JPMorgan's 6 Health Care Stocks to Buy for the Rest of 2015

NEW YORK (TheStreet) - The market sell off has created buying opportunities in the health care sector.

JPMorgan Chase (JPM) analysts see specific investment prospects in names that have "attractive underlying fundamentals, company-specific catalysts and strong management teams with a proven ability to execute," according to a research note to clients on Tuesday.

Among other themes, the analysts believe that specialty drug spending will continue to be "one of the most important themes across the Rx channel over the next few years."

"While the launch of new hepatitis C drugs drove outsize growth in specialty drug spending in 2014, specialty drug trend is still expected to grow in the high teens/low 20% range over the next few years," the note said. "We continue to believe those companies that can help control specialty drug costs through utilization management tools (such as plan design, prior authorization, step therapy, restrictive formularies and site of care management) will benefit."

Another continued theme for health care companies will be capital allocation, specifically in the form of possible continued M&A or share repurchases. "We favor companies that are good stewards of capital, using excess cash for accretive strategic acquisitions or returning that cash to shareholders via large share repurchases or dividend increases," the note said.

Additionally, JPMorgan analysts pointed out that they expect an "uptick" in the absolute dollar value of new generic drug launches in 2015 and 2016, which contributes to profitability for the retail pharmacies and pharmacy benefit management companies.

Finally, each of the large pharmacy benefit managers typically provide updates on the selling season in conjunction with third-quarter earnings releases. "At that point, the vast majority of the selling season for 1/1 starts will be complete. We note that both CVS and Express Scripts provided some early color with the 2Q15 results, and we are not expecting any dramatic changes with the next update," the analysts wrote.

That said, incremental insurance coverage gains resulting from the Affordable Care Act will be less of a catalyst going forward, the analysts wrote.

Here are JPMorgan's top health care stock picks for the rest of the year paired with ratings from TheStreet Ratings for additional perspective.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

CVS Chart CVS data by YCharts

1. CVS Health (CVS)
YTD Return: 4%

JPMorgan Rating/Target Price: Overweight/$128 (December 2016)
JPMorgan Said:
We remain bullish on CVS, which is one of our top picks in our coverage universe over both the near and longer term. Through the company's broad suite of services (which includes retail pharmacy, pharmacy benefit management, LTC pharmacy, specialty pharmacy, home infusion, retail-based clinics, etc.), coupled with strong clinical capabilities, we believe CVS is very well positioned in the evolving healthcare marketplace, especially given the shift over time to a fee-for-value reimbursement model (the company is able to extend the continuity of care across various settings and should be able to help drive better patient outcomes and lower overall healthcare costs). Further, we believe CVS is also well positioned around the broader trend towards consumerism in healthcare given the company's trusted brand and name recognition.
Near-Term Catalysts: 3Q15 earnings; PBM selling season update; 2015 Analyst Day to be held on December 16; close of the Target Pharmacy acquisition.

TheStreet Rating: Buy, A

TheStreet Ratings team rates CVS HEALTH CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate CVS HEALTH CORP (CVS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, good cash flow from operations and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 4.1%. Since the same quarter one year prior, revenues slightly increased by 7.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • CVS HEALTH CORP has improved earnings per share by 5.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CVS HEALTH CORP increased its bottom line by earning $3.96 versus $3.75 in the prior year. This year, the market expects an improvement in earnings ($5.15 versus $3.96).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Food & Staples Retailing industry average. The net income increased by 2.1% when compared to the same quarter one year prior, going from $1,246.00 million to $1,272.00 million.
  • Net operating cash flow has increased to $1,037.00 million or 15.60% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -9.62%.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • You can view the full analysis from the report here: CVS
ESRX Chart ESRX data by YCharts

2. Express Scripts (ESRX)
YTD Return: -0.63%

JPMorgan Rating/Target Price: Overweight/$102 (December 2015)
JPMorgan Said:
We believe we are at an inflection point for Express Scripts. Following several weaker years from a retention standpoint, we believe the company is in a much better position to drive improving retention rates and new business wins, as we note that service-related issues that appeared last year have been resolved, the Medco integration is essentially complete, and we expect M&A related churn to diminish as we are now more than three years post the close of the Medco deal. With retention and new business trends improving, we believe sentiment should continue to improve, and that the multiple can expand from the currently depressed level (shares trade at a sizeable discount to the historical multiple over the past 10-years).

