With an aging baby boomer generation and the growing demand for medical care, the healthcare and medical sectors are a great place to invest. The following five companies operating in this sector have all been experiencing positive growth due to key medical drivers such as the approval of new medical devices like stents, effective management working toward global strategy, and key acquisitions. In this article I will examine five healthcare and medical stocks to see if they present opportunities for investment. Here is what I found.
Owens & Minor (OMI, Financial)
The stock has been trading around $31. The company shares yield 2.90%. After a sudden drop in August 2011 the stock has been on an upward trend until now, it still has not reached the high quotes it had prior to August (between around $32 and $36). The financials of the company are strong with $8 billion in sales, close to 1.3% net income ratio to sales and $244 million in cash flow, twice as much as its net income. This shows that the company has a high amount of liquid assets. This high level of cash enabled the company to make major acquisitions to expand its market and its customer base. Examples of that are the acquisition of Access in 2005, Burrows Co in 2008 and a total of 5 acquisitions between 2005 and 2008. Owens & Minor reshuffled its management team in February 2012, giving the market re-assurance that it has the right management team in place to execute its global strategy. Good management and the stock upside potential are as many reasons to invest in this stock now. To me, OMI is worth buying.
Teleflex (TFX, Financial)
The current stock trades around $63. After a big peak between January and August (around $62 and $64), the stock went down to $50 and recovered to reach present levels. Shares yield at 2.20%. The very question for investors is whether the stock still has the potential to rise or not. Looking at the financials, revenue remained relatively stable and net income decreased to $201 million and cash flow increased to $206 million. In January of the same year the company acquired Vasanova for $ 55 million, which enables it to enter the catheter tip positioning business and expand its product portfolio. At the same time it sold its aerospace business to AAR corporation for $280 million. The firm’s major competitors are Covidien, Carefusion and CR Bard. With $ 1.9 billion it is smaller than those competitors, the biggest being Covidien close to $12 billion in revenue. Although Teleflex’s financial ratios ( gross margin at 43% versus 51% for the industry, operating income at around 14% versus more than 28% for CR Bard) are lower, I believe that through its acquisitions and the sale of some business units Teleflex is going to focus on expanding its market with high margin products, which will help improve those ratios. Some also say the company might be doing some clean-up to merge with Covidien in the future, which is a likely scenario. I strongly recommend buying the stock today because the addition of high margin innovative products is likely to increase the EPS. It is one of the highest in the industry (around $5) already. Teleflex's P/E is lower than the industry average (10 versus 16). This shows that there is a lot of room for the stock to rise much higher and generate significant returns. I recommend buying this stock given the firm’s market potential.
National Healthcare (NHC, Financial)
The stock currently trades around $47. It had dropped around $30 in August 2012 and then reached present levels, closer to where it was before August. Like some of its competitors the company faces regulatory challenges related to Medicare reimbursement. The shares yield 2.6%. With around $754 million NHC’s sales figure is lower than its competitors’: Amedisys, Kindred healthcare, and Life Care Centers of America. The financials are however stronger with 43% gross margin (second highest) and a high operating income ratio of around 10%. Cash flow is $62 million. There have also been talks of a merger between Amedisys and national healthcare but nothing has materialized yet. I believe the stock is solid and like many other healthcare companies the shares are on a favorable trend in spite of healthcare reform. If there are potential upsides with a merger, the stock is definitely worth watching and buying.
Medtronic (MDT, Financial)
The current stock price is around $40 and the stock price has been volatile and mostly following market conditions: the stock retrieved its June levels but has not entirely recovered yet since it had been above $42 in mid-May 2011. The shares yield 2.40%. The company’s financials are strong with $15 billion in sales, 80% gross margin and 20% net income. Cash flow reached $ 3.7 billion down 10% compared to 2010. Medtronic sales should increase further with the approval of a new stent in February 2011. The drop in the stock price in June 2011 was related to a senate investigation launched against the company regarding the non-disclosure of serious complications related to one of Medtronic’s spine surgery products. The company’s major competitors are Boston Scientific with much lower revenue of $7 billion as well as St Jude Medical with around $6 billion. Medtronic has the highest sales growth (around 6%) versus Boston Scientific, which has a negative growth of close to 8%. Medtronic still has the highest EPS at around $ 3 whereas its P/E (around 13) is lower than industry average (around 23). Therefore the shares still have room to rise above current levels. This combined with new product introductions and the company’s financial strength makes me recommend buying this stock.
Zimmer Holdings (ZMH, Financial)
The current stock is at around $62. The shares yield 1.2%. The stock was above $65 up until May 2011 and then kept declining until the end of 2011. Since then it has been on recovery mode to reach current levels. The company’s financials are very strong and 2012 is forecast to top analysts’ estimates. With a steady $4 billion in sales and 75% gross margin, although up 5.5% compared to 2010. The company has had significant product introductions as hip and knee devices and I expect them to pay off in 2012. The firm’s major competitors are Stryker, Biomed and Depuy. Stryker has higher sales ($8 billion) and similar profitability. While both companies have very similar P/E ( around 15) Zimmer’s EPS is around $ 4 compared to $ 1 for Stryker. I believe the company’s EPS will continue to grow and its P/E should catch up to equal the industry average (around 23). While Zimmer holdings is also under investigation by the senate for non-disclosure about its hip and knee it acquired Synvasive Tech in January 2012 and ExtraOrtho in November 2011. This makes me believe that the company will continue to expand its portfolio through acquisitions, thus increasing its EPS and P/E, giving high returns to an investor buying the stock today. I strongly recommend buying the stock.
