When you're looking for stalwart stocks to preserve your portfolio's value while also providing exposure to long-term growth, healthcare businesses can be quite appealing. Everyone needs healthcare, and there's a tremendous amount of innovation when it comes to how to deliver it efficiently and with a favorable outcome.
Both of the businesses I'll discuss today are profitable and steadily growing, and they've also outperformed the market over the past five years. More importantly, they're both absolutely indispensable for their customers, which gives them staying power. Let's dive in and see why that makes them worth considering as investments.
Image source: Getty Images.
1. Thermo Fisher
Thermo Fisher Scientific (TMO 0.01%) is a healthcare sector juggernaut, earning its market cap of around $253 billion by producing a galaxy of critical goods and hardware for hospitals, diagnostic clinics, and research institutions. For everything from laboratory analyzer devices to test tubes and medical refrigerators, Thermo has a solution, and that makes it a force to be reckoned with in the world of healthcare.
Of its $39.1 billion in trailing 12-month revenue (through Oct. 2), 59% is derived from repeatable sales of consumables and 21% comes from maintenance and other services. For its customers in biopharma, there often aren't any competing manufacturers producing substitute products. That means it's an extremely reliable performer quarter after quarter. And management expects to keep growing revenue between 7% and 9% every year just as the company has been doing for many years already.
Thermo also made $7.7 billion in 2021 from sales of coronavirus diagnostic tests and associated hardware, which demonstrates that it's nimble enough to capitalize on emerging opportunities. Coronavirus diagnostics are likely to continue to be a growth segment for Thermo as it sells both the consumable kits required to run PCR tests as well as the hardware analyzers. And once customers are in Thermo's ecosystem, they have a much higher chance of making further purchases.
Moving forward, management plans to use its perpetually strengthening free cash flow (FCF) to finance dividend hikes and share repurchases, both of which will be great for new and old shareholders alike.
2. Vertex
Vertex Pharmaceuticals (VRTX -1.06%) makes drugs that treat cystic fibrosis (CF), a rare hereditary disease of the lungs. Right now, it has four approved medications that treat CF, two of which are combination therapies consisting of previously approved products.
Helped by its drug development pipeline and deep experience in the CF space, the company plans to keep developing new medicines that target market segments as small as 5,000 patients, and it aims to eventually reach 100% of its addressable market.
Its hyper-focused strategy has been quite successful, to say the least. Quarterly revenue has grown by 131% over the past three years, and its free cash flow has expanded by 185%. Management estimates that total revenue could reach as much as $7.5 billion for 2021.
But Vertex is now also branching out into other disease markets, including beta thalassemia and sickle cell disease. Before the end of 2022, its therapy for these conditions, developed in collaboration with CRISPR Therapeutics, will likely be submitted to regulators to consider for approval.
That's sure to juice the stock price, and it could mean that the company's revenue grows at an even faster pace in the years ahead. Plus, if the work with CRISPR is any indication, it'll likely keep looking for opportunities to diversify with the help of additional collaborations or even outright acquisitions.
While Vertex doesn't pay a dividend, it does have an ongoing share repurchase scheme that could also buoy prices. So long as its free cash flow keeps growing, shareholders are sure to benefit.
