Historically, the pharmacy services industry has been viewed as a safe investment opportunity, from a steady-growth and risk-aversion point of view. However, the situation has changed in recent years due to the aging of the American population and changing industry dynamics. Demographics indicate an increasing number of Americans aged 65 and older over the next two decades. This increase in Baby Boomers will require additional medical care and pharmaceuticals, resulting in promising strength for the industry's sales and earnings prospects. The largest pharmacy services providers are best positioned to harvest the coming rewards. Due to the aging population, the opportunities for growth also increase as well as opportunities for expansion. Furthermore, as the growth opportunities are increasing, so is the competition, which comes from every direction.
It is important to note that the pharmacy business is less sensitive to economic cycles, and a sales slowdown could indicate a serious problem. The prescription growth rate is another notable figure in measuring the health of a company, which is gaining status.
As mentioned earlier, revenues of drug wholesalers are associated not to overall economic cycles but to growth in prescription drug spending. Wholesalers will benefit from projected growth in this spending, which has recently been revised upward due to U.S. healthcare reform. According to the report "CMS' Bright Future for Drug Spending in 2020" released by the Centers for Medicare and Medicaid Services (CMS), annual prescription drug expenditures will increase two-fold in the next 10 years to $512.6 billion by 2020. Drug spending will grow at a CAGR of 7.1 percent from 2010 to 2020. Healthcare reform will add an additional $35.2 billion in annual drug spending by 2020.
The report also mentioned that the revenues in the pharmaceutical industry will shift from traditional branded drugs to specialty drugs over the next several years. As a result, specialty distributors will benefit from the growth in specialty products. Full-line wholesalers, like Omnicare Inc. (NYSE:OCR), will benefit most from specialty drugs managed by healthcare providers in hospitals, clinics and physician offices.
About Omnicare Inc.
Omnicare, a Fortune 500 company, provides comprehensive pharmaceutical services to patients and providers across North America. It is the market leader in professional pharmacy, related consulting and data management services for skilled nursing, assisted living and other chronic care institutions. The company also provides key commercialization services for the bio-pharmaceutical industry and end-of-life disease management through its Specialty Care Group.
Omnicare is a medium cap company with market capitalization of $4.8 billion. On the other hand, its competitors, including CVS Caremark (NYSE:CVS), Cardinal Health Inc. (NYSE:CAH) and McKesson, Inc. (MCK), are the largest market players with a large market cap. In this section I will evaluate the company performance with respect to given competitors.
This chart shows the historic stock price performance with respect to Omnicare's competitors. The price appreciation of around 52 percent over the period of one year indicates investors' confidence in the company's performance and financial strength. Despite its small size, compared to its competitors, the company's stock outperformed its peers with a good margin. But in order to understand the increasing impact, a fundamental analysis will give a clearer picture.
The above table shows the valuation metrics of Omnicare compared to its competitors and the industry. You can see that P/B, P/S and P/cash flow indicate that the company is undervalued on the basis of these measures. On the other hand, a higher P/E ratio indicates a totally different position.
The above chart shows the company's dividend and its share buyback history over the period of four years. This table clearly shows that the company pleased its investors by returning cash in the form of dividends over the years. Higher payouts also support the fact that the company paid out most of its earnings to its shareholders in the form of dividends. And the share buyback reflects the company's management and the board's confidence in the company's financial strength, long-term growth prospects and commitment to increase shareholder value.
After analyzing the company's current situation, it is attracting investors by giving them higher dividends. And this is the reason its stock price has been moving up throughout the year. In other words, currently this stock is an attractive to value investors looking for a dividend stock, not for growth investors. A most important point to be noted here is that the company is mostly paying dividends and buying back shares using debt, which is also alarming for growth investors. There no doubt that the industry has a lot of growth potential in coming years as more and more of the population ages, resulting in an increased demand for medical care and pharmaceuticals. Furthermore, President Barack Obama's Patient Protection and Affordable Care Act passed in 2010, which is also a sign of industry growth in the long run. So, I conclude that for the short run this stock is feasible for value investors and for the long run it is feasible for growth investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.