Source: Cigna.
Healthcare has been one of the best-performing sectors in 2014, and investors are right to question whether stocks in the industry will continue their winning ways in 2015. While increasing share prices have made many healthcare companies a bit pricey, these five stocks offer enticing valuations and intriguing reasons that could make them worth considering for portfolios.
1. Overcoming an obstacle
Teva Pharmaceutical (TEVA 0.63%) is the globe's biggest maker of generic drugs, but it's also a major manufacturer of specialty medicines.
Copaxone, which is used to treat multiple sclerosis relapses, is a multibillion-dollar blockbuster that represents 20% of Teva's annual sales. Copaxone is the most widely prescribed therapy for MS patients, with $4 billion in annual sales; however, fears regarding Copaxone losing patent protection this year caused Teva's shares to fall sharply in 2012 and 2013. Although the risk of a generic competitor remains, the stock has climbed nicely this year given that the Food and Drug Administration has been slow to approve a generic biosimilar, and Teva has been very successful at converting Copaxone patients to a new, longer-lasting formulation of the drug that remains under patent protection. In this context, Teva shares could offer a significant opportunity. Currently, investors will pay just 11.34 times next year's earnings per share to own stock in the company.
2. Building on its lead
Thanks to the December 2013 launch of Sovaldi, a highly anticipated hepatitis C therapy, Gilead Sciences (GILD 0.91%) shares have performed strongly this year. Sovaldi notched more than $8 billion in sales through the first nine months of this year, putting it on pace to challenge AbbVie's Humira as the world's top-selling medicine.
Despite Sovaldi's success, investors worried that competitors working on alternative hepatitis C drugs will eat away at Gilead Sciences' market share have kept a lid on the company's valuation. Shares are trading at just 10.6 times next year's expected earnings. That valuation suggests there's plenty of room for upside.
Gilead Sciences won FDA approval of Harvoni, its second-generation hepatitis C drug, in October. Analysts believe the drug, which clears hepatitis C in up to 99% of patients, will in 2015 rack up sales similar to what Sovaldi recorded this year. If so, Gilead Sciences' earnings per share could total $9.95 in 2015, up 25% from this year.
3. Capitalizing on a bargain
Horizon Pharma (HZNP) might not be as big as Teva Pharmaceutical, or as well known as Gilead Sciences, but it could be a nice value stock to own next year.
Thanks to some savvy acquisitions, including the 2013 purchase from AstraZeneca of commercial rights to the rheumatoid arthritis drug Vimovo, analysts think Horizon's growth might drive EPS up from $0.81 in 2014 to $1.04 in 2015.
Horizon paid AstraZeneca just $35 million for Vimovo, betting that its existing rheumatology sales force could significantly increase sales of the drug. That bet seems to be paying off, as Vimovo's sales reached $43.2 million in the third quarter, for a total of $119.6 million through the first nine months of the year.
Source: Community Health Systems
4. More paying customers
Acquiring Health Management Associates early this year turned Community Health Systems (CYH 2.88%) into one of the nation's top hospital operators.
Hospitals operators such as Community Health struggled during the recession as budget-strapped patients put off elective surgery and the number of write-offs for the uninsured jumped. However, the economic recovery and growing health insurance enrollment tied to the Affordable Care Act is resulting in admissions growth and a drop-off in charity care.
Community Health's trailing 12-month operating margin improved from about 5.6% in the first quarter of the year to nearly 6.5% in the third quarter. The amount of money set aside for doubtful accounts fell from 14.4% of its gross sales last year to 13.8%.
That trend should persist in 2015 as admission growth continues and more people sign up for insurance through the ACA's federal and state exchanges or through Medicaid. As a result, analysts think Community Health will deliver EPS of $3.97 next year, up from $3.21 this year. That would give the company a forward P/E ratio of just 13.05 and a price-to-sales ratio of just 0.34.
5. More members and higher prices
Cigna (CI) took a measured approach to the Obamacare health insurance exchanges during the first enrollment period, participating in just five states. But this year, Cigna insurance plans will be offered in three more states , and that could provide a nice lift to the company's revenue and profit next year. Ultimately, Cigna believes insurance plans offered on the exchanges will offer an operating margin of between 3% and 5%. Thanks to price increases for 2015, the company could see those offerings become profitable sooner rather than later.
Additionally, while many of its peers generate revenue solely from health insurance, Cigna also has a booming supplemental insurance business in Asia. That business, which offers health, life, and accident insurance products, has grown by 19% annually over the past five years.
Growing enrollment in exchange plans and higher demand for supplemental policies has Wall Street expecting that Cigna's EPS will reach $8.14 in 2015, up from $7.39 this year. That works out to a forward P/E of just 12.8 times.
Reasonably priced growth
The healthcare sector has an opportunity for growth again in 2015, and a variety of healthcare investments could pay off for investors. Teva Pharmaceutical, Horizon Pharma, Gilead Sciences, Community Health Systems, and Cigna provide investors with exposure to different areas of healthcare, and each is arguably inexpensive relative to the earnings growth expected in 2015. For that reason, investors might want to consider placing these stocks in their portfolios.
