According to the U.S. Bureau of Labor Statistics, jobs in the health care field are expected to grow 14% between 2018 and 2028 – a faster growth rate than any other occupational group. People are living longer and having fewer children, leading to an aging population and thus, a greater demand for health care. Over the past couple of decades, the iShares U.S. Healthcare ETF (IYH, Financial) has grown at a faster rate than the SPDR S&P 500 ETF Trust (SPY, Financial).
Using the GuruFocus All-in-One Screener, a Premium feature, I searched for the large-cap health care companies that have consistently grown their revenue, earnings and Ebitda per share by at least 10% for the past one-year, three-year and five-year periods. Among those results, the following were chosen because they have strong economic moats and other catalysts for future growth.
Biogen
Biogen Inc. (BIIB, Financial) is a neuroscience pioneer based in Cambridge, Massachusetts. It researches and develops therapies for neurological and neurodegenerative diseases, including multiple sclerosis, Leukemia and Alzheimer’s. The company relies on a lineup of high-priced, cutting-edge drugs for most of its profits.
As of Jan. 20, Biogen has a market cap of $51.52 billion, a price-earnings ratio of 10.15, a three-year revenue growth rate of 12.1%, a three-year earnings per share without non-recurring items growth rate of 12.0% and a three-year Ebitda growth rate of 13.6%. According to the Peter Lynch chart, the company is trading below its intrinsic value.
According to the discounted cash flow model, Biogen has an intrinsic value of $354.74. At a share price of $291.52, it trades with a 17.82% margin of safety.
After new results from recent trials, Biogen decided to pick up research and development of its trial-phase Alzheimer’s drug, aducanumab, and pursue regulatory approval for it, providing hope for Alzheimer’s patients. If the drug is successfully approved, it could also translate to profits for Biogen. For once, one of Biogen’s products would have the potential to be produced on a large scale, as there are 5.8 million Alzheimer’s patients in the U.S. alone. In the past, the company’s profits have leaned on selling in smaller markets, which made higher prices necessary. Higher production may thus drive down the cost of aducanumab.
Centene
Originally founded as a nonprofit Medicaid plan, Centene Corp. (CNC, Financial) has evolved into a major provider of government-sponsored health care programs in the U.S. It focuses on uninsured and under-insured individuals and offers a range of services from health insurance to specialty services such as behavioral health management, correctional care and care management software.
As of Jan. 20, Centene has a market cap of $26.71 billion, a price-earnings ratio of 19.98, a three-year revenue growth rate of 17.7%, a three-year earnings per share without non-recurring items growth rate of 16.1% and a three-year Ebitda growth rate of 17.0%. According to the Peter Lynch chart, the company is trading near its intrinsic value.
The DCF model gives Centene shares a value of 53.26% as of Sept. 30, 2019, which is 17.47% below its share price of $64.54 as of Jan. 20.
Centene’s stock price fell due to a federal judge ruling the Affordable Care Act unconstitutional in December 2018. After a months-long court case, U.S. District Court Judge Reed O’Connor of Texas declared that key portions of the legislation were unconstitutional, causing the market to factor in speculative losses for government health insurance providers. Centene’s stock price, which peaked at $73.14 per share in late September 2018, began to fall during October due to the court battle. Once the ruling hit the news, the stock continued to fall to a low of $42.41 in late September 2019.
Contrary to investors’ fears, Centene’s revenue did not suffer a company-crushing decline, as the Affordable Care Act had no significant effect on the company’s profitability. Thus, the stock has high recovery potential.
Intuitive Surgical
Intuitive Surgical Inc. (ISRG, Financial) is a leading developer and producer of robotic products for minimally invasive surgery. Based in Sunnyvale, California, it is particularly famous for its da Vinci Surgical System platforms, which altogether have performed more than five million surgeries over the past 20 years.
As of Jan. 20, Intuitive has a market cap of $69.35 billion and a price-earnings ratio of 54.5. According to the Peter Lynch chart, the company is currently trading higher than its intrinsic value.
At a share price of $600.27, Intuitive is not attractively priced according to traditional value metrics. However, its surgical systems play a leading role in a rapidly expanding industry. Intuitive has a three-year revenue growth rate of 14.3%, a three-year earnings per share without non-recurring items growth rate of 22.4% and a three-year Ebitda growth rate of 15.4%. The company also has no debt and plenty of cash, which is a truly impressive feat for a business whose sales rely on cutting-edge surgical robotics technology.
The installed base for Intuitive’s da Vinci systems has grown from around 4,000 units ($800 million in revenue) in 2016 to around 5,000 units ($1.13 billion in revenue) in 2018. Analysts estimate that the installed base could grow to 6,000 units by 2021, mainly taking the U.S. market into consideration. However, the system is seeing increasing adoption outside of the U.S., with international revenues growing at a year-over-year rate of approximately 19% in 2019.
With recurring revenues continuing to grow in relation to revenues from the sale of new systems, Intuitive may transition out of its fast-growth period in the coming years, which would likely see a contraction of its price margins. If this turns out to be the case, it might be wise to wait to purchase shares at a better price.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful analysis or consult registered investment advisors before taking action in the stock market.
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