Health care and how to pay for it has become one of the biggest issues in the U.S., as President Trump and the Republican-led Congress try to repeal and replace the Affordable Care Act. Whether Obamacare or "Trumpcare" is the law of the land, though, experts believe that health care spending is likely to rise for the foreseeable future.
U.S. health care spending is projected to grow by an average 5.6% per year for the next decade, according to a CMS report via Modern Healthcare.
Assuming Obamacare stays in place by 2025, U.S. health care spending is expected to reach $5.5 trillion, up from nearly $3.4 trillion in 2016. To put that in spending, U.S. total GDP in 2016 was estimated to be $18.56 trillion by the Bureau of Economic Analysis.
Investors, sensing the opportunity that awaits, have bid up many health care stocks, but there are still some attractive names out there, including companies like Medtronic (MDT - Get Report) , Johnson & Johnson (JNJ - Get Report) and Cardinal Health (CAH - Get Report) , say experts.
"If you think about the health care sector, there are certainly some companies that are all hype but there are plenty of others that are fundamentally sound," said Eric Ervin, CEO of Reality Shares, which has $68 million in assets under management. "We want companies that have strong overall balance sheet and income statements."
Cash is king for technology
In the case of Medtronic, which makes medical devices and technology, Ervin noted that even though 2016 was a rough year for the company, 2017 has been a different story altogether, with shares rising nearly 20% since the start of the year, doubling the gains in the S&P 500.
"It's more of a health care technology company that just a traditional drug and pharmaceutical company," Ervin noted, while adding they have a "similar business to J&J."
The company has a strong financial position, with Ervin noting that they've been able to grow their dividend consistently, generate good free cash flow and have a buyback program in place, announcing last year they will buy back $5 billion in stock by the spring of 2018.
Pharma is key
New Brunswick, N.J.-based J&J, which recently announced plans to acquire Acteliion, a Swiss biotech for $30 billion, has an exceptionally strong financial position, even accounting for the debt it will have to take on with the pending purchase.
"In the case of J&J, their [free cash flow] and earnings growth look weak, but they're not really weak when you dive into it," Ervin said. "They've got a strong buyback, a history of rising dividends and a strong Altman Z score, to go with a lot of cash on hand."
The company is slated to host its bi-annual analyst meeting on May 17, where it's expected to discuss updates to its Pharma business, which Wells Fargo analyst Larry Biegelsen noted is the company's key sales growth driver.
Amid weaker guidance than expected for the unit, Biegelsen expects the focus will be on reaccelerating that growth, focusing on "continued momentum of key in-market products like Darzalex and Xarelto," as well as pipeline products which are expected to launch in the next few years and the Actelion purchase, "which management estimated can add [50 basis points] to organic sales and [100 basis points] to organic EPS growth over the next few years."
An aging population
As CMS projects health care spending to reach $5.5 trillion by 2025, much of that increase will be due to an aging population, as well as rising prices for health care services.
The Dublin, Ohio.-based Cardinal Health, which boasts an annual revenue of more than $120 billion and more than 100,000 locations around the world distributing its pharmaceuticals and medical products, is poised to take advantage of these trends.
"Carding Health, from a balance sheet perspective, is among the best health care companies out there," Ervin noted, while adding that the recent dividend increase was weak, given its strong cash position.
Though shares have not done much year-to-date, falling nearly 3% (excluding dividends), there is optimism for shares of the George Barrett-led company.
The company has a free-cash-flow yield of 4.6%, indicating there's plenty of cushion there for the company to take on whatever projects it wants.
"At CAH's current stock price, the market is expecting almost no profit growth over the remainder of the company's life," analysts at New Constructs Research wrote in a recent note. "As a result, expectations in CAH's price are very conservative."