While it does not come as a major surprise, we view the recent announcement regarding the CEO succession plan positively. The company recently announced that Tim Wentworth, ESRX's current President will succeed CEO George Paz following the annual meeting scheduled for May 2016. Having known Mr. Wentworth since before Medco's spin-off from Merck in 2003, we have a high degree of confidence in his ability to execute. Further, we believe Mr. Wentworth's experience, thorough understanding of the PBM business and strong customer relationships make him a great fit as successor to Mr. Paz. Finally, given the lead time, we would expect this to be a smooth transition.

Near-Term Catalysts: 3Q15 earnings; PBM selling season update.

TheStreet Rating: Buy, A

TheStreet Ratings team rates EXPRESS SCRIPTS HOLDING CO as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate EXPRESS SCRIPTS HOLDING CO (ESRX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income, revenue growth, notable return on equity and good cash flow from operations. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • EXPRESS SCRIPTS HOLDING CO has improved earnings per share by 31.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, EXPRESS SCRIPTS HOLDING CO increased its bottom line by earning $2.66 versus $2.31 in the prior year. This year, the market expects an improvement in earnings ($5.50 versus $2.66).
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Health Care Providers & Services industry average. The net income increased by 16.5% when compared to the same quarter one year prior, going from $515.20 million to $600.10 million.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 6.6%. Since the same quarter one year prior, revenues slightly increased by 1.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Health Care Providers & Services industry and the overall market, EXPRESS SCRIPTS HOLDING CO's return on equity exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has increased to $899.90 million or 22.35% when compared to the same quarter last year. In addition, EXPRESS SCRIPTS HOLDING CO has also modestly surpassed the industry average cash flow growth rate of 14.04%.
  • You can view the full analysis from the report here: ESRX

 

MCK Chart MCK data by YCharts

3. McKesson Corp.  (MCK)
YTD Return: -5.3%

JPMorgan Rating/Target Price: Overweight/$255 (December 2016)
JPMorgan Said:
Shares of MCK and the other drug distributors peaked in mid-July but then dropped as investors focused on commentary around slowing generics growth during earnings season, falling further in August with the broader market decline. MCK has declined 18.0% since the July 22 close, before ABC kicked off the earnings season for the distributors, and the group has slid an average of 12.3%, underperforming the S&P 500's drop of 8.1% in the same time period. MCK's weakness reflects concerns about generic inflation, lost business and the quality of FQ1 earnings, but we view MCK's discounted valuation as attractive here vs. both peers and the S&P 500 and still see multiple levers to drive double-digit EPS growth.

Near-Term Catalysts: F2Q16 earnings in October, CVS decisions on Omnicare

and Target distribution contracts.

TheStreet Rating: Buy, A-

TheStreet Ratings team rates MCKESSON CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MCKESSON CORP (MCK) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, good cash flow from operations, impressive record of earnings per share growth and compelling growth in net income. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MCK's revenue growth has slightly outpaced the industry average of 6.6%. Since the same quarter one year prior, revenues slightly increased by 9.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • MCKESSON CORP has improved earnings per share by 42.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MCKESSON CORP increased its bottom line by earning $7.54 versus $6.08 in the prior year. This year, the market expects an improvement in earnings ($12.75 versus $7.54).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Health Care Providers & Services industry average. The net income increased by 42.9% when compared to the same quarter one year prior, rising from $403.00 million to $576.00 million.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Health Care Providers & Services industry and the overall market, MCKESSON CORP's return on equity exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly increased by 149.45% to $454.00 million when compared to the same quarter last year. In addition, MCKESSON CORP has also vastly surpassed the industry average cash flow growth rate of 14.04%.
  • You can view the full analysis from the report here: MCK

Must Read: 25 U.S. Stocks Most Exposed to China's Growth Woes

 

LH Chart LH data by YCharts

4. Laboratory Corp. of America (LH)
YTD Return: 9.6%

JPMorgan Rating/Target Price: Overweight/$144 (December 2016)
JPMorgan Said:
We continue to favor Labcorp (OW) over Quest (N) given its more diversified revenue stream and additional avenues for potential higher growth following the Covance acquisition. We view Labcorp as more than just a traditional lab following its acquisition of the Covance earlier this year. Covance's CRO business now contributes ~30% of total revenues, and the transaction raises LH's international footprint to ~20% of revenues from ~8%. Medicare now contributes only 9% of revenues for LabCorp, down from 13% in 2014 and compared to 14% for Quest - which will help mitigate the impact of the coming PAMA cuts.

