This Healthcare Product Provider Looks a Potential Buy

Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

McKesson Corporation (NYSE: MCK), and Henry Schein, Inc. (NASDAQ: HSIC) are two purely growth stocks that will promise you a reasonable return in the near future. MCK is a 120b pharmaceutical, medical, and healthcare information supplier. HSIC is a $9b dental, medical, educational, and e-service provider.

Both the stocks have delivered in excess of 12% annualized, compared to a 4% overall market performance over the past 10years with the exception of 2008-09, when the stock market reported a decline. Both the stocks have returned in excess of 19% annualized compared to the overall market of 10% since January 2011.

Financial and competitive environment

Both the companies have a track record of consistent ROE performance, and sustained a decent growth rate over the past 10years. MCK has a lower return on assets since, its Debt/EV is 16.6% compared to 6.4% for HSIC. It is due to an increase in Assets/Equity ratio from 3.1x to 4.5x, that MCK has seen an upliftment in its ROE. On the other hand, HSIC has been maintained between 1.8x and 2.0x over a considerable period of time. By this increased leverage, MCK has been able to offset its declining Revenue/Assets ratio. MCK's net margin is only 1% compared to HSIC that enjoys a net margin of 4-5%. EBITDA/Interest Expense for MCK is 11x and for HSIC 25x. This shows that debt ratios of both the companies are in the safe abode. But I want to draw the attention of the investors towards the fact that MCK, due to its laser- thin margins, and higher leverage is obviously exposed to increased risk than HSIC.

The average revenue revenue growth rate of MCK between 2000 and 2004 was 17.4% compared to 14.3% of HSIC. But HSIC reported a revenue growth rate of 8.7% compared to MCK’s sluggish 4.8% between 2008 an 2012. HSIC has a more diversified empire with animal health increasingly becoming an area to boast of double digit growth rates. Analysts are expecting a 5.4% revenue growth for HSIC compared to 3.6% for MCK.

The current margin snapshot of Henry Schein, and its competitor McKesson shows that, MCK recorded a TTM gross margin of 5.3% as against HSIC’s 28.6%. With recent TTM operating margins exceeding historical averages, Henry Schein looks like it's doing fine as compared to McKesson. HSIC is on an acquisition spree and is focusing on expansion through acquisitions both in animal health and dental market, based on its solid cash balance ($89.3 million at the end of third quarter 2012). The Company’s sales reached a record $8.9 billion in 2012, and have grown at a compound annual rate of 17 percent since, Henry Schein became a public company in 1995. With so much attention focused on healthcare stocks lately, it's worth taking a deeper look at one of the stock picks on the list: Henry Schein.

As the leader in the field, Henry Schein's database will ultimately be integrated to any national effort to study emerging trends, and patterns of disease and their treatments. And it looks only to get bigger.

HSIC has grown at a tremendous rate, both organically, and via a ravenous acquisition program that has integrated over 50 companies in just eight years. The company's growth strategy going forward is to maintain its current rate of acquisitions, expand its already potent sales force to further penetrate the private practice market globally and to expand its customer loyalty program to cross sell additional products and services.

To end up with

I am more bullish about growth prospects for HSIC than for MCK. Investors can buy both the stocks, and hold for the long term but, I prefer HSIC slightly over MCK given its more bullish growth outlook. In future, the chances of an improvement in P/E ratios are unlikely compared to what MCK has been enjoying over the last decade as against HSIC. Investors can expect greater returns by buying shares of HSIC. It can turn out to be a safe investment. The shares of MCK offer an opportunity to participate in the company's profitable growth.

 Henry Schein’s strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, an increase in net income, largely solid financial position with reasonable debt levels by most measures, and good cash flow from operations. From what we have discussed so far, it seems that HSIC have made a strong commitment to returning cash to shareholders. Investors should look at a company's dividend payout ratio to make sure the dividend is sustainable. If a diversified portfolio can be built with a few of these high-yielders, healthy returns and plenty of cash are likely to follow.

Abir Karmakar has no position in any stocks mentioned. The Motley Fool recommends McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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