The integration of the latest technologies in the healthcare sector is continuously transforming its operations and contributing to its significant growth. The market is further poised for growth as it leverages the latest advancements like artificial intelligence (AI) and cloud computing.
Amid this backdrop, investors could consider investing in currently undervalued health-tech stocks McKesson Corporation (MCK), Cardinal Health, Inc. (CAH), and Zimmer Biomet Holdings, Inc. (ZBH) for long-term growth.
Technology is all pervasive, be it healthcare devices, pharmaceuticals, processes, or services; advanced technologies are marking strong strides and revolutionizing how activities have been performed traditionally. Also, amid rising chronic illnesses, an aging population, and a growing demand for personalized medicine, the healthcare industry’s reliance on digital technology is expected to increase further.
The healthcare technology market is gaining rapid pace with recent trends like AI, cloud computing, and cutting-edge digital devices and technologies. The market is poised to exhibit growth at a notable CAGR of 18.7%, resulting in a market volume of $1.03 trillion by 2028, driven by a focus on preventive healthcare, remote patient monitoring, and healthcare infrastructure development.
In specific, adoption of Artificial Intelligence (AI) has emerged as the strongest and transformative force, pushing the healthcare sector to new advances. AI technology is presenting credible solutions for current drawbacks with its advantages like precision, efficiency, lower costs, and enhanced patient care.
The global AI in healthcare market is projected to reach $148.40 billion by 2029, growing at a CAGR of 48.1%. The growth in the market is driven by the need for improved computing power, reduced healthcare costs, and the rising partnerships and collaborations among the healthcare market players.
Considering the conducive industry trends, let’s delve deeper into the fundamentals of currently undervalued health-tech stocks such as MCK, CAH, and ZBH for long-term growth.
McKesson Corporation (MCK)
MCK is an international provider of healthcare services. The company operates in four segments: U.S. Pharmaceutical; Prescription Technology Solutions (RxTS); Medical-Surgical Solutions; and International. The company distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products.
On September 5, MCK signed an agreement to sell its Canada-based Rexall and Well.ca businesses to Birch Hill Equity Partners, a Canadian private equity firm. The sale is part of MCK’s enterprise strategy, enabling it to further focus and prioritize investments to grow its oncology and biopharma services platforms.
On August 26, MCK signed a definitive agreement to acquire a controlling interest in Community Oncology Revitalization Enterprise Ventures, LLC, a business and administrative services organization, a leading physician-owned community oncology practice.
MCK purchased its controlling interest for approximately $2.49 billion in cash, which will represent approximately 70% ownership. The strategic acquisition marks an important step towards advancing community-based oncology care and enhances MCK’s integrated oncology platform, Florida Cancer Specialists & Research Institute, to join the US oncology network.
MCK’s forward Price/Sales of 0.22x is 94.5% lower than the industry average of 3.94x. Likewise, the stock’s forward EV/EBIT multiple of 14.89 is 13% lower than the industry average of 17.11. Similarly, its forward non-GAAP P/E of 18.78x is 12.4% lower than the industry average of 21.44x.
During the second quarter that ended on September 30, 2024, MCK’s revenues increased 21.3% year-over-year to $93.65 billion, and its adjusted gross profit increased 6.6% year-over-year to $3.25 billion. The company’s adjusted earnings grew 8.8% from the year-ago value to $915 million, while its adjusted EPS came in at $7.07, up 13.5% year-over-year.
Street expects MCK’s revenue and EPS for the third quarter (ending December 2024) to increase 18.5% and 9.4% year-over-year to $95.86 billion and $8.47, respectively. Moreover, the company topped the consensus EPS estimates in three of the trailing four quarters.
MCK’s stock has increased 21.3% over the past month and 30.8% over the past year to close the last trading session at $615.59.
MCK’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a B grade for Growth, Value, and Sentiment. Within the Medical - Services industry, MCK is ranked #10 out of 64 stocks.
Click here to access additional ratings of MCK for Momentum, Quality, and Stability.
Cardinal Health, Inc. (CAH)
CAH operates as a healthcare services and products company internationally. It offers customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories, physician offices, and patients in the home. It operates in Pharmaceutical and Specialty Solutions, and Global Medical Products and Distribution segments.
On November 11, CAH entered into definitive agreements to acquire two companies to accelerate CAH’s strategic growth areas and enhance patient care. This includes the acquisition of a majority stake in GI Alliance, the country’s leading gastroenterology management services organization, to accelerate the multi-specialty growth strategy.
