From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, and over the past six months, the industry has pulled back by 3.5%. This performance was disheartening since the S&P 500 gained 4.5%.
While some businesses have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three healthcare stocks we’re passing on.
IQVIA (IQV)
Market Cap: $27.24 billion
Created from the 2016 merger of Quintiles (a clinical research organization) and IMS Health (a healthcare data specialist), IQVIA (NYSE: IQV) provides clinical research services, data analytics, and technology solutions to help pharmaceutical companies develop and market medications more effectively.
Why Are We Hesitant About IQV?
- Annual sales growth of 3.4% over the last two years lagged behind its healthcare peers as its large revenue base made it difficult to generate incremental demand
- Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
- 3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
IQVIA is trading at $157.47 per share, or 12.9x forward P/E. To fully understand why you should be careful with IQV, check out our full research report (it’s free).
Azenta (AZTA)
Market Cap: $1.4 billion
Serving as the guardian of some of medicine's most valuable materials, Azenta (NASDAQ: AZTA) provides biological sample management, storage, and genomic services that help pharmaceutical and biotechnology companies preserve and analyze critical research materials.
Why Do We Avoid AZTA?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.8% annually over the last five years
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 19.9% annually, worse than its revenue
- Negative returns on capital show management lost money while trying to expand the business, and its shrinking returns suggest its past profit sources are losing steam
Azenta’s stock price of $30.59 implies a valuation ratio of 41.6x forward P/E. If you’re considering AZTA for your portfolio, see our FREE research report to learn more.
10x Genomics (TXG)
Market Cap: $1.44 billion
Founded in 2012 by scientists seeking to overcome limitations in traditional biological research methods, 10x Genomics (NASDAQ: TXG) develops instruments, consumables, and software that enable researchers to analyze biological systems at single-cell resolution and spatial context.
Why Should You Dump TXG?
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Negative returns on capital show that some of its growth strategies have backfired, and its decreasing returns suggest its historical profit centers are aging
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $11.62 per share, 10x Genomics trades at 2.5x forward price-to-sales. Check out our free in-depth research report to learn more about why TXG doesn’t pass our bar.
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