Looking For Bargains As Health Care's Prognosis Improves
After two years of bad news -- big drugs coming off patent, hospital companies caught up in billing and securities fraud scandals -- 2004 should bring some relief for the health-care sector. More new drugs are in line for approval. A stronger economy will help hospitals collect from patients as well as encourage more elective procedures. And the newly passed Medicare bill is expected to increase demand, not just for drugs but also for medical services as reimbursement levels rise. "Physicians are more likely to prescribe procedures, and hospitals might be more willing to perform them if they know they won't lose money on them," says Morningstar Inc. analyst Jill Kiersky.
Many biotech and pharmaceutical stocks have already climbed in 2003. But health-care providers still offer attractive opportunities. J.C. Waller III, portfolio manager of the ICON Healthcare Fund (ICHCX ), is focusing on hospitals, ambulatory care centers, and managed-care providers because he says that's where the best buys remain. One of his picks is Renal Care Group Inc. (RCI ), which provides kidney dialysis services. The company has reported steady earnings growth over the past five years, and Waller projects continued gains of 13% annually over the next five. With 14% of total assets in cash and almost no long-term debt, Waller thinks Renal Care is worth at least $10 more than its recent price of $41.
Another Waller pick is AmSurg Corp. This company with ambulatory surgery centers was spun off by American Healthcorp Inc. (now American Healthways Inc.) in 1997 and has posted robust earnings growth of 29% to 36% since. It has also outperformed the market so far in 2003. Still, Waller thinks the stock, at a recent $38, is worth more than $50 given its price momentum and his projections for 18% earnings growth over the next five years.
William McKeever, a UBS (UBS ) managed care analyst, also finds valuations in health-services stocks tempting. Among his favorites are two insurers, UnitedHealth Group Inc. (UNH ) and Aetna Inc. (AET ) UnitedHealth Group is aggressively pursuing the Medicare market, offering a drug discount card to seniors as well as a Medicare health-maintenance organization, and has plans for a less-restrictive Medicare preferred-provider organization. McKeever thinks the stock, recently $54, could rise to $63 in 2004 as earnings and revenues grow.
Aetna should also add to its top line as it goes after the Medicare HMO market while at the same time bumping up enrollment in its commercial business 3% to 5% in 2004, says McKeever. The company intends to reduce costs by consolidating facilities and holding the line on hiring and compensation. He predicts that Aetna's stock will climb from a recent $64 to $78 within 12 months as operating profits increase 21% and revenues grow 7% in 2004.
For those who can't resist a drug stock, Samuel D. Isaly, portfolio manager at the Eaton Vance Worldwide Health Sciences Fund, suggests Novartis (NVS ), a Swiss company he says will see earnings growth of 15% in 2004 as it profits from cancer treatments such as Gleevec for chronic myeloid leukemia and Femara for advanced breast cancer. Isaly says Novartis, recently trading at $44, could top $50 in 2004 as earnings increase and investors discover this overlooked stock.
Clearly, not all is well in health care. But, with careful stock selection, an investor should get healthy returns -- if, perhaps, not miracles.
By Carol Marie Cropper