Healthcare companies are pushing the status quo by innovating in areas like drug development and digital health. Players catalyzing medical advancements have benefited from elevated demand, and their momentum is only rising as the industry has posted a 46.9% gain over the past six months, beating the S&P 500 by 25.5 percentage points.
Nevertheless, investors should tread carefully as the sector is heavily regulated, and businesses can be negatively impacted if the rules change. Taking that into account, here are three healthcare stocks that may face trouble.
BioMarin Pharmaceutical (BMRN)
Market Cap: $11.66 billion
Pioneering treatments for conditions that often had no previous therapeutic options, BioMarin Pharmaceutical (NASDAQ:BMRN) develops and commercializes therapies that address the root causes of rare genetic disorders, particularly those affecting children.
Why Does BMRN Worry Us?
- Day-to-day expenses have swelled relative to revenue over the last two years as its adjusted operating margin fell by 5.5 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
BioMarin Pharmaceutical is trading at $59.80 per share, or 10.1x forward P/E. If you’re considering BMRN for your portfolio, see our FREE research report to learn more.
STERIS (STE)
Market Cap: $20.37 billion
With a mission critical role in preventing healthcare-associated infections, STERIS (NYSE:STE) provides infection prevention products, sterilization services, and medical equipment that help healthcare facilities and life science companies maintain sterile environments.
Why Does STE Fall Short?
- Annual revenue growth of 7.4% over the last two years was below our standards for the healthcare sector
- Adjusted operating margin was unchanged over the last five years, suggesting it failed to gain leverage on its fixed costs
- ROIC of 5.7% reflects management’s challenges in identifying attractive investment opportunities
STERIS’s stock price of $204.34 implies a valuation ratio of 18.2x forward P/E. To fully understand why you should be careful with STE, check out our full research report (it’s free).
Agilent (A)
Market Cap: $48.71 billion
Originally spun off from Hewlett-Packard in 1999 as its measurement and analytical division, Agilent Technologies (NYSE:A) provides analytical instruments, software, services, and consumables for laboratory workflows in life sciences, diagnostics, and applied chemical markets.
Why Does A Worry Us?
- Muted 3.7% annual revenue growth over the last five years shows its demand lagged behind its healthcare peers
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $171.50 per share, Agilent trades at 26.3x forward P/E. Check out our free in-depth research report to learn more about why A doesn’t pass our bar.
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