The acquisition of the Advanced Diabetes Supply Group, a leading national direct-to-patient provider of diabetes medical supplies, will also improve CAH’s at-home Solutions growth strategy.
On October 29, CAH opened its new distribution center in Boylston, Massachusetts, supporting its U.S. Medical Products and Distribution business, which is nearly 317,000 square feet in size and will be available in early 2025. The facility provides modernized operations, expanded capacity, and specialized handling capabilities for products with strict storage requirements to healthcare customers.
In terms of forward non-GAAP P/E, CAH’s 15.43x is 27.7% lower than the 21.33x industry average. Its 10.15x forward EV/EBITDA is 25.9% lower than the 13.69x industry average. Also, the company’s forward Price/Sales of 0.13x is significantly lower than the 3.93x industry average.
CAH reported revenue of $52.28 billion for the first quarter that ended September 30, 2024. Its non-GAAP operating earnings grew 12.2% from the year-ago value to $625 million. The company’s non-GAAP net earnings attributable to CAH came in at $460 million or $1.88 per common share, up 7% and 9.3% from the prior year’s quarter, respectively.
The company raised its fiscal 2025 guidance range for non-GAAP EPS attributable to CAH to $7.75 to $7.90 from the previous range of $7.55 to $7.70. It also includes an update to the company’s Pharmaceutical and Specialty Solutions segment profit outlook to 4% to 6% growth, from 1% to 3% growth.
Street expects CAH’s EPS for the third quarter (ending March 2025) to increase 5.4% year-over-year to $2.19, and its EPS for the same quarter is expected to be $53.74 billion. Also, the company has topped the consensus EPS estimate in all four trailing quarters, which is remarkable.
Shares of CAH have surged 24.1% over the past six months and 15.9% over the past year to close the last trading session at $121.64.
CAH’s POWR Ratings reflect its sound fundamentals. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
CAH has a B grade for Value. The stock is ranked #16 among the 64 stocks in the Medical - Services industry.
In addition to the POWR Ratings we’ve stated above, we also have CAH ratings for Sentiment, Momentum, Quality, Growth, and Stability. Get all CAH ratings here.
Zimmer Biomet Holdings, Inc. (ZBH)
ZBH operates as a medical technology company globally. The company designs, manufactures, and markets orthopedic reconstructive products, like knee and hip products and S.E.T. products, including sports medicine, biologics, foot and ankle, extremities, and trauma products.
On August 7, ZBH entered into an agreement to acquire OrthoGrid Systems, Inc., a privately held medical technology company focused on AI-driven surgical guidance systems for total hip replacement. The strategic acquisition aligns well with ZBH’s operations and will help it address the challenges of orthopedic problems with innovative technology solutions.
In terms of forward Price/Book, ZBH’s 1.66x is 43.1% lower than the 2.92x industry average. Its forward EV/EBITDA of 10.66x is 22% lower than the industry average of 13.66x. Also, the company’s forward Price/Sales of 2.84x is 28% lower than the 3.94x industry average.
During the third quarter of 2024, which ended September 30, ZBH’s total revenues increased 4% year-over-year to $1.82 billion. Its adjusted operating profit rose 3.5% from the year-ago value to $480.20 million. Adjusted net earnings of ZBH and EPS came in at $353.20 million and $1.74, up 1.9% and 5.5% year-over-year, respectively.
Furthermore, the company’s free cash flow rose 64.3% from the prior year’s quarter to $310 million.
As per the company’s updated guidance for fiscal 2024, ZBH projects reported revenue change between 3.5% - 4%. It also expects adjusted EPS in the range of $7.95 to $8.05.
Analysts expect ZBH’s revenue for the fourth quarter (ending December 2024) to grow 3.9% year-over-year to $2.02 billion and its EPS for the same period is expected to increase 4.3% year-over-year to $2.30. Furthermore, the company surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
ZBH’s shares have gained 3.5% over the past year to close the last trading session at $109.46.
ZBH’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has a B grade for Value and Growth. Within the Medical – Devices & Equipment industry, ZBH is ranked #18 out of 137 stocks.
In addition to the POWR Ratings we’ve stated above, we also have ZBH ratings for Stability, Momentum, Quality, and Sentiment. Get all ZBH ratings here.
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MCK shares were unchanged in after-hours trading Tuesday. Year-to-date, MCK has gained 34.03%, versus a 26.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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