From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Those leading the charge have realized strong financial performance, and over the past six months, the industry’s 7.6% return has closely followed the S&P 500.
Regardless of these results, investors must exercise caution as many businesses in this space are subject to heavy regulation that can influence their earnings potential. Taking that into account, here are three healthcare stocks that may face trouble.
Danaher (DHR)
Market Cap: $128 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 Does DHR Worry Us?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Efficiency has decreased over the last five years as its operating margin fell by 10.6 percentage points
- Earnings per share were flat over the last five years and fell short of the peer group average
At $187.08 per share, Danaher trades at 20.6x forward P/E. If you’re considering DHR for your portfolio, see our FREE research report to learn more.
Solventum (SOLV)
Market Cap: $13.72 billion
Founded in 1985, Solventum (NYSE: SOLV) develops, manufactures, and commercializes a portfolio of healthcare products and services addressing critical customer and therapeutic patient needs.
Why Is SOLV Risky?
- 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
- Sales are projected to be flat over the next 12 months and imply weak demand
- Free cash flow margin dropped by 30.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Solventum is trading at $76 per share, or 11.1x forward P/E. To fully understand why you should be careful with SOLV, check out our full research report (it’s free).
agilon health (AGL)
Market Cap: $1.94 billion
Transforming how doctors care for seniors by shifting financial incentives from volume to outcomes, agilon health (NYSE: AGL) provides a platform that helps primary care physicians transition to value-based care models for Medicare patients through long-term partnerships and global capitation arrangements.
Why Are We Cautious About AGL?
- Underwhelming customer growth over the past two years shows the company faced challenges in winning new contracts
- Demand will likely fall over the next 12 months as Wall Street expects flat revenue
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
agilon health’s stock price of $106.88 implies a valuation ratio of 102.5x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than AGL.
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