (See ACM Research stock analysis on TipRanks)
Inspire Medical Systems (INSP)
Moving to the healthcare sector, Inspire Medical Systems wants to redefine the standard of care for obstructive sleep apnea (OSA). Given its long runway ahead, it’s no wonder this name just scored Goldman Sachs’ stamp of approval.
Covering the stock for Goldman, analyst Amit Hazan tells clients that a big part of his bullish thesis is related to its expansion in U.S. reimbursement coverage during the past year, which creates a “path of accelerating growth for Inspire to penetrate its over $10 billion addressable market opportunity for OSA in the U.S.”
The analyst added, “Despite our cautious stance on COVID impacts near term, our long-term forecast for implanting facilities to double by 2024 and utilization improvement drives a 5-year sales CAGR of over 25%. In short, this story should gain traction as COVID impacts subside, and we view the current share price as an attractive opportunity for investors.”
Looking more closely at the market, about 400 million patients worldwide and 25 million in the U.S. suffer from moderate to severe OSA. Based on the fact that INSP’s unique MIS neurostimulation therapy has been reviewed and clinically validated as a safe and effective alternative for OSA patients who fail CPAP, Hazan believes that the company is well positioned to capitalize on the opportunity.
Speaking to the reimbursement coverage, Hazan points out that the commercial side has accelerated, with its covered lines growing from 25 million to 180 million in the last 18 months. “Maybe even more importantly, during 2020, all 7 MACs came out with positive LCDs, which effectively constitutes national Medicare coverage today. We expect the remaining major commercial plans (an additional 70-80 million lives) coming on by the end of this year,” the analyst commented.
As broad reimbursement coverage is now in place, INSP is free to focus on execution. To this end, Hazan estimates that the number of centers will double over the next five years. When it comes to utilization, improved reimbursement and increased DTC efforts could lead to a significant boost in annual implants per center.
Add in its strong cash position of $175 million as of Q2 2020, and the deal is sealed for Hazan. The analyst rates INSP a Buy along with a $148 price target. Shares could appreciate by 50%, should the analyst’s thesis play out in the coming months. (To watch Hazan’s track record, click here)
Overall, out of 7 total reviews published in the last three months, 6 analysts rated the stock a Buy, while 1 said Sell. So, INSP gets a Moderate Buy consensus rating. However, the $96.14 average price target suggests shares could dip 4% in the next twelve months. (See INSP stock analysis on TipRanks)
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