In this article, let's take a look at Hospira Inc. (HSP, Financial), a $10.7 billion market cap company, which provides a variety of hospital products, including injectable generic drugs, pumps and syringes.
Market Share
The company was created on May 2004, as a spinoff from Abbott Laboratories (ABT, Financial). It provides medication delivery systems and specialty pharmaceuticals to hospitals, clinics, and physicians.
The industry faces several challenges from new regulations and patent expirations. But, barriers to entry help Hospira to maintain its market share. In an industry where the big players are Abbott Laboratories, Bristol-Myers Squibb (BMY, Financial), Eli Lilly (LLY, Financial) and Pfizer (PFE), we believe the company will continue with a good portion of the market.Â
International Operations
The company has operations in the Americas (79% of 2013 revenues); Europe, the Middle East, and Africa (13%); and Asia-Pacific (8.0%). We are convinced that the firm's international expansion would provide additional growth during the upcoming future, specifically in regions like Europe.
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 14.12% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.92 vs $0.01). The net income growth from the same quarter one year ago and exceeded that of the Pharmaceuticals industry. The net income increased tremendously, a 8247.4% when compared to the same quarter one year before, from $1.90 million to $158.60 million. Further, the net operating cash flow has significantly increased by 1357% to $158.80 million.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| HSP | Hospira Inc. | 10.63 |
| ZTS | Zoetis Inc. | 51.24 |
| MYL | Mylan Inc | 28.67 |
| Â | Industry Median | 6.84 |
The company has a current ROE of 10.63% which is higher than the one exhibit by the industry median.
In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Mylan (MYL, Financial) and Zoetis (ZTS, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 32.6x, trading at a discount compared to an average of 48.9x for the industry. To use another metric, its price-to-book ratio of 3.3x indicates a discount versus the industry average of 3.54x while the price-to-sales ratio of 2.4x is below the industry average of 4.01x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $12.698, which represents a 4.9% compound annual growth rate (CAGR).
The stock price has increased by 51.36% over the past year, outperforming the S&P 500 Index.
Final Comment
As outlined in the article, we believe the company will achieve a predictable growth and a good level of profitability in the next years. Further, the PE relative valuation and the return on equity that exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio), added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
