The medical sector's outlook seems positive, with analysts predicting continued growth driven by an aging population, increased healthcare access, and technological advances. However, certain government policies may pose challenges for fundamentally weaker companies despite the sector's overall significant growth prospects.
Considering these factors, it seems prudent to acquire shares of fundamentally robust Select Medical Holdings Corporation (SEM) while waiting for an opportune moment to invest in Veeva Systems Inc. (VEEV) could be wise. Conversely, it might be best to steer clear of TRxADE HEALTH, Inc. (MEDS) owing to its poor fundamentals.
Before delving into the featured stocks, let's examine the current happenings in the medical industry in detail.
Hospitals are regaining normalcy, reflected in rising revenue and operating margins, indicating the alleviation of healthcare staffing shortages. Moreover, diagnostics firms are poised for a turnaround, addressing the gaps left by the decline in COVID-19 test kit revenue.
The industry is also rapidly advancing through technologies such as automation, Artificial Intelligence (AI), and digital therapeutics. Wearables and home-based consumer devices are empowering patients. This transformative growth underscores the industry's forward-thinking approach.
Additionally, the introduction of new treatments for cancer and Alzheimer's is poised to drive further sales growth in this sector. Further opportunities for expansion lie in the production of specialty products, medicines for chronic conditions, and generic drugs, particularly within aging populations.
Elevated demand for personalized medicine and treatments for chronic diseases is being propelled by aging populations in developed markets. Increasingly robust healthcare systems and rising disposable incomes are further contributing to heightened demand.
AI and big data analytics are also unequivocally enhancing efficiency in drug development, clinical trials, and patient care. The year 2023 marked the unequivocal dominance of AI, heralding a technological era poised to persist into 2024 with continued advancements and impact.
However, some companies are expressing apprehension about the impending Inflation Reduction Act, which may impact Medicare drug prices. Potential adverse effects loom from federal government policies, notably the FTC's intensified anti-competition stance, seen in the Sanofi-Maze case, and the Biden administration's revised NIH framework introducing march-in rights.
Considering this outlook, let’s look at the fundamentals of the three medical stocks.
Stock to Buy:
Select Medical Holdings Corporation (SEM)
SEM oversees critical illness and rehabilitation facilities, including outpatient clinics and occupational health centers. Its operations are organized into four segments: The Critical Illness Recovery Hospital; The Rehabilitation Hospital; The Outpatient Rehabilitation; and The Concentra.
In March of last year, SEM unveiled its expansion initiative by constructing a state-of-the-art specialty hospital in Orlando. This move aligns with the surging demand for superior post-acute care in Florida, driven by the rapid growth of its aging population, particularly those over 65, positioning SEM for substantial gains.
In the same month, SEM and Lutheran Health Network of Indiana, a subsidiary of Community Health Systems (CHS), unveiled a strategic joint venture to offer advanced inpatient rehabilitation and critical illness recovery care in Fort Wayne.
SEM, as the majority owner and managing partner, signifies its foray into Indiana's rehabilitation sector, meeting the region's demand for critical illness recovery care.
For the fiscal 2023 third quarter that ended September 30, 2023, SEM’s revenue increased 6.2% year-over-year to $1.67 billion. Its income from operations rose 42.1% from the year-ago value to $129.96 million. Also, the company’s net income and earnings per common share grew 59.5% and 81% from the prior year’s quarter to $60.82 million and $0.38, respectively.
The consensus revenue estimate of $6.64 billion for the fiscal year ending December 2023 reflects a 4.9% year-over-year improvement. Likewise, the consensus EPS estimate of $1.98 for the same period indicates a 61% rise from the prior year. Also, the company surpassed the consensus revenue and EPS estimates in three of four trailing quarters.
Shares of SEM have gained 10.8% over the past month to close the last trading session at $26.32.
SEM’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
SEM has a B grade for Value, Growth, and Stability. It is ranked #6 out of 11 stocks within the Medical - Hospitals industry.
In addition to the POWR Ratings I’ve highlighted, you can see SEM’s Momentum, Sentiment, and Quality ratings here.
Stock to Hold:
Veeva Systems Inc. (VEEV)
VEEV furnishes cloud-based software tailored for the life sciences sector, encompassing the Veeva Development Cloud, an application suite addressing clinical, regulatory, quality, and safety functions. The company extends professional and support services, along with ongoing managed services featuring outsourced systems administration.
On January 18, VEEV disclosed that its suite of Veeva training solutions had been adopted by over 350 companies, presenting a strategic advantage for the company. The widespread implementation of the training solutions positions VEEV to experience heightened demand and increased market presence.
For the fiscal 2024 third quarter that ended October 31, 2023, VEEV’s total revenues increased 11.6% year-over-year to $616.51 million. Its gross profit grew 12.6% from the year-ago value to $448.82 million.
However, VEEV’s cash inflow from operating activities on a non-GAAP basis decreased 44% from the prior year’s quarter to $79.32 million. As of October 31, 2023, the company’s cash and cash equivalents came in at $743.71 million, compared to $886.47 million as of January 31, 2023.
Analysts expect VEEV’s revenue to increase 9.2% year-over-year to $2.35 billion for the fiscal year ending January 2024. Moreover, the company’s EPS for the current year is expected to grow 11.2% from the prior year to $4.76. The stock has gained 12.7% over the past month. However, it has plunged 2.3% over the past six months to close the last trading session at $204.50.
VEEV’s outlook is apparent in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary rating system.
VEEV has an A grade for Quality and a B for Sentiment. It also has a C grade for Stability and a D for Value. The stock is ranked #27 out of 67 stocks within the Medical - Services industry.
Click here to access additional VEEV ratings for Momentum and Growth.
Stock to Avoid:
TRxADE HEALTH, Inc. (MEDS)
MEDS centers on digitizing the retail pharmacy realm. It prioritizes optimizing drug procurement, prescription journeys, and patient engagement. The company oversees the TRxADE drug procurement marketplace, offering price transparency, purchasing capabilities, and additional value-added services.
For the three months that ended on September 30, 2023, MEDS’ total operating expenses increased 60.2% year-over-year to $2.55 million. Its operating loss widened 286.3% from the year-ago value to $845.15 thousand.
Additionally, the company’s net loss widened 566.7% from the prior year’s period to $3.53 million, while net loss attributable to common stockholders worsened 63.7% year-over-year to $1.49.
The stock has plummeted 18.1% over the past month and 50.6% over the past six months, closing the last trading session at $4.66.
MEDS’ poor prospects are reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system.
MEDS has a D grade for Momentum and Stability. It is ranked last in the 4-stock Medical - Drug Stores industry.
Click here to access the additional MEDS ratings (Growth, Value, Sentiment, and Quality).
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
VEEV shares were trading at $203.58 per share on Friday morning, down $0.92 (-0.45%). Year-to-date, VEEV has gained 5.74%, versus a 0.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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