“I don’t get no respect, no respect at all. I go into a store to buy rat poison and the clerk says, ‘Should I wrap it, or do you want to eat it here?’” - Rodney Dangerfield.
Investors in healthcare company Owens & Minor (NYSE:OMI), a medical and surgical supplies distributor, might have some idea what Rodney’s talking about.
In their earnings release a couple of weeks ago, midcap OMI reported quarterly revenue grew about 14%, while net income soared over 37%. Gross margins improved, cash flow was healthy and the company reiterated its outlook for strong revenue and earnings growth.
The stock? Down 15% that day, and still languishing double-digits below where it traded before the earnings report.
What went wrong? First, of course, see-all analysts had estimated OMI earnings would increase more than a measly 37%.
Second, while some of OMI’s margin improvement resulted from their revenue jump, some (gasp!) resulted from a large OMI supplier significantly reducing its prices, allowing OMI to (oh, no!) cut its inventory cost.
Finally, OMI confessed that some of its new customers were not as profitable as established ones, and the company would “work with these new customers to improve operating margins.”
Here’s the punch line: this strong OMI quarterly growth was not a one-time laugher from a usually dull slow-grower. EPS grew 36% in 2008. Reuters puts 3-year and 5-year average revenue growth above 14% and 11%, respectively, and EPS growth at 15% and 11%, though these averages smooth-out big year-to-year variations.
A stand-up Dividend Achiever, OMI began raising its dividend in 1998, so has now racked up 12 years of dividend growth, including this year’s 15% boost.
OMI declared this latest dividend increase in the dark days of February 2009 and paid it in March, saying, “This 15% increase reflects our belief in our company, our ability to achieve our goals, and the value we bring to the healthcare market.”
Overall, OMI dividends have grown about in line with earnings, averaging 15% and 18% over the past 3-year and 5-year periods, also according to Reuters. Payout ratio: 33%.
But who could know any of this?
For example, you’ll find only 11 Seeking Alpha contributors’ articles that reference OMI over the past 18 months.
Contrast this with healthcare Dividend Aristocrat Becton Dickinson (NYSE:BDX) and Dividend Achiever Cardinal Health (NYSE:CAH): Seeking Alpha has about 90 articles referencing BDX and over 60 referencing CAH.
Yet at 2.2%, hard-to-find OMI yields a bit more than the elder BDX, and its record of annual dividend increases is as consistent as CAH, which yields 2.4%.
Even when I was a kid I got no respect. When I played in the sandbox, the cat kept covering me up.
Of course, when sales and earnings move up and the stock price moves down, you can at least smile at the valuations. Morningstar puts the OMI trailing 12-month P/E ratio under 16, the Price to Sales at 0.2, and shows Price to Cash Flow improving, though not quite in the same cheap seats. Return on equity is 13% and debt to equity is a manageable 30%, also according to Morningstar.
Prior to its recent earnings release, OMI was performing in line with the S&P 500 and beating the S&P Healthcare Sector ETF (NYSEARCA:XLV) over the trailing 1-year period, but the stock’s single day 15% drop ruined that.
OMI trounced those two benchmarks, and also beat the S&P MidCap ETF (NYSEARCA:MDY), BDX and CAH over the trailing 2-year and 5-year periods.
Like most investments, OMI isn’t for everyone. Despite a low beta (.39) it has some very volatile sessions, its earnings growth can be unnervingly erratic from year to year, and investors seeking to maximize current income won’t humor it for a 2.2% yield.
But the company has shown it can grow its business and dividend, and reward its shareholders, through good times and bad. Watch for another double-digit dividend increase announcement in February.
And if OMI can keep all that up, who knows, maybe someday it will even get some respect.
Interested investors might check out this month’s live and archived webcasts of OMI investor presentations, and the upcoming December webcast of the company’s 2010 financial outlook.
Finally, for a couple of those BDX and CAH articles that helped bury OMI in the sandbox with kid Rodney, you might check out my own contributions to the problem, “With a Name Like Becton Dickinson...” and “Cardinal Health Dividend Has A New Spin.”
OK, take us out of here, Rodney:
’I tell ya, I don’t get no respect from nobody. I went to see my doctor. ‘Doctor, every morning when I get up and look in the mirror... I feel like throwing up. What's wrong with me?’ He said, ‘I don't know but your eyesight is perfect.’ Yeah, I don’t get no respect at all.
References and Links
Press Release, “Owens & Minor Posts Revenue Gains, Strong Operating Earnings, & Positive Cash Flow for 3rd Quarter 2009,” October 26, 2009.
Morningstar Stock Analyst Notes, “O&M 3Q Benefits from Change to Inventory Valuation,” October 27, 2009.
Morningstar, “Owens and Minor 10-Year Valuation,” 2009.
Press Release, “Owens & Minor to Participate in Three Upcoming Investor Events,” November 6, 2009.
Seeking Alpha, “With a Name Like Becton Dickinson...” September 17, 2009.
Seeking Alpha, “Cardinal Health Dividend Has A New Spin,” August 31, 2009.