Owens & Minor, Inc. (NYSE:OMI) is a global healthcare leader with a diversified business across medical consumables manufacturing and distribution along with related services. The company was a big winner during the pandemic as a key supplier of personal protection equipment (PPE) with everything from surgical kits, face masks, and exam gloves while also seeing strong demand for its industry-leading inventory software management solutions. Indeed, shares of OMI have returned a massive 800% from pre-pandemic levels supported by strong earnings and a positive long-term outlook. We like the stock with an expectation that the operating momentum can be continued as the company consolidates its market position with new growth opportunities. The recent emergence of Omicron likely adds upside to near-term results allowing the company to outperform expectations for the year ahead.
OMI Financials Recap
OMI last reported its Q3 earnings in early November with adjusted EPS of $0.74 which beat expectations by $0.15. Revenue in the quarter at $2.5 billion climbed 14% year over year which was also ahead of estimates. Despite a tough comparison period against 2020 which saw a boost of demand for core products, the company was able to both maintain operating momentum with resilient profitability. This quarter saw some margin pressure from a combination of sales mix and timing along with some noted supply-chain inflationary cost pressures. Still, the more impressive trend here is the year-to-date results considering EPS of $3.29 through nine months in 2021, up over 3x from $1.05 in the period last year.
(Source: Company IR, highlights from author)
Overall volumes are up 8% compared to Q3 2020 while total revenues have also benefited from some higher average pricing. Within that figure, management noted some market share gains particularly in the "Global Solutions" segment which is the services arm of the business where sales were up 9%. For reference, global solutions represent about 80% of the total business although this has narrowed from 86% in 2020 considering the strength in the "Global Products" segment that includes PPE and other types of consumables through brands like "Halyard", "MediChoice", and "Medical Action".
The way to think about this business split between solutions and products segments is that OMI offers the distribution of products from other manufacturers within solutions while also capturing momentum from its own proprietary portfolio in "products". The "Byram Healthcare" group, for example, focuses on the delivery of disposable medical supplies directly to patients and home health agencies which often include OMI's products. Into technology, the "QSight" software is a leading hospital inventory management and operational analytics tool that has also gained penetration in the market.
(Source: Company IR)
In terms of the balance sheet, OMI ended the quarter with $40 million in cash and equivalents against $960 million in long-term debt. A financial current ratio near 2x highlights solid liquidity. Considering adjusted EBITDA in the range near $500 million expected this year, net debt to adjusted EBITDA leverage ratio around 1.7x is stable in our opinion. The company has made an effort to reduce its debt following a series of acquisitions over the last several years supported by the recurring free cash flow. On this point, management continues to see room for strategic M&A to support growth opportunities within a long-term leverage target between 2x and 3x.
(Source: Company IR)
OMI Management Guidance
Management expects the underlying growth momentum to continue, supported by a view that there is a "new normal" for long-term PPE demand which directly supports the company as a leading manufacturer including through facilities in the U.S. For the full-year 2021, the current guidance is for adjusted EPS in a range between $3.90 and $4.10. If confirmed, the result at the midpoint represents an increase of 77% over 2020.
For 2022, the guidance from the last quarter was based on an expectation for adjusted EPS to pull back to a range between $3.00 to $3.50. This considers that the exceptional pandemic momentum from 2020 and 2021 is (or was) expected to normalize based on a view that the elevated demand would slow down. Notably, these estimates were made before the emergence of the Omicron variant in December which we now believe can add upside to these estimates.
Longer-term, the company has issued targets for 2026 with an expectation of revenue climbing an average of 6% per year, while expanding margins drive earnings higher to reach EPS of $6.00 in the next five years.
(Source: Company IR)
OMI Stock Forecast
OMI has rallied since the Q3 earnings release. The stock initially spiked on the report by over 10%, before consolidating gains in the past two months. The setup here looks interesting because shares are still below a previous high near $50.00 back in June which we believe is within reach over the near term. We make the case that with the latest Omicron variant, the outlook for OMI into 2022 is stronger than ever. Anecdotally, hospitals that may have stocked up on PPE into Q3 during the last "Delta variant" wave may need to be making new orders which can drive some incremental sales beyond the baseline.
To be clear, OMI is more than just PPE and what we like about the business is the apparent revenue flywheel where the different segments and underlying groups sort of build on each other. New customer relationships forged since the start of the pandemic can be expanded to include different products and services. From a high level, looking beyond the pandemic, themes like an aging population and increasing demand for more complex healthcare services support a higher level of organic growth.
One of the dynamics from 2020 is that the pandemic that year resulted in disruptions to other hospital services like elective surgeries that ended up resulting in disruptions to demand for non-PPE-related consumables. We sense that at this stage, even with a new climb in hospitalization related to the Omicron variant, other types of medical services should continue normally considering people are more aware of the health risks related to possible infections while the various types of Covid therapeutics. In other words, the outlook for OMI through 2022 is particularly strong in a scenario where Covid lingers for longer while the rest of the business maintains momentum.
As it relates to valuation, the consensus EPS for 2022 at $3.31 is in line with the management guidance for earnings this year and implies a forward P/E of 13.9x. We believe this level is attractive considering the company's leadership position and growth outlook. The effort at balance sheet deleveraging also supports a higher valuation.
The one comparable to OMI we bring up is Cardinal Health, Inc. (CAH) which trades at a lower forward P/E of 9.5x. That said, a key distinction is that while Cardinal Health is a larger player in medical supplies distribution, OMI benefits from its higher proportion of services that supports higher margins. Indeed, OMI's gross margin in the last quarter at 13% is well above CAH which historically has only generated a gross margin of around 4%. We also note that OMI has a stronger growth outlook over the next several years. Putting it together, OMI is our pick between the two and warrants a premium.
Is OMI a Buy, Sell, or Hold?
We rate shares of OMI as a buy with a price target for the year ahead at $60.00 implying a 17x multiple on the current top end of the current 2022 EPS guidance. Our thinking is that with a strong enough operating momentum into the current quarter, we see room for management to revise higher the year ahead EPS target during the next earnings release. This would represent a catalyst for the stock through the effect of narrowing the forward earnings ratio making OMI appear even more attractive. Longer-term, strength in the patient direct and services businesses can support higher margins, justifying a higher valuation.
On the downside, we see the risk that shares remain volatile and sensitive to Covid headlines. Even if it does not directly impact near-term sales, the potential that the global Pandemic fades away more quickly than expected could pressure the stock through weaker sentiment. In the upcoming quarter, weaker than expected results would likely force a reassessment of the long-term earnings outlook. Monitoring points include the gross margin as well as free cash flow levels.
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