Image source: Getty Images.
Which industries have the best long-term prospects? Healthcare certainly deserves a spot on the list. And while there are some healthcare stocks that have lofty valuations, others aren't all that expensive. Here are three relatively cheap healthcare stocks that you can buy right now and hold on to for years to come.
Benefit from pharmacy benefits management
It's easy to make an argument for owning Express Scripts (ESRX) stock. Americans are aging. Older people tend to use more prescription drugs. Payers, including insurance companies, government agencies, and self-funded employers, want to keep prescription drug costs down. Express Scripts helps achieve that goal.
Express Scripts also claims some competitive advantages that few other pharmacy benefits managers (PBMs) share. Its size provides significant leverage in negotiating prices with drug distributors as well as giving operational efficiencies. Because of its large number of customers and high prescription volume, Express Scripts has access to vast amounts of data that it uses to pinpoint ways to cut waste related to prescription drug usage.
With all these things going for it, you might expect Express Scripts' shares to be priced in the stratosphere. That's not the case, however. The stock trades at just over 10 times forward earnings. Wall Street expects the PBM's earnings growth over the next five years to be roughly the same as the last five years -- a period where Express Scripts' shares gained over 60%.
What's the catch? Express Scripts and one of its largest customers, giant health insurer Anthem (ELV -0.45%), have sued each other. Anthem claims that Express Scripts owes up to $3 billion in past drug savings. Express Scripts disagrees.
My view is that the market has baked an Anthem departure into Express Scripts' share price. However, it's not a foregone conclusion that Anthem will take its business elsewhere -- at least not until its contract with the PBM expires in 2019. Even if the two companies do part ways, Express Scripts is still priced inexpensively considering its growth prospects.
A patient way to rack up investing returns
HCA Holdings (HCA -2.37%) directly or indirectly operates 169 hospitals and 116 freestanding surgery centers in 20 states and the United Kingdom. That large footprint makes the company the biggest health system in the U.S.
Investors have plenty to like about HCA. The company's scale should allow it to effectively navigate the changing healthcare landscape. HCA's stock benefited tremendously from implementation of Obamacare, more than quadrupling in the last five years. But HCA doesn't necessarily need Obamacare to survive and thrive in the coming years.
Like many companies in the healthcare industry, HCA stands to benefit from the aging demographics in the U.S. (and the U.K.). Older individuals are more likely to require hospitalization. As the population ages, government healthcare programs will definitely try to hold hospital costs down. I suspect that larger hospital systems like HCA will have a leg up over many of their smaller rivals in keeping a lid on those costs. Bigger is often better when it comes to negotiating with vendors and other healthcare providers and for recruiting quality staff.
HCA's significant presence in the freestanding surgery center market is a big positive for the company. Payers often prefer these outpatient surgical centers because they tend to be less costly than inpatient surgeries. Outpatient revenue accounted for nearly 40% of HCA's total patient revenue in the second quarter. This percentage could grow in the years to come. Milton Johnson, HCA's chairman and CEO, indicated in the second-quarter earnings call that the health system continues to be in acquisition mode on this front.
HCA's stock currently trades at less than 11 times forward earnings and only 13 times trailing-12-month earnings. While the company might not see the heady earnings growth experienced over the past five years thanks largely to Obamacare, double-digit percentage growth on an annual basis seems quite attainable.
A generic way to win
It's been a rough 12 months for generic-drug maker Lannett Company (LCI). Shares are down over 40% since September 2015 -- and that reflects significant gains racked up since May. What happened?
Lannett's main challenges stemmed from its acquisition in 2015 of Kremers Urban Pharmaceuticals. Before the deal was even finalized, Kremers lost one of its biggest customers. Wall Street didn't like the debt that Lannett took on to finance the transaction. It didn't help matters that the key executive in charge of overseeing the integration of Kremers left Lannett earlier this year.
I think Lannett's future looks brighter than its immediate past, however. The company seems to be right on track with its integration efforts for Kremers, hitting the target level of synergies for its fiscal year ending June 30, 2016. In May, Lannett announced that it was reengaging with the customer that left Kremers earlier. The company has paid off all of its high-interest debt associated with financing the Kremers deal, a move that will save $170 million in interest payments.
Lannett projects that fiscal year 2017 revenue will grow at least 21% year over year. That revenue growth will drive earnings higher as well, although the Kremers business has lower margins than the company's other business. There's even better news: Lannett's projections don't include the impact of new products in the pipeline. The company has quite a few products awaiting FDA approval that hold the potential to make Lannett's numbers come in higher than its guidance.
As for valuation, Lannett's stock trades at a low nine times forward earnings. I think we're already seeing that the company will be able to make its Kremers acquisition work and decrease its debt over time. As Lannett's earnings continue to grow as a result of the transaction and new products, share prices should better reflect the company's true potential.
