Resmed, Sonic Healthcare and Cochlear: Buy, sell or hold?

These three big healthcare stocks are a mixed bag.

a woman

Healthcare sector stocks have received plenty of publicity in the past 12 months, but which have the best outlook? The following are three healthcare stocks that I rate as buy, hold and sell.

Buy: Resmed
Dividend yield: 1.5%

Resmed (ASX: RMD) shares have strongly outperformed rivals Cochlear (ASX: COH) and Sonic Healthcare (ASX: SHL) over the past 12 months, as it has successfully continued its relentless pursuit of revenue growth. The company, which manufactures sleep apnea devices, in August recorded its 74th consecutive quarter of revenue growth — an 11% rise despite challenging market conditions.

Margins expanded nicely and with around 95% of revenue coming from outside Australia, it stands to be a major beneficiary of a weaker Australian dollar. Particularly pleasing was the growth in Europe, which had been struggling. There’s no reason to think that Resmed will stop delivering record revenue and long term investors should consider buying at any dip in the share price.

Hold: Sonic Healthcare
Dividend yield: 4.0%

Pathology and medical diagnostics market leader Sonic Healthcare has performed admirably in the past 12 months, rising over 18% as profit grew moderately in difficult conditions. Sonic has invested heavily in the US and Europe in recent years to grow volume and is now starting to reap the benefits, as margins are improving with scale. This is expected to continue in the coming years with far less investment required by the company, although revenue growth will probably be more organic than acquisition based.

There don’t appear to be many unknown catalysts to push the share price rapidly higher in the short term so investors may be best waiting until the first half earnings are released in December before deciding to buy or sell.

Sell: Cochlear
Dividend yield: 4.1%

Hearing aid manufacturer Cochlear has had a tough 12 months following a poor full year result and greater competition in its key markets. Cochlear’s share price dropped around 20% over two weeks in May and June when it announced weakness in its key US market and slowing sales pending the release of the company’s newest hearing aid product, the Nucleus 6.

Cochlear has struggled since the recall of its Nucleus 5 in September 2011, and recently lost a lucrative Chinese contract to competitor Sonova. The 1,500-unit contract means that the company can only sell a maximum of 1,200 units to China this financial year, compared to 2,800 last year. Based on a sale price of $30,000 this may amount to over $40 million, or 5% of revenue.

I recently sold my COH shares as I no longer believe the company holds a sustainable competitive advantage in the industry, as cheaper alternatives have become available and competitor offerings have become more appealing.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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