CSL, ResMed and Healius are our preferred healthcare picks: Macquarie

Macquarie reviews the ASX 200 Health Care sector following its underperformance of the broader market over the last three months.

The cause of underperformance

The Healthcare sector has failed to live up to its defensive nature, down -7.8% in the last three months compared to the ASX 200's -1.8% decline.

ASX 200 vs. ASX 200 Healthcare Index (Orange)

Macquarie notes three key observations for the recent underperformance of Healthcare stocks:

• EPS revisions: Negative EPS revisions have been recorded for most stocks. This has accounted for the majority of share price performance for Regis, Healius, Ramsay Health Care and Integral Diagnostics

• Multiple change: Multiples have generally compressed. This has been the key driver of share price performance for ResMed, CSL and Cochlear

• FX movements: For stocks reporting in USD, a weaker AUD/USD provided an incremental benefit. Notably, this has been the key driver of outperformance for Ansell and a partial offset to multiple compression for ResMed and CSL

Most preferred picks

CSL (ASX: CSL) was a top pick for its favourable growth outlook, "supported by a base business recovery, earnings from Vifor and potential contributions from pipeline products." An outperform rating was maintained with a $329.50 target price.

ResMed's (ASX: RMD) medium-to-longer term outlook remains positive, "underpinned by an expectation for robust device growth". Macquarie notes ongoing negotiations between rivals Philips and the US Justice Department about its recall of millions of sleep apnea and ventilator machines as a potential tailwind for ResMed. An outperform rating was maintained with a $37.75 target price.

Healius' (ASX: HLS) valuation was viewed as appealing at current levels. Macquarie expects the company as "positively leveraged to a recovery in business-as-usual volumes" in pathology and imaging. As well as the realisation of benefits as part of its Sustainable Improvement Program (SIP), first introduced in late FY19. An outperform rating was maintained with a $4.80 target price.