8 Healthcare Stocks For Your 2012 Watchlist (Part 1)
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
January is commonly marked by an uptick in U.S. equity markets as investors look to re-deploy capital that may sought the safety of the sidelines during the course of the previous year. During the course of the most recent presidential elections, the healthcare sector has gotten particular attention, especially early in the year. The eight stocks discussed below are one to watch as 2012 takes shape and into the future. While the names included cover a wide range of details, each is worth keeping on one’s watch list moving into 2012.
Owens and Minor, Inc. (NYSE: OMI) – With an impressive dividend yield of 2.9%, OMI resides in the critical, but frequently overlooked, medical logistics field. Of equal interest is the fact that the company has increased its payout ratio by roughly 14% in each of the previous five years. This bodes well for investors looking for a solid income play. As to the company’s business line, most investors overlook distribution and logistics when scanning the market for investments. This is a critical piece of the proverbial puzzle and can make for a solid addition to one’s portfolio. The two companies that provide the best comparisons are Cardinal Health (CAH) and McKesson Corp. (MCK), both in the medical wholesale business. While not perfect comps, they give some contextual reference by which to judge OMI. On a valuation basis, OMI trades at a price-to-earnings multiple of 15.7, relative to 16.1 for CAH and 17.1 for MCK. This metric measures how much an investor much pay for each dollar of earnings; the lower the reading, the more favorable. On an operating basis, OMI has an operating margin of 2.4%, relative to 1.6% for CAH and 1.9% for MCK. Within the context of this comparison, OMI has strong financial metrics. When coupled with the income element and the critical nature of the business, the stock is quite attractive.
Teleflex, Inc. (NYSE: TFX) – In the medical device segment, TFX offers a dividend yield of 2.2%. the company specializes in single-use products, making repeat business a built in part of the sales cycle, a definite strength of the company. At current levels the company appears to be a good value relative to competitors CareFusion Corp. (CFN), Covidien (COV) and CR Bard, Inc. (BCR). TFX is currently trading at a price-to-earnings ratio of 10.38, relative to 19 for CFN, 12.1 for COV and 22 for BCR. When the growth element is included, the numbers are even more compelling. TFX is trading at a price-to-earnings over growth (PEG) ratio of 1.0, relative to 1.25 for CFN, 1.1 for COV and 1.3 for BCR. A PEG ratio at or below 1.0 is generally considered attractive, placing TFX at the upper limit. It is its relative position, however, which is most compelling in this instance. Other financial metrics for the stock are solid, but not as clearly in favor of TFX. Overall, the stock looks like a solid buy at current levels and should certainly be added to the watch list of any investor looking to construct a competitive healthcare portfolio.
National HealthCare Corp. (NYSEMKT: NHC) – This is an odd little stock that is very thinly traded, but recently announced that its next dividend payment will bring the stock’s dividend yield to nearly 3%. At less than fifty thousand shares traded per day, there are some real liquidity concerns. Furthermore, it should be noted that prior to the current dividend, the stock had essentially no dividend. With the lack of a dividend history, it is difficult to predict how the stock will perform on an income basis. The stock best compares with Amedisys, Inc. (AMED) and Kindred Healthcare, Inc. (KND); each company is in the long-term care facility business. On a price-to-earnings over growth (PEG) ratio, NHC has a PEG ratio of 1.18, relative to 0.49 for AMED and 0.5 for KND. The appeal of the stock is the industry. As more and more baby boomers age, this stands to be a growth business. Keying on the recent dividend spike as a catalyst, the stock bears watching.
Roche Holdings Ltd. (OTC: RHHBY) – This Swiss company competes directly with some of the largest pharmaceutical companies in the world, including Glaxo SmithKline (NYSE: GSK) and Merck & Co. (MRK); the company is similarly sized in terms of market capitalization. At current levels, the stock appears to be a solid value. RHHBY is currently trading at a price-to-earnings multiple of 16.7, relative to 44.4 for GSK and 28 for MRK. This indicates that the stock is cheaper in terms of what an investor must pay for each dollar of earnings generated by the company. The stock operates quite efficiently with an operating margin of 31.8%, relative to 37.3% for GSK and 25.9% for MRK. The strong valuation and efficient operation make the stock attractive. The fact that it is not one of the more widely recognized names in the space means that there me be greater opportunity to enter at an attract
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