Right now, the average P/E ratio of the S&P 500 is around 21 -- meaning investors pay $21 per $1 of actual earnings from a company.
In this video segment from Industry Focus: Healthcare, Motley Fool analysts Sean O'Reilly and Kristine Harjes highlight the outrageous P/E numbers of a few players in the healthcare sector and discuss why they are so much higher than the average.
A full transcript follows the video.
This podcast was recorded on Feb. 12, 2016.
Sean O'Reilly: Can you give us a rundown on some more numbers, or, what we need to know we're up against if we want to invest in one of these competitors?
Kristine Harjes: I'm glad you brought that up, because one of the most important things to note when you're looking at the space is, these companies are really expensive. I mean, you're not talking about cheap, single-digit, or even low --
O'Reilly: There are no 15 P/Es here. [laughs]
Harjes: Yeah, exactly. Let's see; I have some numbers in front of me. Cerner (NASDAQ: CERN), that's actually the cheap one [laughs]. They've got a P/E of 32 based on 2015 earnings, forward P/E of 26. Then, Epic is private, as we mentioned. You look at another key player in the space, which is Athenahealth (NASDAQ:ATHN); they've got a P/E of 87 based on their 2015 earnings, and a forward P/E of 68. That's huge! This is also a company --
O'Reilly: What's the market assuming? "Oh, yeah, they'll be a monopoly someday, it'll be fine." What? [laughs]
Harjes: Basically, healthcare is the last holdout industry that hasn't modernized its IT, so you're assuming that, OK, this [is a] huge, huge deal, to get all of these records online, and to get functioning computer systems through the healthcare industry.
O'Reilly: Make it efficient, yeah.
Harjes: So the expectation there is that somebody is going to win this. When they do, it's extremely sticky. So they are really intriguing companies; they're just expensive.
Kristine Harjes has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Athenahealth and Cerner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.