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10 Undervalued Quality Healthcare Stocks

These wide-moat healthcare stocks are trading below our analysts’ fair value estimates in 2023.

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While it’s been a down year for the stock market as a whole, it’s been a good year for healthcare stocks as these often-defensive plays live up to their reputations during the bear market.

Despite the relatively strong showing of healthcare stocks, Morningstar equity analysts still see plenty of attractive opportunities for long-term investors.

The Morningstar US Healthcare Index, which measures the performance of stocks in the healthcare sector, lost 3.6% for the 12 months through March 8, 2023, while the broader market fell 6.6% during the same period, as measured by the Morningstar US Market Index. Still, of the 75 healthcare companies reviewed by Morningstar equity analysts, 32 are currently undervalued.

Line graph showing trailing 12-month performances for the Morningstar US Healthcare Index and the Morningstar US Market Index from March 2022-March 2023.

What Kinds of Companies Are Healthcare Stocks?

A wide range of companies fall under the umbrella of healthcare stocks.

The Morningstar US Healthcare Index comprises seven industries: biotechnology, drug manufacturers, healthcare plans, healthcare providers and services, medical devices and instruments, medical diagnostics and research, and medical distribution.

There are companies engaged in the research, discovery, development, and production of innovative drugs and technologies, and companies that offer a wide variety of managed health products and services, like health maintenance organizations and preferred provider organizations. Some of the largest healthcare stocks include UnitedHealth Group UNH, Johnson & Johnson JNJ, and Eli Lilly LLY.

Healthcare stocks fall under Morningstar’s defensive Super Sector, meaning they tend to do well even when the overall market is down.

For this screen, we looked for the 10 most undervalued stocks in the Morningstar US Healthcare Index all carrying a Morningstar Rating of 4 or 5 stars. Then we looked for healthcare stocks that have earned a Morningstar Economic Moat rating of wide or narrow, signifying the degree to which a company has a durable competitive advantage. Stocks with the combination of economic moats and low valuations tend to historically outperform for long-term investors.

10 Undervalued Healthcare Stocks to Buy Now

The following were the 10 most undervalued healthcare stocks in the Morningstar Healthcare Index as of March 8:

  • Ionis Pharmaceuticals IONS
  • Baxter International BAX
  • Veeva Systems VEEV
  • Zimmer Biomet Holdings ZBH
  • Syneos Health SYNH
  • Medtronic MDT
  • CVS Health CVS
  • DaVita DVA
  • LivaNova LIVN
  • Becton, Dickinson and Co. BDX

The most undervalued healthcare stock is Ionis Pharmaceutical, trading at a 42% discount to the fair value estimate set by Morningstar analysts. The least undervalued on the list is Becton, Dickinson and Co., trading at a 23% discount. Morningstar stocks analysts believe all 10 of these stocks are high-quality and continue to be undervalued in the market.

List of undervalued wide-moat companies from the Morningstar US Healthcare Index.

Ionis Pharmaceuticals

  • Industry: Biotechnology
  • Stock Price: $35.63
  • Morningstar Fair Value Estimate: $62

“Ionis is a leader in RNA-based therapies, and its spinal muscular atrophy drug Spinraza, marketed by partner Biogen BIIB, is the first RNA-based therapy to achieve blockbuster status. The firm’s antisense oligonucleotide, or ASO, technology faces strong competition from RNA interference technology emerging from Alnylam ALNY, Arrowhead ARWR, and Dicerna, as well as gene editing and gene therapy pipelines at multiple firms. However, Ionis has built a massive pipeline of promising new drugs that are rapidly moving toward the market, securing a narrow moat.”

“Our uncertainty rating for Ionis is not materially affected by environmental, social, and governance, or ESG, risks, although we see access to basic services (tied to drug pricing) as the biggest ESG risk that the firm needs to manage. Overall, we see Ionis as less exposed than its peers to U.S. pricing risks, given Spinraza’s low Medicare Part D exposure, strong international sales, and lack of U.S. price increases, although new drug approvals in ATTR amyloidosis, Alzheimer’s disease, and cardiovascular indications could increase Medicare exposure.”

—Karen Andersen, sector strategist

Baxter International

  • Industry: Medical Instruments & Supplies
  • Stock Price: $39.44
  • Morningstar Fair Value Estimate: $67

“Following the spinoff of Baxalta in mid-2015, Baxter’s new management team has focused on increasing efficiencies and innovating in medical products. That focus has resulted in much-improved profitability and cash flow generation since then. At its 2022 investor meeting, the company highlighted a goal for mid-single-digit sales growth primarily through new product launches and for double-digit adjusted earnings per share and free cash flow growth compounded annually. Acquisitions, like the recent combination with Hillrom (medical equipment like hospital beds with digital connection capabilities), could add to those prospects, if executed properly.”

