Four Healthcare stock picks from Beacon Securities

A number of Healthcare stocks have taken it on the chin over the past year and while investors may still be cagey about jumping into the sector, Beacon Securities says stocks have hit bottom. Analyst Doug Cooper argues in a Tuesday report on the sector that not only is Healthcare due for a turnaround based on demographic realities, some names remain well below historical averages despite continued strong growth profiles. 

It’s been tough for some healthcare stocks of late, with investors turning away from the more speculative areas of the market amid broader economic and geopolitical uncertainties. But the sector has broadly done well over the past year, with the Health Care Selective Sector SPDR Fund (Health Care Selective Sector SPDR Fund Stock Quote, Charts, News, Analysts, Financials NYSE:XLV), an ETF which broadly tracks the sector as a whole, down three per cent from its 52-week high while the S&P 500 is off about ten per cent. Worse has been the S&P Biotech SPDR ETF (S&P Biotech ETF Stock Quote, Charts, News, Analysts, Financials NYSE:XBI), which has more speculative names in its basket and is now down 40 per cent from its 52-week high.

But the relatively poor overall performance for the space should be coming to an end, Cooper argues, as there are prevailing factors in its favour. First, Cooper points to the fact that healthcare is a recession-proof space with an aging demographic in its favour. Cooper said the combined healthcare spend in the United States, for example, is about 17 per cent of GDP and growing at over four per cent per year, while the drugs and goods and services provided by the sector are not considered products and services that can be deferred to the future during economic downturns. And with the Baby Boom generation representing a major cohort (22 per cent of the US population), healthcare will be much more in demand as this group ages. Cooper pointed to the stat saying that 56 per cent of healthcare expenses are incurred after the age of 55.

“If one of the key determinants driving healthcare spend is age, then the industry is going to see accelerated demand in the coming years as the large Baby Boom generation enters their Golden Years. By 2030, all of this generation (71.6 million in the United States or 22% of the population) will be over 65 (when per capita spend accelerates materially), which will significantly drive demand for multiple years given the average life expectancy in the US is 79,” Cooper wrote.

Second, Cooper said healthcare stocks, especially in the smaller cap group, are currently trading at valuations well below historical norms. To that end, the analyst highlighted four names in his coverage universe that should do well over the next 12 months.

In the pharmaceutical space, Cooper recommends pharmacy services company CareRx (CareRx Stock Quote, Charts, News, Analysts, Financials TSX:CRRX), saying the company plays a key role in supporting long-term care facilities for the supply of chronic medications and as the largest and fastest-growing provider of pharmacy services to seniors homes and other care settings, CareRx will be meeting the rising demand from the seniors cohort as it ages, reaching 9.5 million in Canada in the next ten years and pushing up the number of people living in assisted living by 86 per cent to 670,000 over that same time period.

“Based on its record Q4/FY21 results, CRRX serviced 96,310 beds. This equates to ~25% market share across the country albeit the share is larger in the geographies in which it operates as it does not currently have a presence in Quebec or the Maritimes. The company has set a target of 130,000 beds serviced (very conservative in our view) over the next two years,” Cooper wrote.

The analyst said CRRX currently trades at 0.9x/9x his fiscal 2022 Sales/EBITDA and 0.8x/7.5x his 2023 estimates versus its closest comparable, Neighbourly Pharmacy, at 1.8x/14x consensus estimates, putting CRRX at about a 50 per cent discount currently. 

“Given the demographic trends in terms of an aging population, the expansion of the number of beds to service them, that 65+ age cohort consuming the largest per capita prescription drugs and CRRX having, by far, the leading market share in Canada, we remain very bullish as to the outlook for the company,” Cooper wrote.

Cooper reiterated his “Buy” rating on CareRx and $10.00 target price, which at the time of publication represented a projected one-year return of 86.9 per cent.

Next up are two healthcare companies in the respiratory durable medical equipment (DME) space: Quipt Home Medical (Quipt Home Medical Stock Quote, Charts, News, Analysts, Financials TSXV:QIPT) and Viemed Healthcare (Viemed Healthcare Stock Quote, Charts, News, Analysts, Financials TSX:VMD). Quipt provides in-home monitoring and disease management services focused on end-to-end respiratory solutions for patients in the US, with the company aiming to grow both organically through increased annual revenue per patient through offering multiple services and inorganically through an M&A program which has completed 11 acquisitions over the past two years in a still highly fragmented DME service provider space.

Cooper said QIPT is currently trading at “remarkably” inexpensive levels at 1.0x/4.3x his fiscal 2022 Sales/EBITDA forecasts and 0.8x/3.8x his 2023 estimates, where historically the group has traded within the range of 2-3x Sales and 8-12x EBITDA. 

“Quipt reported record Q1/FY22 (Dec 31, 2021) results with revenue/EBITDA of US$29.5m/US$6 million, which was +17 per cent y/y and +7 per cent q/q. We believe these were excellent results considering the headwind caused by the ongoing Philip’s recall issues. Note that the quarter did not include the full impact of two acquisitions completed during the quarter nor one completed on January 3, 2022. If all of its acquisitions were included, its quarterly revenue would have been US$33.1 million implying run-rate results are ~US$132 million/US$27 million,” Cooper wrote.

The analyst reiterated his “Buy” rating for Quipt and $16.00 target, which translated to a projected return of 189.9 per cent.

Viemed also works in the US and provides home respiratory services to patients dealing with conditions like COPD and neuromuscular diseases. Cooper said the company has a diversified product mix which is currently increasing revenue per active patient, while Viemed is actively growing its sales force along with its geographical footprint. 

Cooper said Viemed reported better than expected results in its most recent fourth quarter 2021 results, with revenue up 11 per cent year-over-year and up 4.3 per cent sequentially, with an EBITDA margin of 26 per cent.

“Shares of VMD have risen ~50 per cent since it reported its Q4/FY21 results, yet it still trades at just 1.4x/5.8x our FY22 forecast and 1.3x/5.0x FY23 estimates. This is well below the historical valuation for the group at 2-3x sales and 8-12x EBITDA. Maintain Buy and $12.25 TP based on 10x our FY23 EBITDA forecast,” he said.

At press time, Cooper’s $12.25 target represented a projected return of 80.1 per cent.

Last up is Salona Global (Salona Global Stock Quote, Charts, News, Analysts, Financials TSXV:SGMD), which is in the physiotherapy and rehabilitation wing of the DME market where it sells IP-based products like electrodes and sensors to PT clinics. Cooper said physio and rehab are also expected to see strong growth due to an aging demographic that aims to remain as active as possible through the latter years of life, with employment of physical therapists expected to grow by 20 to 30 per cent over the next five years. 

Cooper said Salona’s pre-released Q4 numbers came in strong, with recent acquisitions set to contribute further to growth in upcoming quarters. The analyst pegs Salona as trading at 1.2x/8.1x his fiscal 2023 forecast and 1.0x/4.8x his 2024 estimates, as opposed to medical device manufacturers which typically trade at 4-8x sales. Cooper has maintained his “Buy” rating and $2.50 target, which is based on a 4x multiple of his 2023 Sales forecast and represented at press time a projected return of 201.2 per cent.

“We do not believe healthcare companies are as susceptible to recession or inflation as other sectors and, as such, we believe the market is mis-pricing future growth, which is based on addressing the needs and requirements of an aging population. Such needs/requirements include long-term care (LTC) facilities, prescription drugs, respiratory aids (CPAP, oxygen, vents) and medical devices used in physiotherapy clinics,” Cooper said.