Are These 5 Healthcare Stocks Worth All The Investor Interest They're Getting?

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 |  Includes: AMGN, CRVL, MD, MHS, ONXX
by: Stock Croc

As market volatility increases due to the eurozone crisis and the ongoing subdued global economic outlook, investors are seeking investment opportunities in niche industries with substantial growth opportunities. This has seen a renewed focus on the drug research and biotechnology industries as investors seek to capitalize on the potential upside that comes from companies that make significant drug and medical research breakthroughs that can lead to rapid profits.

Investing in the biotech and drug research stocks poses some interesting challenges, primarily as the valuation of a company is very difficult. Some assets are easy to value such as cash, investments in other companies, property and equipment. However, intellectual capital, including patents issued as well as pending, trade secrets and ‘know how’, freedom-to-operate and strategic position are much more difficult to value. In this article I will review five medical stocks in which investors have shown considerable interest, as shown by their prices all crossing the 200 day simple moving average, to determine whether they represent solid investment opportunities with substantial growth prospects.

Mednax Inc (NYSE:MD)

Mednax has a market cap of $3.36 billion and a price to earnings ratio of 15.90. Its 52 week trading range is $58.48 to $75.47. At the time of writing, it is trading at around $70. It reported third quarter earnings 2011 of $407.67 million, an increase from second quarter earnings of $393.40 million. Third quarter net income was $58.24 million, an increase from second quarter net income of $55.94 million. It has quarterly revenue growth of 16.10% and a return on equity of 14.06%.

One of Mednax' competitors is Team Health Holdings, Inc. (NYSE:TMH). Team Health Holdings is trading at around $20.50 and has a market cap of $1.35 billion. It has a price to earnings ratio of 58.06, quarterly revenue growth of 17.60% and no return on equity. It doesn’t pay a dividend. Based on these key performance indicators, it has marginally better growth prospects than Mednax but is not delivering a credible return on equity.

Mednax’s third quarter 2011 balance sheet showed cash of $42.96 million, an increase from second quarter cash of $34.94 million. It has quarterly revenue growth of 16.10%, versus an industry average of 12.20%, and a return on equity of 14.06%, versus an industry average of 17.60%. This indicates that it is performing on par with many of its competitors.

The earnings outlook for the Specialized Health Services industry is uncertain and subdued, primarily due to the poor economy and the impact of the significant health reforms that were enacted in 2010. This has increased pressure on providers to reduce costs and improve quality of care, both of which have a direct impact on net income.

Despite the uncertain and negative industry outlook, Mednax has increased both net income and cash holdings in a difficult operating environment, showing that it is well positioned for future growth as the industry outlook improves. The company also has solid performance indicators demonstrating that it has solid earnings growth potential and strong management. On this basis I rate the company as buy.

Medco Health Solutions Inc (NYSE:MHS)

Medco Health Solutions Inc has a market cap of $22.39 billion and a price to earnings ratio of 16.83. For a 52 week period its trading range has been $44.60 to $66.38. It is currently trading at around $58. The company reported third quarter earnings for 2011 as $16.98 billion, a decrease from second quarter earnings of $17.07 billion. Third quarter net income was $355.40 million, an increase from second quarter net income of $342.80 million. It has quarterly revenue growth of 4.10% and a return on equity of 35.22%.

One of Medco Health Solutions closest competitors is Omnicare Inc (NYSE:OCR). Omnicare currently trades at around $31 and has a market cap of $3.54 billion. It has quarterly revenue growth of 1.90%, a return on equity of -0.90% and pays a dividend with a yield of 0.50%. Based on these performance indicators it is underperforming Medco Health Solutions.

Medco Health Solutions cash position has substantially improved, its third quarter 2011 balance sheet showed $166.80 billion in cash, an increase from $100.60 million in the second quarter. Its quarterly revenue growth of 4.10% is less than the industry average of 6.70%, and its return on equity of 35.22% is greater than the industry average of 16.60%. These indicators show that whilst it lags behind many of its competitors in growth prospects it has superior management who have tight control on the profitability of the company.

The earnings outlook for the Wholesale Drugs industry is quite positive. While it is predicted that revenues will decline as a result of the sluggish global economy and decreasing demand, Barclays Capital have predicted that operating profit will grow dramatically as wholesalers benefit from more profitable generic drugs replacing brand-name drugs.

When this is considered in conjunction with Medco’s increased quarterly net income and cash holdings as well as its solid return on equity, this shows the stock should continue to increase in value. On this basis I understand the high degree of investor interest and rate the company as a buy.

Amgen Inc (NASDAQ:AMGN)

Amgen Inc has a market cap of $50.85 billion and has a price to earnings ratio of 14.37. For a 52 week period its trading range has been $47.66 to $61.53. It is currently trading at around $58. The company reported third quarter earnings 2011 as $3.94 billion, a slight decrease from second quarter earnings of $3.96 billion. Third quarter net income was $454.00 million, a substantial decrease from second quarter net income of $1.17 billion. The company is achieving quarterly revenue growth of 3.40%, a return on equity of 15.84%, and pays a dividend yield of 1.90%.