Near-Term Catalysts: PAMA rule release on 2017 Medicare rate cuts.

TheStreet Rating: Buy, A-

TheStreet Ratings team rates LABORATORY CP OF AMER HLDGS as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate LABORATORY CP OF AMER HLDGS (LH) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, increase in net income, good cash flow from operations, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 6.6%. Since the same quarter one year prior, revenues rose by 49.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Health Care Providers & Services industry average. The net income increased by 19.2% when compared to the same quarter one year prior, going from $141.30 million to $168.40 million.
  • Net operating cash flow has significantly increased by 91.27% to $396.70 million when compared to the same quarter last year. In addition, LABORATORY CP OF AMER HLDGS has also vastly surpassed the industry average cash flow growth rate of 14.04%.
  • 37.34% is the gross profit margin for LABORATORY CP OF AMER HLDGS which we consider to be strong. Regardless of LH's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, LH's net profit margin of 7.42% compares favorably to the industry average.
  • LABORATORY CP OF AMER HLDGS reported flat earnings per share in the most recent quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, LABORATORY CP OF AMER HLDGS reported lower earnings of $5.93 versus $6.24 in the prior year. This year, the market expects an improvement in earnings ($7.90 versus $5.93).
  • You can view the full analysis from the report here: LH

 

PINC Chart PINC data by YCharts

5. Premier Inc. (PINC)
YTD Return: 8.7%

JPMorgan Rating/Target Price: Overweight/$41 (December 2015)
JPMorgan Said:
We remain bullish on Premier, and the company remains one of our top SMID Cap picks. Premier is more than just a GPO, providing a broad array of solutions under an integrated model, with a focus on driving performance improvement for healthcare providers across the continuum of care. We believe the company's offering is unmatched among its peers, and that it is well positioned to benefit from the changing healthcare market dynamics thanks to the company's diversified platform of integrated services and solutions. Recall that the company gave initial FY2016 guidance on August 24 pointing to continued solid growth with projections for 13%-16% revenue growth (10%-13% excluding acquisitions) and EBITDA and

EPS growth of 8-13%. Further, we also believe valuation is attractive based on the expected growth profile (we expect solid double-digit EBITDA growth going forward), with shares currently trading at an EV/EBITDA multiple of 10.7x.

Near-Term Catalysts: Analyst Day (10/6); Fiscal 1Q16 earnings; potential

accretive capital deployment.

TheStreet Rating: not rated

CERN Chart CERN data by YCharts

6. Cerner (CERN)
YTD Return: -4.5%

JPMorgan Rating/Target Price: Overweight/$75 (December 2016)
JPMorgan Said:
We believe Cerner is one of the best positioned HIT (health information technology) names to benefit from a likely growing trend of replacement and consolidation in the still fragmented EHR (electronic health records) market. Although revenue growth this year has been tracking below expectations, this has been offset by lower expenses to achieve EPS estimates and the outlook for revenue growth in 2016 and beyond remains strong, with bookings growth of 20% in Q2 that exceeded our expectations and management guidance and Q3 guidance calling for 27% growth. Beyond the yet-to-be quantified direct earnings contribution of the recently awarded $4.3B/10-year Defense Department IT modernization contract to Cerner and its partners, we think this win highlights the growing importance of interoperability and also return on investment in EHR decisions - and more competitive pricing and public advocacy on interoperability could help Cerner compete better with rival Epic going forward.

Near-Term Catalysts: Cerner Health Conference October 11-14, Q3 earnings in late October, final rules for Meaningful Use Stage 3 and Stage 2 modifications

 

TheStreet Rating: Buy, B

TheStreet Ratings team rates CERNER CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate CERNER CORP (CERN) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, notable return on equity and solid stock price performance. We feel its strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 35.5%. Since the same quarter one year prior, revenues rose by 32.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • CERN's debt-to-equity ratio is very low at 0.16 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, CERN has a quick ratio of 2.01, which demonstrates the ability of the company to cover short-term liquidity needs.
  • 47.00% is the gross profit margin for CERNER CORP which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 10.21% is above that of the industry average.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Health Care Technology industry and the overall market on the basis of return on equity, CERNER CORP has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • Compared to where it was trading a year ago, CERN's share price has not changed very much due to (a) the relatively weak year-over-year performance of the overall market, (b) the company's stagnant earnings, and (c) other mixed results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • You can view the full analysis from the report here: CERN

 

 

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