“In the longer run, we would note that some of Baxter’s product lines, particularly IV solutions, nutritional products, and generic injectables, have been commodified and face significant quality-control issues that contribute to the firm’s ESG risks. If new competitors decide to make the substantial up-front and ongoing investments needed to participate in these markets, we think pricing pressures, which have been manageable through volume increases or mix benefits on differentiated delivery systems, may accelerate, especially in an increasingly cost-conscious healthcare system—another one of Baxter’s key ESG-related risks. We also believe Baxter must innovate to maintain its competitive advantages, particularly in renal care, infusion pumps, acute therapy, and advanced surgery.”

—Julie Utterback, senior equity analyst

Veeva Systems

  • Industry: Health Information Services
  • Stock Price: $172.63
  • Morningstar Fair Value Estimate: $265

“Veeva is the leading provider of cloud-based software solutions tailored to the life sciences industry. It provides an ecosystem of products to address the operating challenges and regulatory requirements that companies in the space face. Instead of focusing on a general, one-size-fits-all system, Veeva has created platforms that are purely designed to serve one industry.”

“We assign Veeva a wide moat rating because we believe the firm’s high retention rate and its customers’ unlikeliness to move to a different product (switching costs) should continue to support economic profits for at least the next 20 years.”

“We expect the commercial business to grow at a modest to high single-digit rate over the next five years. For Research and Development solutions, we expect revenue growth to soften but we still expect a very strong growth for this defensive stock in the healthcare industry over the next five years with a revenue CAGR of 22%.”

—Keonhee Kim, equity analyst

Zimmer Biomet Holdings

  • Industry: Medical Devices
  • Stock Price: $121.91
  • Morningstar Fair Value Estimate: $175

“Zimmer’s strategy is two-pronged. First, it is focused on cultivating close relationships with orthopedic surgeons who make the brand choice. High switching costs and high-touch service keep the surgeons closely tied to their primary vendor, and the surgeons bring in enough profitable procedures to keep hospital administrators at bay.”

“Second, the firm aims to accelerate growth through innovative products and improved execution. The latter is critical, in our view, to realizing the firm’s potential.”

“We’re holding steady on our fair value estimate of this defensive stock at $175 per share, which reflects our expectation that more normal procedure volume will be able to flow through after 2022 thanks to widespread vaccinations and some level of COVID-19 immunity acquired by extensive infection by previous variants.”

—Debbie S. Wang, senior equity analyst

Syneos Health

  • Industry: Diagnostics & Research
  • Stock Price: $39.38
  • Morningstar Fair Value Estimate: $55

“INC Research’s 2017 merger with inVentiv Health launched Syneos Health, the new entity, into the upper echelon of large global late-stage contract research organizations, but at the price of a significant debt load. We believe Syneos is one of a handful of CROs with the global infrastructure necessary to compete for large multinational late-stage trials and secure strategic partnerships with large pharmaceutical companies. However, its debt load could limit capital deployment in the near term.

“Most of Syneos’ CRO business comes from the most lucrative area of the market: long, complex trials that typically require thousands of patients across the globe and thus have ample room for missteps. Trial sponsors need a CRO not only with strong technical know-how in specific disease areas, but also with the expertise in local country cultures and government relations. Further, clients expect CROs to consistently trim trial times and deliver quality outcomes. Late-stage trials consume a significant portion of drug patent lives, making reduction in clinical trial time a priority for CROs and their customers. We like that Syneos does not have a lot of exposure to less-moatworthy early-stage trials, but the option is there if clients need it.”

—Rachel Elfman, equity analyst

Medtronic

  • Industry: Medical Devices
  • Stock Price: $78.40
  • Morningstar Fair Value Estimate: $112

“Medtronic’s standing as the largest pure-play medical device maker remains a force to be reckoned with in the medtech landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered its position as a key partner for its hospital customers. Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes.”

“Overall, we now include the following in our assumptions for Medtronic: a more gradual resumption of prepandemic procedure volume in fiscal 2023 and 2024, hospital labor constraints that will prevent significant expansion of capacity through the midterm, and the anticipated launch of renal denervation by early 2024. We project 3% average annual top-line growth through fiscal 2027, as procedure volume returns and stabilizes closer to prepandemic levels over the next 18 months.”

