The medical industry is expected to witness considerable growth in the foreseeable future amid the rising frequency of chronic diseases, the aging population, increasing health awareness, rapid drug innovation, and technological advancements. The pharmaceutical sector could exceed $1 trillion this year.
Moreover, the industry is experiencing tremendous waves of investment. The Consolidated Appropriations Act of 2023 will provide $120.70 billion in funding for the U.S. Department of Health and Human Services (HHS).
The stock market witnessed heightened volatility in 2022 amid various macroeconomic headwinds. Although inflation is showing signs of easing, the Fed is expected to keep interest rates high until inflation inches closer to 2%. Since Fed officials indicated more rate hikes ahead, recession fears are resurfacing.
Regardless of broader economic conditions, medical stocks tend to be recession-resistant or perform well due to inelastic demand for medical products and services.
Against this backdrop, fundamentally strong medical stocks McKesson Corporation (MCK) and Cardinal Health, Inc. (CAH) could be wise additions to your portfolio in 2023. However, Teladoc Health, Inc. (TDOC) might be best avoided now, given its weak financials and bleak growth prospects.
Stocks to Buy:
McKesson Corporation (MCK)
MCK offers healthcare services on a global scale. Its segments include U.S. Pharmaceutical; International; Medical-Surgical Solutions; and Prescription Technology Solutions. The company sells branded, generic, specialty, biosimilar, over-the-counter pharmaceuticals, and other healthcare products.
On October 26, 2022, MCK inaugurated a new pharmaceutical distribution facility in Jeffersonville, Ohio, which would provide customers with pharmaceutical, over-the-counter, and home healthcare products. The facility might help MCK improve its operations, maximize efficiency and production, and offer superior customer service.
In September, MCK disclosed that it had signed a definitive agreement to purchase Rx Savings Solutions (RxSS), a prescription price transparency and benefit insight company. RxSS’ services for patients and employers should improve MCK’s capacity to address drug availability issues. The acquisition could also accelerate its aim for growth in biopharma services.
For the fiscal second quarter of 2023 (ended September 30, 2022), MCK’s revenues grew 5.4% year-over-year to $70.16 billion, while its operating income rose 108.5% from the year-ago value to $1.12 billion. The company’s net income came in at $967 million, up 211.9% year-over-year, and its EPS stood at $6.42, reflecting a 275.4% rise year-over-year.
The company has raised its dividends for 15 consecutive years. It pays a $2.16 per share dividend annually, which translates to a 0.57% yield on the current price level. MCK’s four-year average dividend yield is 0.91%, and its dividend payments have grown at a 10.3% CAGR over the past five years.
Analysts expect MCK’s revenue for the fiscal year ending March 2023 to come in at $275.93 billion, indicating a 4.5% year-over-year improvement. Moreover, the company’s EPS for the same year is expected to increase by 4.6% from the previous year to $24.78.
Shares of MCK have gained 13.8% over the past six months and 55.5% over the past year to close the last trading session at $384.12.
MCK’s POWR Ratings reflect its strong outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock also has an A grade for Growth and a B for Quality, Value, and Stability. It has topped the 79-stock Medical - Services industry.
Beyond what we stated above, we also have MCK’s ratings for Momentum and Sentiment. Get all MCK’s ratings here.
Cardinal Health, Inc. (CAH)
CAH is a global provider of integrated healthcare services and solutions. The company operates in two segments, Pharmaceutical and Medical. It offers specialized solutions for healthcare organizations like hospitals, pharmacies, ambulatory surgery facilities, clinical labs, doctor's offices, and individuals receiving care at home.
On January 26, 2023, CAH announced that it had formed a strategic partnership with Palantir Technologies Inc. (PLTR), a leading provider of operating systems for the modern enterprise.
CAH aims to reshape the pharmaceutical supply chain with innovative procedures, products, and solutions to improve access to critical pharmaceuticals and streamline pharmacy inventory management by employing PLTR's platform.
Moreover, on November 15, 2022, CAH introduced Velocare, a last-mile fulfillment and supply chain network that enables patients to receive hospital-level care at home in a matter of hours. This alliance could aid CAH's expansion as it is expected to revolutionize how patient care is delivered.
For the fiscal first quarter that ended September 30, 2022, CAH’s revenues increased 12.8% year-over-year to $49.60 billion. Revenue for the pharmaceutical segment rose 15.1% year-over-year to $45.80 billion, while profit for the same segment increased 6.2% from the year-ago value to $431 million.
CAH has increased its dividends for 28 consecutive years. It pays a $1.98 per share dividend annually, which translates to a 2.62% yield on prevailing prices. The company’s dividend payments have grown at a 1.5% CAGR over the past five years, and its four-year average dividend yield is 3.62%.
The consensus revenue estimate of $201.22 billion for the fiscal year ending June 2023 indicates an 11% year-over-year improvement. The consensus EPS estimate of $5.30 for the same year reflects a rise of 4.8% from the prior year. The stock has gained 34.7% over the past six months and 53.3% over the past year to close the last trading session at $77.88.
CAH’s strong prospects are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
CAH has a B grade for Growth and Value. Within the Medical - Services industry, it has ranked #5 of 79 stocks.
In addition to the POWR Ratings I’ve just highlighted, you can access CAH’s ratings for Momentum, Sentiment, Stability, and Quality here.
Stock to Avoid:
Teladoc Health, Inc. (TDOC)
TDOC offers virtual healthcare services across the globe. It provides services and solutions for non-urgent, episodic, chronic, and complicated medical illnesses. In addition to providing services to individual members, the organization also offers services to employers, health plans, hospitals, and health systems.
On January 18, 2023, TDOC slashed 6% of its non-clinician global workforce and implemented other cost-cutting measures in the fourth quarter of 2022. As part of the restructuring, the corporation also reduced the number of office spaces in certain markets.
Moreover, the Wall Street securities and shareholder law firm Moore Kuehn, PLLC, investigated whether TDOC or its executives and directors had breached their fiduciary duties. TDOC's insiders sold about $168 million worth of the company's stock between February 11, 2021, and July 27, 2022, which could have increased these possible fiduciary violations.
For the third quarter of the fiscal year 2022 (ended September 30, 2022), TDOC’s total expenses increased 17.3% year-over-year to $683.13 million, and its loss from operations widened 18.4% from the prior year’s quarter to $71.73 million. The company’s adjusted EBITDA declined 24% year-over-year to $51.21 million.
In addition, the company’s net loss came in at $73.48 million or $0.45 per share.
For the fiscal year that ended December 2022, analysts expect TDOC to report a loss per share of $1.52. Moreover, the company is expected to report a loss per share of $1.42 for the current fiscal year ending December 2023.
Shares of TDOC have slumped 31.1% over the past six months and 60.2% over the past year to close the last trading session at $27.68.
TDOC’s bleak prospects are also apparent in its POWR Ratings. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
The stock has a D grade for Sentiment and Momentum. Within the same industry, it is ranked #78.
To see additional POWR Ratings for Growth, Value, Stability, and Quality for TDOC, click here.
MCK shares were trading at $384.00 per share on Friday morning, down $0.12 (-0.03%). Year-to-date, MCK has gained 2.37%, versus a 6.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
2 Medical Stocks to Keep on Your Buy List in 2023 and 1 to Remove StockNews.com
