With an aging 'baby boomer' generation and the growing demand for medical care, the healthcare and medical device sectors are a great place to invest. The following five companies operating in this sector have all been experiencing positive growth due to key drivers such as the approval of new medical devices like stents.
In this article, I will examine five healthcare and medical companies for investment opportunities. Here is what I found:
Owens & Minor (NYSE:OMI) offers a dividend yield of 2.9%. 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 enabled the company to make major acquisitions to expand its market and its customer base. The acquisition of Access in 2005 and Burrows in 2008 are included in a total of five 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. Effective management and a strong upside potential are just a few of the many reasons to invest in this stock. I recommend buying Owens & Minor today.
After a big peak between January and August (around $62 and $64), Teleflex (NYSE:TFX) went down to $50, and has since recovered to reach present levels. Shares currently yield a 2.2% dividend. 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, while cash flow increased to $206 million. In January of the same year the company acquired Vasanova for $55 million, which enabled 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 (COV), Carefusion (NYSE:CFN) and CR Bard (NYSE:BCR). With revenues of $1.53 billion, it is smaller than those competitors, the biggest being Covidien with close to $12 billion in revenue. Although Teleflex's financial ratios (gross margin at 43% versus 51% for the industry, operating income at 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 (NYSEMKT:NHC) had dropped around $30 in August 2012 before climbing back up to present levels, closer to where it was before August. Like many of its competitors, the company faces regulatory challenges related to Medicare reimbursement. The shares have a dividend yield of 2.6%. With around $754 million, National Healthcare's sales figure is lower than its competitors: Amedisys (NASDAQ:AMED), Kindred Healthcare (NYSE:KND), and Life Care Centers of America. However, the financials are stronger with 43% gross margin (second highest) and a high operating income ratio of around 10%. Cash flow stands at $62 million. There have also been talks of a merger between Amedisys and National Healthcare, but nothing has materialized yet. I believe this company is solid, and like many other healthcare companies, the shares are on a favorable trend in spite of healthcare reform. I recommend buying shares of National Healthcare now.
Shares of Medtronic (NYSE:MDT) have been volatile and have closely followed market conditions: The stock has not entirely recovered yet since climbing above $42 in mid-May 2011. The shares have a dividend yield of 2.4%. The company's financials are strong with $15 billion in sales, 80% gross margin, and 20% net income. Cash flow reached $3.7 billion in 2011, down 10% compared to 2010. Medtronic sales should increase further with the approval of a new stent back 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 include Boston Scientific (NYSE:BSX), with a much lower revenue of $7 billion, along with St. Jude Medical (NYSE:STJ) with $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 the industry average (around 23). Therefore, shares of Medtronic still have room to rise above current levels. I recommend buying shares of Medtronic, due to the combination of new product introductions and financial strength.
Zimmer Holdings (ZMH) currently produces a dividend yield of 1.2%. The stock climbed above $65 until May 2011, then declined until the end of 2011. Since then, shares have been trying to recover.
The company's financials are very strong and 2012 is expected to top analysts' estimates. With a steady $4 billion in sales and 75% gross margin, these numbers were up 5.5% compared to 2010. The company had significant product introductions- hip and knee devices -and I expect them to pay off in 2012. The firm's major competitors are Stryker (NYSE:SYK), Biomed and Depuy. Stryker boasts 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 devices, it acquired two companies within a very short timeframe.
I believe the company will continue to expand its portfolio through acquisitions, thus increasing its EPS and P/E, giving higher returns to investors. I strongly recommend buying the stock.
The healthcare and medical device sector is very sensitive and prone to risks related to government regulations. However, those companies which adopt a global strategy, have good management, and show strong innovation will generally have higher returns. Investors should always assess the risks before buying stocks in these sectors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.