Healthcare and medical device are very sensitive sectors and are very prone to risks related to government regulations. However those stock values, which adopted a global strategy, have good management and are innovative generally have stock with high returns, investors should do a good risk assessment before buying this type of stock.
Owens & Minor (OMI, Financial)
The stock has been trading around $31. The company shares yield 2.90%. After a sudden drop in August 2011 the stock has been on an upward trend until now, it still has not reached the high quotes it had prior to August (between around $32 and $36). The financials of the company are strong with $8 billion in sales, close to 1.3% net income ratio to sales and $244 million in cash flow, twice as much as its net income. This shows that the company has a high amount of liquid assets. This high level of cash enabled the company to make major acquisitions to expand its market and its customer base. Examples of that are the acquisition of Access in 2005, Burrows Co in 2008 and a total of 5 acquisitions between 2005 and 2008. Owens & Minor reshuffled its management team in February 2012, giving the market re-assurance that it has the right management team in place to execute its global strategy. Good management and the stock upside potential are as many reasons to invest in this stock now. To me, OMI is worth buying.
Teleflex (TFX, Financial)
The current stock trades around $63. After a big peak between January and August (around $62 and $64), the stock went down to $50 and recovered to reach present levels. Shares yield at 2.20%. The very question for investors is whether the stock still has the potential to rise or not. Looking at the financials, revenue remained relatively stable and net income decreased to $201 million and cash flow increased to $206 million. In January of the same year the company acquired Vasanova for $ 55 million, which enables it to enter the catheter tip positioning business and expand its product portfolio. At the same time it sold its aerospace business to AAR corporation for $280 million. The firm’s major competitors are Covidien, Carefusion and CR Bard. With $ 1.9 billion it is smaller than those competitors, the biggest being Covidien close to $12 billion in revenue. Although Teleflex’s financial ratios ( gross margin at 43% versus 51% for the industry, operating income at around 14% versus more than 28% for CR Bard) are lower, I believe that through its acquisitions and the sale of some business units Teleflex is going to focus on expanding its market with high margin products, which will help improve those ratios. Some also say the company might be doing some clean-up to merge with Covidien in the future, which is a likely scenario. I strongly recommend buying the stock today because the addition of high margin innovative products is likely to increase the EPS. It is one of the highest in the industry (around $5) already. Teleflex's P/E is lower than the industry average (10 versus 16). This shows that there is a lot of room for the stock to rise much higher and generate significant returns. I recommend buying this stock given the firm’s market potential.
National Healthcare (NHC, Financial)
The stock currently trades around $47. It had dropped around $30 in August 2012 and then reached present levels, closer to where it was before August. Like some of its competitors the company faces regulatory challenges related to Medicare reimbursement. The shares yield 2.6%. With around $754 million NHC’s sales figure is lower than its competitors’: Amedisys, Kindred healthcare, and Life Care Centers of America. The financials are however stronger with 43% gross margin (second highest) and a high operating income ratio of around 10%. Cash flow is $62 million. There have also been talks of a merger between Amedisys and national healthcare but nothing has materialized yet. I believe the stock is solid and like many other healthcare companies the shares are on a favorable trend in spite of healthcare reform. If there are potential upsides with a merger, the stock is definitely worth watching and buying.
Medtronic (MDT, Financial)
The current stock price is around $40 and the stock price has been volatile and mostly following market conditions: the stock retrieved its June levels but has not entirely recovered yet since it had been above $42 in mid-May 2011. The shares yield 2.40%. The company’s financials are strong with $15 billion in sales, 80% gross margin and 20% net income. Cash flow reached $ 3.7 billion down 10% compared to 2010. Medtronic sales should increase further with the approval of a new stent in February 2011. The drop in the stock price in June 2011 was related to a senate investigation launched against the company regarding the non-disclosure of serious complications related to one of Medtronic’s spine surgery products. The company’s major competitors are Boston Scientific with much lower revenue of $7 billion as well as St Jude Medical with around $6 billion. Medtronic has the highest sales growth (around 6%) versus Boston Scientific, which has a negative growth of close to 8%. Medtronic still has the highest EPS at around $ 3 whereas its P/E (around 13) is lower than industry average (around 23). Therefore the shares still have room to rise above current levels. This combined with new product introductions and the company’s financial strength makes me recommend buying this stock.
Zimmer Holdings (ZMH, Financial)
The current stock is at around $62. The shares yield 1.2%. The stock was above $65 up until May 2011 and then kept declining until the end of 2011. Since then it has been on recovery mode to reach current levels. The company’s financials are very strong and 2012 is forecast to top analysts’ estimates. With a steady $4 billion in sales and 75% gross margin, although up 5.5% compared to 2010. The company has had significant product introductions as hip and knee devices and I expect them to pay off in 2012. The firm’s major competitors are Stryker, Biomed and Depuy. Stryker has higher sales ($8 billion) and similar profitability. While both companies have very similar P/E ( around 15) Zimmer’s EPS is around $ 4 compared to $ 1 for Stryker. I believe the company’s EPS will continue to grow and its P/E should catch up to equal the industry average (around 23). While Zimmer holdings is also under investigation by the senate for non-disclosure about its hip and knee it acquired Synvasive Tech in January 2012 and ExtraOrtho in November 2011. This makes me believe that the company will continue to expand its portfolio through acquisitions, thus increasing its EPS and P/E, giving high returns to an investor buying the stock today. I strongly recommend buying the stock.
Healthcare and medical device are very sensitive sectors and are very prone to risks related to government regulations. However those stock values, which adopted a global strategy, have good management and are innovative generally have stock with high returns, investors should do a good risk assessment before buying this type of stock.