One of Amgen’s competitors is AstraZeneca PLC (NYSE:AZN). AstraZeneca is currently trading at around $47. It has a market cap of $62.04 billion and a price to earnings ratio of 6.43. It has quarterly revenue growth of 4.00%, a return on equity of 43.71%, and pays a dividend with a yield of 3.80%. Based on these performance indicators it is outperforming Amgen.

Amgen’s cash position has declined, the third quarter 2011 balance sheet showed $17.68 billion in cash, a decrease from the second quarter of $19.17 billion. Amgen’s quarterly revenue growth of 3.40%, versus the industry average of 19.10%, and a return on equity of 15.84%, versus an industry average of 8.70%, indicates it is underperforming many of its competitors with regard to earnings growth but has a strong management team and has a stronger return on equity.

The outlook for the biotechnology industry is difficult to predict, while the outlook for the drug manufacturing industry is gloomy, it is far more upbeat for biotech companies, despite tight credit markets and the poor economic outlook. However , as stated earlier, a lot of this is dependent upon biotech companies being able to translate their research into approved and marketable products.

Despite the relatively positive industry outlook I feel the increased investor interest is unwarranted primarily as it has reported a substantial decrease in net income and cash holdings, combined with mediocre performance indicators. Accordingly I rate Amgen as a hold.

CorVel Corporation (NASDAQ:CRVL)

CorVel Corporation has a market cap of $588 million and a price to earnings ratio of 23.74. Its 52 week trading range has been $38.04 to $54.64. It is currently trading at around $51. It reported third quarter 2011 earnings of $104.55 million, a slight increase from second quarter earnings of $102.31 million. Third quarter net income was $7.88 million, a decrease from second quarter net income of $8.20 million. CorVel has quarterly revenue growth of 11.90%, a return on equity of 23.97%, and doesn’t pay a dividend.

One of CorVel’s closest competitors is Coventry Health Care Inc (CVH). Coventry Health Care currently trades at around $33 and has a market cap of $4.72 billion. It has a price to earnings ratio of 7.98, quarterly revenue growth of 5.10%, a return on equity of 14.18% and doesn’t pay a dividend. Based on these performance indicators it is underperforming CorVel .

CorVel’s cash position has substantially declined, the third quarter balance sheet showed $8.13 million in cash, compared to $17.58 million for the second quarter. CorVel’s quarterly revenue growth rate of 11.90% is less than the industry average of 21.60%, and its return on equity of 23.97%, is greater than the industry average of 17.20%. This indicates that it is doesn’t have earnings growth prospects as strong as many of its competitors but is delivering a better return on equity.

The earnings outlook for the Health Care Insurance industry is poor primarily due to the poor economic climate and increased costs and uncertainty associated with the health care reforms. Based on this outlook, when combined with Corvel’s net income and cash holdings, it is difficult to understand the increased investor interest in the company. On this basis I rate the company as a hold.

Onyx Pharmaceuticls Inc (NASDAQ:ONXX)

Onyx Pharmaceuticals Inc has a market cap of $2.51 billion and no price to earnings ratio. Its 52 week trading range is $27.17 to $45.90. It is currently trading at around $39.50. It reported third quarter earnings 2011 of $75.04 million, an increase from second quarter earnings of $67.96 million. Third quarter net income was -$36.86 million, an increase from second quarter net income of -$54.54 million. Onyx Pharmaceuticals Inc has quarterly revenue growth of -38.90%, a return on equity of -24.28% and doesn’t pay a dividend.

One of Onyx Pharmaceuticals’ closest competitors is Pfizer Inc (NYSE:PFE). Pfizer currently trades at around $20 and has a market cap of $155.50 billion. It has a price to earnings ratio of 13.88, quarterly revenue growth of 6.30% and no return on equity. It pays a dividend with a yield of 4.00%. Based on these key performance indicators,

Onyx Pharmaceuticals third quarter 2011 balance sheet showed cash of $506.89 billion, a decrease from second quarter 2011 of $522.54 million. Onyx Pharmaceuticals quarterly revenue growth of -38.90% versus an industry average of 10.50%, and a return on equity of -24.28%, versus an industry average of 15.80%, indicates that it is underperforming many of its competitors.

The industry outlook for the Drug Manufacturing industry is quite gloomy primarily due to the poor economic climate and reduced consumer demand triggered by negative consumer sentiment. In addition, Moody's has stated that 2012 will be a more challenging year for the industry, although the devalued U.S. dollar, which makes U.S. exports cheaper, should provide some earnings relief.

Based upon the negative industry outlook combined with Onyx Pharmaceuticals reduced earnings, net loss and reduced cash holdings, I do not believe the company is a good investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.