Raymond James Makes Huge Changes to Health Care Top Picks List

Health and Healthcare

Published: March 4, 2020 9:31 am

Last Updated: March 4, 2020 10:00 am

With a world that is very concerned over the spread of the coronavirus, health care stocks, especially the top pharmaceutical stocks, have been in the spotlight as researchers scurry to find a cure. Like other sectors, health care was scorched as the market has been hammered, but it has held up reasonably well, considering the sharp drop in some more volatile areas.

Given the huge market moves, it makes sense for many firms to review the calls from their analysts on the top stocks in each sector, and the team at Raymond James did just that this week. They made some serious changes to the firm’s Top Picks health care companies. All four are rated Strong Buy, and they noted this in the research report when discussing earnings posted for the fourth quarter and the outlook for the rest of 2020:

Fundamental performance in the healthcare sector has remained positive; 84% of the sector topped consensus earnings-per-share for the fourth quarter (though only 39% topped revenue by at least 1%). Though growth concerns have weighed on sentiment, earnings revisions have remained modest. The sector continues to be in the bottom half of sectors in terms of multiple expansion, but the top half in estimate revisions, implying an increasingly attractive relative valuation. Headline political risks remain a factor as well, including exacerbating moves in managed care, for example, as Sanders looked more and more like the eventual Democratic candidate but Biden took South Carolina over the weekend. Super Tuesday should tell us a lot about who the likely candidate is, but the probability that the healthcare debate simmers down is extremely low.

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Masimo

This more off-the-radar play has solid potential for more conservative growth accounts. Masimo Corp. (NASDAQ: MASI) is a medical technology company that develops, manufactures and markets noninvasive patient monitoring technologies, medical devices and sensors.

Masimo’s products include continuous monitors, patient-worn monitors, hospital automation connectivity, capnography and gas, data download and analytics, and sensors and accessories. The coronavirus threat could bode well for the company, and the analysts noted this:

We are adding Masimo to the list given its relative positioning among our hospital supply coverage should COVID-19 gain traction in the U.S. and Europe. Given that COVID-19 is a respiratory infection with life-threatening pneumonia in severe cases, pulse oximetry is a routine monitoring technology utilized for patients that are hospitalized. Recall, Masimo has a leadership position in pulse oximetry with ~45% global share and an especially strong presence in the U.S. and Europe. Although the shares are admittedly not inexpensive, we do not see Masimo’s strong double-digit growth as being derailed by COVID-19, and perhaps, even enhanced in the near-term.

The Raymond James price objective for the shares $183, but the Wall Street consensus price target is up at $198.67. Masimo stock closed Tuesday’s trading at $171.20 a share, down almost 4% on the day.

Merit Medical Systems

For years, this company has been a rumored takeout candidate. Some on Wall Street feel that is still the case. Merit Medical Systems Inc. (NASDAQ: MMSI) is a leading manufacturer of a diverse range of disposable medical devices, with a focus in cardiology, radiology and endoscopy.

Merit’s average selling price is around $50, and the company sells over 180 products (classified into over 20,000 SKUs) used in a variety of cardiovascular, peripheral, orthopedic and endoscopic interventional, diagnostic and therapeutic procedures. The analysts have stayed very positive on the company despite a rough patch and said this in the report:

Following a couple of tough quarters, Merit has begun to take steps towards right-sizing the cost structure of the business and, in our view, has never been more motivated to do so. Following improved execution in the fourth quarter (beat on revenue/ EPS) and what we believe to be a low bar for the first quarter of 2020, we like the near-term setup for Merit Medical. Furthermore, with investor sentiment still low (4-5 turns below peers on 2021 price to earnings), and Coronavirus impact already baked into consensus, we see an opportunity for multiple expansion.

Raymond James has set a $47 price target, while the posted consensus is $45.57. The last trade for Merit Medical Systems stock on Tuesday came in at $36.52 a share.