Citigroup: CSL Limited & ResMed Inc. (CHESS) could soar this earnings season

The healthcare sector has been one of the best performing parts of our market in 2017. But with so much investor goodwill priced in, can these stocks still deliver a positive earnings surprise cum the February reporting season?

Citigroup thinks yes and has highlighted the stocks that are most likely to beat consensus earnings forecast.

Stocks that deliver above expectations are the most likely to outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), while those that miss forecasts will be severely punished following the recent robust market rally that sent the S&P/ASX 200 Health Care (Index:^AXHJ) (ASX:XHJ) index up by over 18%, when the broader market is up by less than 6% over the past year.

One healthcare hero that is tipped to bring cheer to investors next month is blood products group CSL Limited (ASX: CSL).

Citigroup has pencilled in a first half earnings per share (EPS) forecast of US$1.98, which is 3% above consensus.

The “Aussie Flu” outbreak in North America provides another reason for investors to be bullish. The outbreak of a particularly bad strain of flu in the US is driving a surge of demand for CSL’s vaccine, Seqirus.

JP Morgan is now expecting Seqirus to deliver up to three times more earnings this year to around US$20 million, according to a report in the Australian Financial Review.

JP Morgan is also tipping management to upgrade its full year earnings guidance to US$1.55 billion from US$1.48 billion.

The terrible flu season has been dubbed “Aussie Flu” because it afflicted Australians six months ago during our winter.

Another healthcare stock that could deliver a pleasant earnings surprise is sleep apnoea treatment device maker ResMed Inc. (CHESS) (ASX: RMD) with Citigroup forecasting a core EPS of US80 cents for the second quarter of FY18.

This is over 5% ahead of consensus as Citigroup noted that the mask category is returning to growth following sales issues in the first quarter, and that the return to sales growth will arrest the declining gross margins that were experienced in the previous period.

These are the only two stocks in the sector that the broker expects to beat consensus and where it has a “buy” recommendation.

On the flipside, Citigroup believes medical services provider Primary Health Care Limited (ASX: PRY) and funeral services group InvoCare Limited (ASX: IVC) are at risk of handing in results that are below market expectations.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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