Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Despite the rosy long-term prospects, short-term headwinds such as COVID inventory destocking have caused the industry to lag recently - over the past six months, the collective 1.4% gain for healthcare stocks has fallen short of the S&P 500’s 15.5% rise.
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.
Danaher (DHR)
Market Cap: $143.4 billion
Born from a real estate investment trust that transformed into a manufacturing powerhouse, Danaher (NYSE: DHR) is a global science and technology company that provides specialized equipment, software, and services for biotechnology, life sciences, and diagnostics.
Why Are We Wary of DHR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.9% annually over the last two years
- 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
- Free cash flow margin shrank by 7.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Danaher’s stock price of $200.40 implies a valuation ratio of 24.7x forward P/E. Dive into our free research report to see why there are better opportunities than DHR.
Penumbra (PEN)
Market Cap: $10.98 billion
Founded in 2004 to address challenging medical conditions with significant unmet needs, Penumbra (NYSE: PEN) develops and manufactures innovative medical devices for treating vascular diseases and providing immersive healthcare rehabilitation solutions.
Why Does PEN Worry Us?
- Revenue base of $1.28 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Low free cash flow margin of 4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Underwhelming 0.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
Penumbra is trading at $281.46 per share, or 65.3x forward P/E. Check out our free in-depth research report to learn more about why PEN doesn’t pass our bar.
Hologic (HOLX)
Market Cap: $14.85 billion
As a pioneer in 3D mammography technology that has revolutionized breast cancer detection, Hologic (NASDAQ: HOLX) develops and manufactures diagnostic products, medical imaging systems, and surgical devices focused primarily on women's health and wellness.
Why Do We Think Twice About HOLX?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 23.6 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
At $66.51 per share, Hologic trades at 15.3x forward P/E. Read our free research report to see why you should think twice about including HOLX in your portfolio.
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