In this article I use AAII’s A+ Investor Stock Grades to provide insight into three healthcare stocks. With the healthcare sector projected for significant growth, should you consider the three stocks of Cardinal Health (CAH), Pediatrix Medical Group (MD) and Tenet Healthcare (THC)?
Healthcare Stocks Recent News
The U.S. healthcare services sector is poised for significant expansion, fueled by technological innovations including artificial intelligence (AI). AI is increasingly being applied in areas such as diagnostics, personalized medicine and improving operational efficiency.
Precedence Research forecasts that the global AI healthcare market will grow from $26.69 billion in 2024 to $613.81 billion by 2034, reflecting a compound annual growth rate (CAGR) of 36.83%. National healthcare expenditures are also on the rise. According to the U.S. Centers for Medicare and& Medicaid Services (CMS), healthcare spending is expected to grow at an average annual rate of 5.6% from 2023 to 2032, increasing healthcare’s share of gross domestic product (GDP) to 19.7% by 2032. Additionally, PwC’s Health Research Institute predicts that medical costs in the group insurance market will rise by 8% year over year in 2025, with costs for the individual market rising 7.5%. The global value-based healthcare services market, which prioritizes health outcomes over treatment volume, is also expanding, with Spherical Insights & Consulting forecasting growth in the market to rise from $1.33 trillion in 2023 to $4.13 trillion by 2033, at a CAGR of 12%.
For individual investors, these trends may present a reason to look at healthcare stocks such as Cardinal Health, Pediatrix and Tenet Healthcare.
Grading Healthcare Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades. They evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three healthcare stocks—Cardinal Health, Pediatrix and Tenet Healthcare—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Healthcare Stocks
What the A+ Stock Grades Reveal
Cardinal Health (CAH) is a global healthcare services and products company operating in the U.S., Canada, Europe, Asia and beyond. It offers solutions for hospitals, pharmacies, healthcare systems and patients at home. The company operates in two segments: pharmaceutical and specialty solutions, and global medical products and distribution. Cardinal Health distributes pharmaceutical and medical products, including branded, generic and over-the-counter drugs, as well as medical supplies. It also provides pharmacy management, specialty pharmaceutical services and medical product manufacturing, including surgical gloves, needles and diagnostic devices. The company was founded in 1979 and is headquartered in Dublin, Ohio.
Cardinal Health has a Value Grade of B, based on its Value Score of 64, which is good value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda).
Cardinal Health has a shareholder yield of 4.1%, which is among the cheapest 17% of all U.S.-listed stocks (shareholder yield and valuation are inversely related). The stock’s price-to-sales ratio is 0.13, which ranks in the cheapest 6th percentile and is below the sector median of 3.51. This favorable ratio suggests that Cardinal Health’s is inexpensively valued relative to other companies in its sector.
Cardinal Health has a Momentum Grade of C, based on its Momentum Score of 51. This means that the stock’s momentum is average in terms of its weighted relative price strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The quarterly ranks are 54, 76, 32 and 51, sequentially from the most recent quarter, with higher ranks signaling stronger price momentum. The weighted four-quarter relative price strength is –2.7%.
Cardinal Health has a Growth Grade of A, which is very strong. The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. The company has a five-year annualized sales growth rate of 9.3% and has generated positive annual cash from operations in the past five consecutive years.
Pediatrix Medical Group (MD), along with its subsidiaries, provides a wide range of newborn, maternal-fetal, pediatric cardiology and other pediatric subspecialty care services across the U.S. The company offers neonatal care for babies born prematurely or with complications through specialized physicians, nurse practitioners and pediatric clinicians in hospital units. It also provides maternal-fetal care to expectant mothers and unborn babies through maternal-fetal medicine specialists, obstetricians and other clinicians. In pediatric cardiology, Pediatrix delivers inpatient and office-based care to fetuses, infants, children, adolescents with congenital heart defects, and adults with congenital heart disease. Additionally, the company offers other pediatric subspecialty services supporting hospitals. The company was formerly known as Mednax and changed its name to Pediatrix Medical Group in July 2022. Pediatrix was founded in 1979 and is based in Sunrise, Florida.
