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 13.2%. This drawdown was noticeably worse than the S&P 500’s 2.4% loss.
A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. Taking that into account, here are three healthcare stocks we’re swiping left on.
Solventum (SOLV)
Market Cap: $12.65 billion
Founded in 1985, Solventum (NYSE: SOLV) develops, manufactures, and commercializes a portfolio of healthcare products and services addressing critical customer and therapeutic patient needs.
Why Does SOLV Fall Short?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Expenses have increased as a percentage of revenue over the last two years as its adjusted operating margin fell by 4.2 percentage points
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 21.9% annually
Solventum’s stock price of $73.09 implies a valuation ratio of 12.9x forward P/E. Check out our free in-depth research report to learn more about why SOLV doesn’t pass our bar.
Integer Holdings (ITGR)
Market Cap: $4.14 billion
With its name reflecting the mathematical term for "whole" or "complete," Integer Holdings (NYSE: ITGR) is a medical device outsource manufacturer that produces components and systems for cardiac, vascular, neurological, and other medical applications.
Why Are We Hesitant About ITGR?
- 6.5% annual revenue growth over the last five years was slower than its healthcare peers
- Smaller revenue base of $1.75 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- 7.7 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 $118.76 per share, Integer Holdings trades at 18.9x forward P/E. Read our free research report to see why you should think twice about including ITGR in your portfolio.
Patterson Companies (PDCO)
Market Cap: $2.77 billion
With roots dating back to 1877 and serving over 150,000 customers across North America and the UK, Patterson Companies (NASDAQ: PDCO) is a specialty distributor that supplies dental practices and animal health professionals with equipment, consumables, pharmaceuticals, and practice management software.
Why Are We Cautious About PDCO?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Negative free cash flow raises questions about the return timeline for its investments
Patterson Companies is trading at $31.34 per share, or 13.6x forward P/E. To fully understand why you should be careful with PDCO, check out our full research report (it’s free).
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