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 1.1% gain over the past six months while the S&P 500 was flat.
Although these businesses have produced results, only a handful will thrive over the long term as the influx of venture capital has ushered in a new wave of competition. Taking that into account, here is one healthcare stock poised to generate sustainable market-beating returns and two that may face trouble.
Two Healthcare Stocks to Sell:
RadNet (RDNT)
Market Cap: $4.77 billion
With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ: RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.
Why Do We Think Twice About RDNT?
- Smaller revenue base of $2.04 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 3 percentage points
- Poor free cash flow margin of 0.7% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
RadNet’s stock price of $61.41 implies a valuation ratio of 104.2x forward P/E. If you’re considering RDNT for your portfolio, see our FREE research report to learn more.
Elanco (ELAN)
Market Cap: $11.92 billion
Originally established as a division of pharmaceutical giant Eli Lilly before becoming independent in 2018, Elanco Animal Health (NYSE: ELAN) develops and sells medications, vaccines, and other health products for pets and farm animals across more than 90 countries.
Why Does ELAN Fall Short?
- Sales trends were unexciting over the last two years as its 3.3% annual growth was below the typical healthcare company
- Expenses have increased as a percentage of revenue over the last two years as its adjusted operating margin fell by 3.3 percentage points
- Push for growth has led to negative returns on capital, signaling value destruction
At $24.01 per share, Elanco trades at 24.4x forward P/E. Dive into our free research report to see why there are better opportunities than ELAN.
One Healthcare Stock to Buy:
HCA Healthcare (HCA)
Market Cap: $110.4 billion
With roots dating back to 1968 and a network spanning 20 states, HCA Healthcare (NYSE: HCA) operates a network of 190 hospitals and 150+ outpatient facilities providing a full range of medical services across the US and England.
Why Is HCA a Good Business?
- Enormous revenue base of $75.6 billion gives it economies of scale and advantages over new entrants due to the industry’s regulatory complexity
- Share repurchases over the last five years enabled its annual earnings per share growth of 21% to outpace its revenue gains
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures
HCA Healthcare is trading at $495.40 per share, or 16.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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