From novel pharmaceuticals to telemedicine, most healthcare companies are on a mission to drive better patient outcomes. But speed bumps such as inventory destockings have persisted in the wake of COVID-19, limiting growth. This has capped returns as the industry’s six-month gain of 7.5% has lagged the S&P 500’s 13% climb.
While some businesses have durable competitive advantages that enable them to grow consistently, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three healthcare stocks that may face trouble.
BD (BDX)
Market Cap: $54.74 billion
With a history dating back to 1897 and a presence in virtually every hospital around the globe, Becton Dickinson (NYSE:BDX) develops and manufactures medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions and professionals worldwide.
Why Does BDX Fall Short?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 5.7% for the last five years
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.6 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
BD is trading at $189.98 per share, or 13x forward P/E. Check out our free in-depth research report to learn more about why BDX doesn’t pass our bar.
Bruker (BRKR)
Market Cap: $6.35 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 Are We Wary of BRKR?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Free cash flow margin shrank by 11.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Eroding returns on capital suggest its historical profit centers are aging
At $41.50 per share, Bruker trades at 20.8x forward P/E. If you’re considering BRKR for your portfolio, see our FREE research report to learn more.
PacBio (PACB)
Market Cap: $474 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 Should You Sell PACB?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.5% annually over the last two years
- Increased cash burn over the last five years raises questions about the return timeline for its investments
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
PacBio’s stock price of $1.56 implies a valuation ratio of 2.8x forward price-to-sales. To fully understand why you should be careful with PACB, check out our full research report (it’s free for active Edge members).
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