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Central banks are raising interest rates aggressively in an effort to restore inflation to their target level. As a result, the global economy has remarkably slowed down and the risk of an upcoming recession has greatly increased. Therefore, investors should make sure that their stocks are resilient to recessions. Healthcare stocks are attractive holdings during recessions. As people do not curtail their healthcare expenses even during the roughest economic periods, healthcare stocks have repeatedly proved resilient to recessions. In this article, we will discuss the prospects of three healthcare stocks, namely Philips Electronics (PHG), Pfizer (PFE), and Humana (HUM), which are attractively valued right now.

Philips Electronics

Philips Electronics is a global manufacturer of electronic products for healthcare, lighting and other consumer products. It used to generate approximately half of its sales from lighting, TV and lifestyle entertainment products but has gone through a major transformation in recent years and thus it has become a health tech leader.

Philips Electronics has a strong brand name, which provides a competitive advantage in the markets in which the company operates. In addition, the company generates more than 60% of its sales from the #1 or #2 position based on market share for its respective products. It thus has material pricing power in its business.

Philips Electronics incurred a major setback in 2021, namely the recall of 4 million respiratory devices. Over 100 injuries were reported from a foam part of the devices, which can degrade and cause cancer. The FDA categorized the recall as “the most serious type.” Philips Electronics recently changed its CEO in an effort to turn around. While this headwind is non-recurring, it may cost many billions of dollars and hence it has increased the risk of the stock. It also helps explain the 60% plunge of the stock in 2022.

On the other hand, we believe that the worse is behind company, which is likely to recover from this downturn thanks to its leading position in its markets. The stock is currently trading at a forward price-to-earnings ratio of 16.2, which is much lower than the 10-year average price-to-earnings ratio of 22.8 of the stock. Whenever Philips Electronics begins to recover from its major downturn, the stock will enjoy a double reward; higher earnings and a higher price-to-earnings ratio.

Pfizer

Pfizer is a global pharmaceutical giant, which focuses on prescription drugs and vaccines. It has a market capitalization of $285 billion and its product portfolio includes Eliquis, Ibrance, Prevnar, Enebrel (international), Sutent, Xtandi, Vyndaqel / Vyndamax, Inlyta, Xeljanz, Plaxlovid and Comiranty.

Pfizer is one of the largest pharmaceutical companies in the world. It thus has scale in R&D, manufacturing, regulatory affairs, distribution and marketing around the world. Therefore, Pfizer has the ability to bring new therapies to market, partner with smaller companies or acquire entire companies. Its current pipeline in oncology, inflammation & immunology, rare diseases and vaccines is promising, with some products under study likely to become blockbuster drugs.

Pfizer failed to grow its earnings per share consistently between 2012 and 2020 but it has posted blowout earnings in each of the last two years, primarily thanks to its COVID-19 vaccine and its anti-viral drug Plaxlovid.

The stock is currently trading at a price-to-earnings ratio of 7.3, which is far lower than the 10-year average price-to-earnings ratio of 14.9 of the stock. The exceptionally cheap valuation has resulted primarily from concerns that the sales of the COVID-19 vaccine and the anti-viral drug will decrease significantly in the upcoming years. While such concerns are justified, Pfizer has utilized its record earnings to acquire other companies. As a result, these acquisitions may offset the waning sales of its top products. Whenever the market realizes this, it will probably reward the stock with a much higher earnings multiple.

Humana

Humana is one of the largest private health insurers in the U.S., with a focus on administering Medicare Advantage plans. The company has built a niche specializing in government-sponsored programs, with nearly all its medical membership stemming from individual and group Medicare Advantage, Medicaid, and the military's Tricare program. At the end of 2021, Humana had approximately 17 million members in medical benefit plans, as well as approximately 5 million members in specialty products. In 2021, 83% of premiums and services revenue came from contracts with the federal government.

Humana is a well-established player in the business of healthcare plans, with a strong reliance on the federal government. Rising healthcare costs and an increase in chronic medical care are likely to result in substantial medical membership growth in the upcoming years. As a leading health insurer, Humana is likely to be able to raise its health insurance premiums and keep up with inflation and increasing healthcare costs.

Humana has an exceptional performance record. During the last decade, it has grown its earnings per share in almost every year, at an 11.7% average annual rate. The company has accelerated its performance over the last five years, with 16.4% average annual growth of earnings per share. The exceptional growth pace combined with the consistency of the company are testaments to the strength of its business model and its reliable growth trajectory. Thanks to the aforementioned secular tailwinds of the business of Humana, we expect the company to continue growing its earnings per share at a double-digit rate for many more years.

Final Thoughts

In the adverse scenario of a severe recession, the above three healthcare stocks are likely to outperform the broad market thanks to their resilience to downturns. Philips Electronics has become remarkably cheap due to the recall of its respiratory devices, which is likely to prove a one-time setback. Pfizer is exceptionally cheap as well, while Humana is on a reliable long-term growth trajectory. Patient investors, who can remain focused on the long run, are likely to be highly rewarded by these three stocks.

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