A healthcare stock newly covered by Morningstar analysts may be of use to investors on the hunt for defensive earnings, without wanting to pay a premium.

Healthcare stocks have been on the rise in recent months as unsure investors seek out safety in a sector known for its defensive earnings.

Healthcare stocks, like stocks classified under Morningstar’s 'Consumer Defensive' and 'Utilities' sectors, are typically less sensitive to the machinations of the wider market.

That’s because earnings generated by these companies are largely considered non-discretionary, making them more insulated from economic conditions and generally more sought after when the market turns.

But as Morningstar noted in its most recent quarterly outlook, high-quality stocks with defensive earnings are screening as expensive, while those with less certain near-term outlooks are being hit hard by the market.

The average ASX healthcare stock covered by Morningstar is currently trading at around a 20% premium to its Morningstar fair value estimate (FVE).

Less than a year ago, shares in the sector were considered to be “fairly valued”, on average.

By comparison, the average stock across all of Morningstar’s coverage universe is trading at a slight 4.5% discount to their FVEs.

This trend is also reflected in Morningstar’s 'star ratings' across the healthcare sector. Morningstar ranks its equities with a 1- to 5-star rating, which considerd the fair value estimate of a share and an “uncertainty rating” to determine whether a stock is undervalued, overvalued, or fairly valued.

3-star stocks are considered fairly valued, 4- and 5-star stocks are considered undervalued and 1- and 2-star stocks are considered overvalued.

Morningstar currently does not classify any ASX healthcare stocks with 5 stars and only two were consider 4-star stocks—that is, until recently.

A 4-star ASX healthcare stock


Morningstar recently initiated coverage on Integral Diagnostics (IDX), a diagnostic imaging services provider which operates across Australia and New Zealand.

The company's earnings are largely sourced from the public health Medicare system via bulk billing and focus on common imaging services like MRI and PET scans.

Like many in the sector, shares in Integral, which first listed on the ASX in late 2015, peaked following the COVID-19 pandemic, but have since retreated.

According to Morningstar analyst Shane Ponraj, the company has recently faced wage inflation and labor shortage issues, which pulled its gross margin down to 32% in its most recent half-year report. That compares to around a 38% gross margin in the previous fiscal year.

Shares have tumbled following the earnings result, but Ponraj says the outlook for the company’s recovery appears positive.

“We suspect the market is likely underestimating the speed and extent of Integral's margin recovery,” he says.

“We expect labour challenges to gradually alleviate and a recovery in patient volumes from pandemic lows.”

Morningstar is forecasting margins to recover to 36% by fiscal 2025.

Taking a longer view, Ponraj adds that the company’s earnings are defensive, and its strategy is underpinned by population growth, ageing demographics, higher incidence of diseases and wider adoption of preventative diagnostics.

“Integral's balance sheet is in sound condition and has low financial risk given low revenue cyclicality and solid cash conversion.”

“In addition, diagnostic imaging services are shifting toward higher-margin imaging modalities. We view Integral's strategy favourably as it focuses on these higher value modalities and regional Australia.”

Shares in Integral Diagnostics last traded at an 10% discount to Morningstar’s fair value estimate of $3.60.