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, limiting growth. This has capped the upside for healthcare stocks lately as the industry’s flat return over the past six months has trailed the S&P 500’s 4.2% gain.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Keeping that in mind, here is one resilient healthcare stock at the top of our wish list and two that may face trouble.
Two Healthcare Stocks to Sell:
Select Medical (SEM)
Market Cap: $2.04 billion
With a nationwide network spanning 46 states and over 2,700 healthcare facilities, Select Medical (NYSE: SEM) operates critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers across the United States.
Why Does SEM Give Us Pause?
- Declining admissions over the past two years suggest it might have to lower prices to accelerate growth
- Sales over the last five years were less profitable as its earnings per share fell by 9.3% annually while its revenue was flat
- 6× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Select Medical is trading at $16.45 per share, or 13x forward P/E. Dive into our free research report to see why there are better opportunities than SEM.
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 Cautious About IQV?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 4.3% for the last two years
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- 4 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
At $162.75 per share, IQVIA trades at 12.6x forward P/E. Check out our free in-depth research report to learn more about why IQV doesn’t pass our bar.
One Healthcare Stock to Watch:
Boston Scientific (BSX)
Market Cap: $92.25 billion
Founded in 1979 with a mission to advance less-invasive medicine, Boston Scientific (NYSE: BSX) develops and manufactures medical devices used in minimally invasive procedures across cardiovascular, urological, neurological, and gastrointestinal specialties.
Why Could BSX Be a Winner?
- Core business is healthy and doesn’t need acquisitions to boost sales as its organic revenue growth averaged 15.7% over the past two years
- Incremental sales over the last five years have been highly profitable as its earnings per share increased by 24.2% annually, topping its revenue gains
- Free cash flow margin grew by 12.3 percentage points over the last five years, giving the company more chips to play with
Boston Scientific’s stock price of $62.25 implies a valuation ratio of 17.9x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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