As supply chain constraints continue to squeeze health care stocks, one analyst suggested Monday to look for "ports in storms."
When it comes to the first-quarter earnings season, Evercore ISI analyst Vijay Kumar prefers names like Agilent, Becton Dickinson, Boston Scientific, Danaher, Thermo Fisher Scientific and Medtronic. These six have plenty of free cash flow to support their valuations, he said in a report.
"The big picture will matter heading into the first quarter," he said. "We can't think of another quarter in recent times when so many factors seem to be at play. This makes group/sector calls very difficult. We prefer 'ports in storms.'"
Health Care Stocks: The Macro Matters
Macro factors are dominating the conversation for health care stocks, Kumar said.
Executives from Baxter, Intuitive Surgical, Medtronic and Zimmer Biomet have warned supply chain issues will persist amid the war in Ukraine and Covid lockdown in China. Meanwhile, Covid cases continue to rise in the U.K. Evercore analysts also believe a recession is possible in Europe.
Still, excluding Baxter and Zimmer Biomet, the impact from the war in Ukraine seems manageable for health care stocks, Kumar said.
Evercore expects inflation pressure to cool down by year-end, he said. The worst impacts of shipping and labor shortages could ease this year. That would help lower costs for companies. For airfreight, capacity is still constrained and fuel surcharges are likely to have a second-quarter hit.
"We could see lower shipping costs in fiscal year 2023, however fuel surcharges could put incremental pressure on margins in the second quarter (specifically for medtech)," Kumar said.
Shares Are Still Under Pressure
Health care stocks have largely trended down this year.
Investor's Business Daily's Medical-Products industry group — which is led by Medtronic — has shaved off 10% as of Monday. The Intuitive Surgical-led Medical-Systems/Equipment industry group has toppled 15%. Thermo Fisher's group, Medical-Research/Equipment, is down about 19% this year.
Among the six health care stocks Kumar noted, Agilent is expected to top first-quarter performance. Analysts polled by FactSet expect Agilent's adjusted profit to surge more than 15% and for sales to rise 6%. On the other hand, Becton Dickinson is expected to report declines on both measures.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