—Debbie S. Wang, senior equity analyst

CVS Health

  • Industry: Healthcare Plans
  • Stock Price: $79.81
  • Morningstar Fair Value Estimate: $113

“CVS aims to be the most customer-centric health company in the United States and has spent over a decade positioning itself as a leader in healthcare services, with the acquisitions of pharmacy benefit manager Caremark (2007) and insurance provider Aetna (2018) defining its strategic direction. CVS’ top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, and going forward, the firm hopes to add more primary care assets to that equation.

“CVS appears uniquely positioned to improve health outcomes, and we appreciate management’s focus on better leveraging its medical insurance, pharmacy benefit management, and retail operations assets through digital and other means to bring a more consumer-centric approach to healthcare, which could provide many benefits.

“Also, CVS continues to dive further into healthcare services through its HealthHub strategy and additional plans to acquire or partner its way into more primary-care assets. We think the relatively high-margin healthcare services business could help accelerate CVS’ profit growth directly or by reducing long-term costs in its medical and pharmacy benefit businesses.”

—Julie Utterback, senior equity analyst

DaVita

  • Industry: Medical Care Facilities
  • Stock Price: $79.38
  • Morningstar Fair Value Estimate: $108

“After selling the DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States with an expanding international footprint. Over several decades, DaVita has built the largest network of dialysis clinics in the U.S., and although COVID-19-related mortality concerns look likely to constrain results through 2022, we view DaVita’s long-term prospects as solid.”

“We also see some uncertainty around efforts to treat more ESRD patients at home. Positively, the need for dialysis clinics will not evaporate in that scenario since at-home patients need to be trained and monitored even if they don’t receive treatment in the clinic. However, we recognize that one of the firm’s major intangible assets (convenient locations) may become less important, which could eventually affect profitability.

“In the very long term, technology threats, such as regenerative medicine or other technology developments that eliminate the need for dialysis, could emerge and disrupt the DaVita business model, although we see those threats as unlikely in the foreseeable future. Also, DaVita appears to be investing in some early-stage technologies that could allow the firm to benefit from such shifts in the long run.”

—Julie Utterback, senior equity analyst

LivaNova

  • Industry: Medical Devices
  • Stock Price: $43.58
  • Morningstar Fair Value Estimate: $60

“As a midsize medical device firm, LivaNova follows the same innovation strategy that has been successful for many larger competitors, including Medtronic and Boston Scientific BSX. With this approach, manufacturers can create differentiated products that are not entirely interchangeable, and with each iteration of the technology, can eke out a pricing premium. The success of this strategy hinges on two factors. First, firms must be able to generate meaningful innovation. This usually happens through internal R&D, potentially augmented with acquisition of emerging technologies. Very rarely have we seen medical technology firms succeed solely on acquisition of technology. Second, successful commercialization also depends on a salesforce that has built strong relationships with the practitioners making the brand choice.”

“As with other medical technology companies, LivaNova is vulnerable to potentially disruptive technology. For example, biopharma company UCB UCBJF is currently working on padsevonil for treatment-resistant epilepsy that features a novel mechanism of action. If clinical data is favorable and the drug is commercialized, this could both siphon off patients who otherwise would have considered LivaNova’s implantable technology, and delay the flow of patients as more of them try out padsevonil first before moving onto more invasive therapies.”

—Debbie Wang, senior equity analyst

Becton, Dickinson and Co

  • Industry: Medical Instruments & Supplies
  • Stock Price: $235.23
  • Morningstar Fair Value Estimate: $306

“After a tumultuous few years, Becton, Dickinson is undergoing course correction. The COVID-19 revenue windfall has been reinvested, which should lift the firm’s core business growth in the upcoming years once the testing revenue fades. The biggest uncertainty remains around the return of BD’s pump infusion system (Alaris) to the market, which could be a material catalyst for the company whenever it occurs.

“Historically, BD was considered a virtually recession-proof business. The essential nature of many of BD’s medical products had typically shielded the firm from any capital spending-related volatility, and this business continued to fare fine during the COVID-19-induced hospital admission deceleration. However, many of the businesses acquired with Bard have exposed BD to revenue volatility. Combined with the setbacks and revenue deceleration in the peripheral segment, the Bard acquisition has not been a smashing success. We’re not quite ready to call that deal capital-destructive even though the steep price paid has given BD very little margin for error. With hospital activity returning to more normal levels, we’re starting to see momentum in the surgery segment that came with Bard, and while peripheral is no longer the star of the portfolio, businesses acquired are lifting BD’s growth profile from its historic levels.”

—Alex Morozov, regional director

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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