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"Baby Blue Chips" in Healthcare
05/03/2016 8:00 am EST
In our latest screen, we uncovered two "baby blue chips" in the healthcare sector. And while they may not be household names, but they share many of the same traits as traditional blue chips, asserts Richard Moroney, editor of Upside.
These stocks show strong returns on investment and equity, and solid track records for growing earnings per share, revenue, and cash flow over the past five years.
We also looked for stock with leading market positions that help them cope with the economic cycle’s highs and lows as well as well-capitalized balance sheets and healthy financial metrics that position them to expand.
AMN Healthcare Services (AHS)
AMN’s core business involves supplying temporary nurses to hospitals and physician offices. The company supplements organic growth (26% in 2015) with a steady diet of deals to broaden its product portfolio.
AMN spent $139 million on five acquisitions in the past three years, adding data-analytics and consulting services to its offerings.
With medical utilization rebounding, AMN’s 2015 returns on equity and investment reached their highest levels in more than a decade.
AMN is expected to grow earnings per share 29% in 2016, which would mark the fifth time in six years that profit growth exceeded 20%. The stock is rated best buy.
ICON has built a track record that most blue chip stocks would envy, growing sales in 10 straight years. Since its launch in 1990, ICON has become one of the largest players in the fragmented contract research organization industry.
Its returns on equity and investment are more than double the median returns generated by the health-care sector.
Analyst estimates for 2016 are rising, with the consensus projecting growth of 19% for per-share profits and 8% for revenue.
At 16 times estimated 2016 earnings, the stock trades 18% below the median S&P 1500 health-care stock. ICON is a Best Buy.
Molina Healthcare (MOH)
Managed-care firm Molina is growing by leaps and bounds. In 2015, membership surged 35% to nearly 3.9 million people, thanks in large part to acquisitions and the Affordable Care Act.
Last year, per-share profits nearly doubled on sales growth of 46%. Looking ahead, Molina’s growth strategy focuses on improved member retention and market-share gains.
Expansion into new regions should also drive growth, while better cost control should fatten profit margins.
The consensus estimate projects Molina will grow per-share profits 39% this year and 23% in 2017. Yet shares trade at only 17 times estimated 2016 earnings and in line with the industry median.
Molina earns our maximum 12-Factor Sector quantitative ranking score of 100. The stock, capable of climbing 20% to 25% in the year ahead, is a best buy.
By Richard Moroney, Editor of Upside
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