Morgan Stanley: Challenging healthcare outlook results in 2 surprise rating changes

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If one thing was evident in the August reporting season, it was that there is margin pressure and earnings are increasingly challenged. This was even true of the healthcare sector, traditionally a defensive sector in tougher climes.Leading into August, a range of companies released downgraded earnings expectations setting the tone for a muted reporting season. It was the first time that CSL ASX:CSL had downgraded its expectations – and then its annual reporting was in line with this. Ramsay Health Care ASX:RHC disappointed with its results, while Resmed ASX:RMD actually reported an 18% rise in full-year revenues but still found analysts, including Morgan Stanley, reducing their price targets.Like companies in other sectors, a tight labour market and rising interest rates meaning a higher cost of debt, will see healthcare companies tighten their belts and continue to adjust expectations in FY24.The four key issues that Morgan Stanley seesMorgan Stanley cited one stock-specific concern along with three broader issues.Immonoglobulin yields were larger but longer than Morgan Stanley had thought. This is a concern for CSL going forward, though Morgan Stanley retain an Overweight rating on it.Private health surgeries and claims have moved higher, though they are still below pre-pandemic levels.Labour costs are likely to remain elevated for healthcare services.Debt costs have become much higher as a result of the rapid increase in the cash rate over the last year.Of the back of this, Morgan Stanley revised price targets downwards for Resmed, Fisher & Paykel Healthcare ASX:FPH, and Sonic Healthcare ASX:SHL with cost pressures from labour and debt a common thread.Two surprise rating changesReaders may be interested to find out that the company to disappoint was the company to be upgraded, while the company to offer better than expected annual results was a downgrade.MarcusToday’s Henry Jennings recently described Cochlear’s ASX:COH results as one of the few in the sector to do better than expected.“That one seems like a shining light, but I think the healthcare sector generally is not quite as defensive as some investors though and, as a result, I think we’re seeing a lot of people shunning the sector at the moment,” said Jennings.Morgan Stanley downgraded its ratings for Cochlear to underweight from equal weight, though retained its price targets. The rationale f...

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