2022 has been a year for the bears with the S&P 500 down more than 20% YTD. However, there is one interesting change under the surface.
After more than a year of rates rising, we are starting to finally see some weakness in longer-term rates as the market’s expectations for inflation ease, while the risk of recession is rising. In fact, some analysts believe the Fed may be forced to start cutting rates as soon as Q1 of 2023.
The dynamic of rising recession risk and moderating inflation means that investors should avoid cyclical stocks. Instead, this is the environment when quality growth stocks outperform. Among this group, healthcare and pharmaceutical stocks look particularly attractive as these companies’ earnings and operations are well-insulated from economic or monetary shocks.
In this sector, investors should look at companies with attractive valuations and improvements in operations that investors may have overlooked during the first half of the year. In today’s article, I want to talk about InfuSystem Holdings (INFU) which has these exact characteristics.
Company Background
INFU is a provider of infusion pumps, and services to hospitals, doctors, and healthcare providers. Some of its services include Integrated Therapy Services and Durable Medical Services.
Recently, the company signed a major contract with GE Healthcare for infusion pumps, becoming its most favored vendor. The deal is expected to contribute between $10 million and $12 million in 2023. Following the deal’s signing, analysts increased 2023 EPS forecast to $0.38 from $0.29 previously.
Value
INFU is a turnaround play, so the normal method of looking at valuations doesn’t apply. From its high last year, the stock price declined by more than 50% before modestly bouncing.
The company also has a $20 million buyback program with about $15 million. This is pretty meaningful given the company’s total market cap of $183 million.
However, the biggest determinant will be whether earnings will bounce back and exceed 2020 level. Currently, analysts are forecasting $0.44 in EPS for the next 12 months, giving it a forward P/E of 21.7.
Catalysts
As mentioned in the intro, one catalyst for INFU is the change in market conditions which should lead to more inflows for the healthcare sector.
For INFU, the GE Healthcare deal is an obvious needle-mover, and it should have an opportunity to add product sales beyond just infusion pumps. Another potential tailwind for the company is increased earnings from its pain management division.
One reason for its poor performance in 2021 was the company spent heavily to bolster its sales team. In the coming quarter, we will find out whether this was a good investment. However, management seems confident as they see Pain & Wound Care contributing $20 million in revenue in 2023.
POWR Ratings
The POWR Ratings are also bullish on INFU as it is rated a B which translates to a Buy. B-rated stocks have an average annual performance of 19.7% which compares favorably to the S&P 500’s annual performance of 7.3%.
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INFU shares were unchanged in after-hours trading Friday. Year-to-date, INFU has declined -43.22%, versus a -19.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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