Cardinal Health, Cigna, Merck among top healthcare Quant picks ahead of Q1 earnings

The S&P 500’s health care sector (NYSEARCA:XLV), holding a weightage of 12.12% in the S&P 500 index, saw only a 3.82% rise YTD and is the third lowest scored sector by the SA Quant rating system.

With earnings at the doorstep, we look at the sector’s performance and where its constituents stand on the rating system.

XLV index gained about 6.12% in the last 12 months, trailing behind the broader S&P 500 which gained about 25.59%. The S&P 500 health care sector is the third-lowest rated sector as per Seeking Alpha's Quant ratings system, followed by Consumer Staples and the Real Estate sectors. It has a score of 2.62 out of 5 with a Neutral rating.

The index fares well on profitability metrics with a score of A, but it scores a D on valuation and C+ in EPS revisions.

Quant ratings of companies

Out of the sector’s 64 constituents, 6 companies have a Strong Buy rating, 6 companies have a Buy rating and the rest have a Hold rating.

Cardinal Health (CAH) has the highest score of 4.87 with a Strong Buy rating as the company raised its FY2024 guidance and posted better than expected Q2 results. Analysts believe that this company is undervalued and is poised for growth in the coming months given its recent acquisition of Specialty Networks and steady pipeline.

Medtronic (MDT) comes in a close second with a score of 4.84. The company has had a steady dividend growth over the years, and with its recent successful earnings, analysts are confident that this company can provide good returns to their investors.

Cigna (CI) tied with MDT for the second position, also scoring a 4.84 out of 5. According to SA analyst Uttam Dey, Cigna's Evernorth Services segment, fueled by the acquisition of Express Scripts in 2018, is well positioned to benefit from innovation in drugs and specialty pharmacy.

Merck (MRK) is the third top scored company with 4.65 out of 5 and Strong Buy rating. Analysts are expecting a full-year guidance raise by the company, while the company's biggest money maker treatment Keytruda received European commission nod of approval for lung cancer. SA contributor Juxtaposed Ideas says, “With Keytruda receiving 14 new approvals in 2022, 15 in 2023, and 3 YTD, the management is working hard to extend the LOE while introducing a new subcutaneous administration.

We may also see the FY2024 guidance moderately raised, given the recently approved Winrevair, with it expected to generate up to $8.2B in peak annual sales.”

Bio-Rad Laboratories (BIO) continues to lie in the bottom of the quant ratings system in the health care sector with a score of 2.54 after the company missed revenue expectations for the sixth time in a row.

Humana (HUM) and Bio-Techne (TECH) tied at the second last spot with a score of 2.55.

Analyst comments

Citi Research strategists last week lowered the health care sector to underweight as they have struggled with “uninspiring” growth in equipment and services.

“Earnings trends point to consistent growth, but margin expectations are not inspiring,” Scott Chronert said in a U.S. Equity Strategy report. “Despite solid positive revision trend, growth expectations have not moved higher.”

Speaking on the recent broader market effects on the sector, Goldman Sachs Equity Research noted, “HC sector performance has been increasingly eclipsed by the broader market since late Feb in an underperformance gap that recently started to grow alongside a (strikingly) widening divergence in favor of Cyclicals over Defensives as the markets have been pricing in strong US economic growth.”

S&P Global, on the healthcare sector, said in the beginning of the year, “While health care demand remains solid and the labor situation has improved, with EBITDA margins for most companies being flat to up versus the prior year, they remain below pre-pandemic levels and are unlikely to return to those levels through 2024, as labor costs will remain a challenge and cash flows will remain weighed down by elevated interest expense.”