3 Healthcare Stocks That Are Screaming Deals Right Now

The article identifies three undervalued healthcare stocks with potential for re-rating: DaVita (DVA), Merck (MRK), and Universal Health Services (UHS). DaVita, despite a 14% YTD decline, is poised for valuation expansion from its 11x forward P/E due to international growth and strategic share repurchases. Merck, trading at 9x forward earnings due to Keytruda's impending patent expiration, could see a re-rating driven by its robust drug pipeline and new Keytruda formulations. Similarly, Universal Health Services, trading at a discount (9x forward P/E) to peers, is expected to benefit from continued earnings growth and a subsequent valuation adjustment.

Analysis

The current market uncertainty is driving renewed interest in defensive healthcare sectors, presenting contrarian opportunities in select undervalued stocks. Three companies, DaVita (DVA), Merck (MRK), and Universal Health Services (UHS), are highlighted as potential re-rating candidates despite recent headwinds or perceived risks. The overall sentiment for these opportunities is strongly positive, indicating a bullish outlook.

DaVita, a dialysis center operator, has seen shares decline 14% year-to-date, influenced by disappointing earnings and a ransomware attack. However, its 11x forward P/E is attractive given its recession-resistant business, international expansion, and strategic share repurchases, which explain Berkshire Hathaway's position trimming. Similarly, Universal Health Services, trading at a significant discount of 9x forward earnings compared to peers like HCA Healthcare (15x), offers promising growth prospects in acute and behavioral healthcare.

Merck faces a significant challenge with Keytruda's patent expiration in 2028, leading to its current 9x forward earnings valuation. The company is actively addressing this through the development of Keytruda Qlex and boasts a robust pipeline of 20 potential blockbuster drugs, representing $50 billion in future revenue. Successful mitigation of the patent cliff could lead to a moderate re-rating to a low-to-mid teens forward valuation.

Key Decisions for Investors

• Investors should evaluate DaVita (DVA) for its international growth potential and strategic share repurchases, considering its current 11x forward P/E as a potential undervaluation.
• Monitor Merck's (MRK) progress on Keytruda Qlex and its 20-drug pipeline, as successful patent cliff mitigation could drive a significant re-rating from its 9x forward earnings.
• Consider Universal Health Services (UHS) for its discounted valuation at 9x forward earnings relative to peers, anticipating potential re-rating as earnings growth aligns with analyst forecasts.