From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. Those leading the charge have not only realized strong financial performance but also propelled the broader industry’s returns as healthcare stocks have gained 31.4% over the past six months while the S&P 500 was up 4.5%.
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. With that said, here are three healthcare stocks that may face trouble.
Dentsply Sirona (XRAY)
Market cap: $2.01 billion
With roots dating back to 1877 when it introduced the first dental electric drill, Dentsply Sirona (NASDAQ: XRAY) manufactures and sells professional dental equipment, technologies, and consumable products used by dentists and specialists worldwide.
Why Is XRAY Risky?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 14.6% annually, worse than its revenue
- Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up
Dentsply Sirona is trading at $10.06 per share, or 7.1x forward P/E. If you’re considering XRAY for your portfolio, see our FREE research report to learn more.
AdaptHealth (AHCO)
Market cap: $989.9 million
With a network of approximately 680 locations serving patients across all 50 states, AdaptHealth (NASDAQ: AHCO) provides home medical equipment, supplies, and related services to patients with chronic conditions like sleep apnea, diabetes, and respiratory disorders.
Why Are We Bearish on AHCO?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.9% annually over the last two years
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 30.5% annually while its revenue grew
- Negative returns on capital show that some of its growth strategies have backfired, and its decreasing returns suggest its historical profit centers are aging
AdaptHealth’s stock price of $7.32 implies a valuation ratio of 5.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why AHCO doesn’t pass our bar.
PacBio (PACB)
Market cap: $755.3 million
Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.
Why Does PACB Give Us Pause?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.5% annually over the last two years
- Cash-burning history makes us doubt the long-term viability of its business model
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $2.45 per share, PacBio trades at 4.7x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PACB.
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