From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But financial performance has lagged recently as players offloaded surplus COVID inventories in 2023 and 2024, a headwind for overall demand. The result? Over the past six months, the industry’s return was flat while the S&P 500 climbed by 5%.
A cautious approach is imperative when dabbling in these businesses as regulation is another unpredictable element that can affect their earnings potential. On that note, here are three healthcare stocks we’re passing on.
Sotera Health Company (SHC)
Market Cap: $4.37 billion
With a critical role in ensuring the safety of millions of patients worldwide, Sotera Health (NASDAQGS:SHC) provides sterilization services, lab testing, and advisory services to ensure medical devices, pharmaceuticals, and food products are safe for use.
Why Does SHC Give Us Pause?
- Annual revenue growth of 5.3% over the last two years was below our standards for the healthcare sector
- Subscale operations are evident in its revenue base of $1.16 billion, meaning it has fewer distribution channels than its larger rivals
- Flat earnings per share over the last four years underperformed the sector average
At $15.34 per share, Sotera Health Company trades at 16.2x forward P/E. Dive into our free research report to see why there are better opportunities than SHC.
Acadia Healthcare (ACHC)
Market Cap: $2.52 billion
With a network of over 250 facilities serving patients in 38 states and Puerto Rico, Acadia Healthcare (NASDAQ: ACHC) operates facilities providing mental health and substance use disorder treatment services across the United States.
Why Do We Think ACHC Will Underperform?
- Weak admissions over the past two years imply it may need to invest in improvements to get back on track
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 6.1% annually while its revenue grew
- Free cash flow margin dropped by 18.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Acadia Healthcare’s stock price of $27.08 implies a valuation ratio of 18.8x forward P/E. To fully understand why you should be careful with ACHC, check out our full research report (it’s free).
Bruker (BRKR)
Market Cap: $5.51 billion
With roots dating back to the pioneering days of nuclear magnetic resonance technology, Bruker (NASDAQ: BRKR) develops and manufactures high-performance scientific instruments that enable researchers and industrial analysts to explore materials at microscopic, molecular, and cellular levels.
Why Do We Think Twice About BRKR?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 6.8 percentage points
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Bruker is trading at $36.84 per share, or 18.8x forward P/E. If you’re considering BRKR for your portfolio, see our FREE research report to learn more.
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