Pediatrix has a Quality Grade of B, with a score of 69, which is strong. Higher-quality stocks possess traits associated with upside potential and reduced downside risk. The Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. To be assigned a Quality Score stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Pediatrix ranks strongly in terms of its return on invested capital and accruals to assets. It has a return on invested capital of 65.7% and an accruals-to-assets ratio of –19.1%. The negative accruals-to-assets ratio shows that cash from operating activities is greater than net income. This is a positive sign because it suggests that earnings are more sustainable.
The one weak component in the stock’s Quality Grade is its return on assets of –11.5%, which ranks in the weakest 24th percentile of all stocks.
Pediatrix has a Value Grade of B, based on a score of 72, which is good value. The company ranks in the cheapest 30th percentile for its enterprise-value-to-Ebitda ratio and in the 21st cheapest percentile for its price-to-sales ratio. The company has an enterprise-value-to-EBITDA ratio of 8.5 and a price-to-sales ratio of 0.60. A lower price-to-free-cash-flow ratio is also considered better value, and Pediatrix has a price-to-free-cash-flow ratio of 10.4. The price-to-book-value ratio is 1.43, which ranks in the 44th percentile.
The company has a Momentum Grade of A, based on its Momentum Score of 87. This means that the stock’s momentum is very strong in terms of its weighted relative price strength over the last four quarters. The quarterly ranks are 86, 97, 15 and 46, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 11.9%.
Tenet Healthcare (THC) is a diversified healthcare services company operating in the U.S. through two segments: hospital operations and services, and ambulatory care. Its general hospitals offer a wide range of services, including acute care, operating and recovery rooms, radiology, respiratory therapy, clinical laboratories, and pharmacies. The company also provides intensive and critical care units; cardiovascular, digestive disease, neurosciences, musculoskeletal and obstetrics services; and outpatient services like physical therapy. Tenet Healthcare offers tertiary (specialized) care such as cardiothoracic surgery, complex spinal surgery, neonatal intensive care and neurosurgery, along with quaternary care (a higher level of specialized care). Additionally, it provides orthopedics, joint replacement, spinal procedures, gastroenterology, pain management, otolaryngology, ophthalmology and urology services. Tenet Healthcare operates hospitals, ambulatory surgery centers, imaging centers, surgical hospitals, off-campus emergency departments and micro-hospitals. Founded in 1967, Tenet Healthcare is headquartered in Dallas, Texas.
Tenet Healthcare has a Quality Grade of A, based on a score of 93, which is very strong. The company ranks strongly in terms of its return on assets, buyback yield and F-Score. Its return on assets of 11.0% ranks in the 90th percentile among all U.S.-listed stocks. Its buyback yield of 5.8% ranks in the 94th percentile. Its F-Score of 7 ranks in the 85th percentile. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position based on profitability, leverage, liquidity and operating efficiency of a company. Higher scores are better.
The company’s Growth Grade is C, which is average. Tenet Healthcare has realized positive annual cash from operations during each of the past five fiscal years. It also has a five-year annualized sales growth rate of 2.3%.
Earnings estimate revisions indicate whether analysts’ expectations for the firm’s profits have improved or worsened. Tenet Healthcare has an Earnings Estimate Revisions Grade of B, based on a score of 75, which is positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the increases in consensus earnings estimate for the current fiscal year over the past month and past three months.
Tenet Healthcare reported a positive earnings surprise of 23.6% for the third quarter of 2024. In the second quarter, it reported a positive earnings surprise of 21.1%. Over the last month, the consensus earnings estimate for full-year 2024 has been revised upward from $11.118 to $11.224 per share. Four analysts have raised their full-year earnings forecasts while none have reduced them.
__
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
If you want an edge throughout this market volatility, become an AAII member.
This article was published by Forbes on 2024-12-12 20:20:00
View Original Post
