The healthcare industry has achieved immense growth over the past few years owing to the COVID-19 pandemic, surging chronic disease cases, and an aging population. Healthcare stocks remained relatively stable during the market correction earlier this year, thanks to the inelastic demand for medical products and services.
However, certain risks are associated with the healthcare sector, including rules and regulations to control drug prices or corporate taxes, growing competition, and economic uncertainty, that potentially weigh on healthcare companies’ profits. Also, extended-care facilities have seen a downward trend over the past two years due to the emergence of COVID-19 variants. This has impacted the financials of certain healthcare companies. So, investors are advised to avoid healthcare stocks that are relatively overvalued versus their peers because their current price levels cannot be justified. Furthermore, such stocks have weak financials in addition to bleak growth potential.
Given these factors, we think fundamentally weak stocks such iRhythm Technologies, Inc. (IRTC), TransMedics Group, Inc. (TMDX), and HealthEquity, Inc. (HQY) are best avoided.
Click here to checkout our Healthcare Sector Report for 2022
iRhythm Technologies, Inc. (IRTC)
San Francisco-based IRTC is a digital healthcare company. It offers ambulatory electrocardiogram (ECG) monitoring products for patients in the U.S. IRTC provides Zio service, an ambulatory cardiac monitoring solution, and Zio XT and AT monitors, wire-free and wearable patch-based biosensors. The company also has a development collaboration agreement with Verily Life Sciences LLC.
On March 30, IRTC amended its existing debt facility with Silicon Valley Bank. The amended credit facility is non-dilutive and consists of a term loan of up to $75 million and a revolving credit facility of up to $25 million, with the maturity extended to March 2027. This debt facility is expected to increase IRTC’s debt burden.
In its fiscal year 2021 fourth quarter, ended Dec. 31, 2021, IRTC’s gross profit declined 12.1% year-over-year to $51.28 million. Its total operating expenses increased 23% year-over-year to $83.48 million. The company's loss from operations grew 236.1% from the year ago value to $32.20 million. And IRTC's net loss and net loss per common share came in at $32.49 million and $1.10, respectively, registering an increase of 236.7% and 233.3% from the prior-year period.
IRTC is relatively overvalued compared to its peers. In terms of forward EV/Sales, IRTC is currently trading at 11.31x, which is 146.5% higher than the industry 4.59x average Its 11.61 forward Price/Sales multiple is 117.5% higher than the 5.34x industry average. And its 19.41 forward Price/Book ratio compares with the 3.39 industry average.
The negative $1.06 consensus EPS estimate for its fiscal 2022 first quarter, ended March 31, 2022, represents an 11.5% year-over-year decline from the same period in 2021. It is no surprise that IRTC has missed the consensus EPS estimates in three of the trailing four quarters.
The stock declined marginally over the past five days and closed yesterday's trading session at $152.98.
IRTC's POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
IRTC has a D grade for Value, Growth, and Momentum. Within the D-rated Medical - Diagnostics/Research industry, it is ranked #39 of 51 stocks.
To see IRTC's POWR Ratings for Stability, Quality, and Sentiment, click here.
TransMedics Group, Inc. (TMDX)
TMDX is a commercial-stage medical technology company that operates in the U.S. and internationally. The Andover, Mass.-based company engages in transforming organ transplant therapy and offers Organ Care System (OCS), which is a portable organ perfusion and monitoring system. TMDX’s Organ Care System includes OCS LUNG, OCS Heart, and OCS Liver for facilitating organ transplantation.
TMDX's total operating expenses increased 70.8% year-over-year to $18.31 million in its fiscal year 2021 fourth quarter, ended Dec. 31, 2021. TMDX’s loss from operations grew 92.1% year-over-year to $11.33 million. The company’s net loss came in at $12.67 million, registering a 100.7% increase year-over-year. Its net loss per share attributable to common stockholders has increased 100% from its year ago value to $0.46.
TMDX is trading at a premium to its peers. In terms of forward EV/Sales, TMDX is currently trading at 13.52x, which is 194.6% higher than the 4.59x industry average. Its 18.76 forward Price/Book multiple is 453.9% higher than the 3.39x industry average. TMDX’s 14.44 forward Price/Sales ratio compares with the 5.34 industry average.
The Street expects TMDX's loss per share to amount to $0.39 for its fiscal 2022 first quarter, ended March 31, 2022, representing a 34.1% increase from the prior-year period.
Shares of TMDX have declined 14.9% in price over the past year. It closed yesterday's trading session at $27.20.
TMDX's POWR Ratings reflect its poor prospects. The company has an overall F rating, which equates to a Strong Sell in our proprietary rating system.
TMDX has a D grade for Stability, Sentiment, Quality, Momentum, and Value. It is ranked #152 of 161 stocks in the D-rated Medical - Devices & Equipment industry.
To see additional POWR Ratings (Growth) for TMDX, click here.
HealthEquity, Inc. (HQY)
HQY in Draper, Utah, provides technology enabled services platforms in the United States to consumers and employers to make healthcare spending and saving decisions. The company offers multiple cloud-based platforms for consumers to pay healthcare bills, compare treatment options, and make savings and investment choices. In addition, it offers a mutual fund investment platform, flexible spending accounts, and health reimbursement arrangements.
Last October, HQY priced an offering of an additional $100 million aggregate principal amount of its 4.5% senior notes due 2029. The note offering might increase the company’s debt and interest burden.
In its fiscal year 2022 fourth quarter, ended Jan.31, 2022, HQY’s total operating expenses rose 29.3% year-over-year to $132.60 million. The company’s loss from operations increased 1,617.1% year-over-year to $27.25 million. Its net loss and comprehensive loss increased 711.5% year-over-year to $32.82 million. And the company's net loss per share grew 657.1% from its year-ago value to $0.39.
HQY is overvalued compared to its peers. In terms of forward P/E Non-GAAP, it is currently trading at 52.87x, which is 146.2% higher than the 21.47x industry average. Its 25.26 forward EV/EBITDA multiple is 81.4% higher than the 14.03x industry average. Its 7.77 forward EV/Sales ratio compares with the 4.59 industry average.
Analysts expect HQY's earnings per share to decline 29.8% year-over-year for its fiscal 2023 first quarter, ending March 31, 2022.
HQY closed yesterday's trading session at $67.50.
HQY's POWR Ratings reflect this bleak outlook. The stock has an overall D rating, which translates to Sell in our proprietary rating system. It has a grade of D for Value, Sentiment, and Quality. It is ranked #10 of 11 stocks in the Medical - Health Insurance industry.
Click here to see HQY's POWR Ratings for Growth, Stability, and Momentum.
Click here to checkout our Healthcare Sector Report for 2022
IRTC shares were trading at $153.70 per share on Thursday afternoon, up $0.72 (+0.47%). Year-to-date, IRTC has gained 30.60%, versus a -5.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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