2 Medical Stocks to Buy, 3 to Avoid in 2012

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

As we get closer to the health care reform legislation becoming effective, many people are looking for prospective healthcare plays.  Many health care companies have seen a pretty marked increase in volume and volatility as of late as news sheds light as to how particular provisions of the new law will affect various healthcare subsectors.  In this article, I analyze key companies that a may see an outsized impact due to the law and determine whether, on a relative value and growth basis, could be worth a closer look.  Please use this analysis as a starting point for your own due diligence.

Mednax Inc. (NYSE: MD): Shares traded around $68 at the time of this writing.  This price is right in the middle of their 52 week high of $75.47 and 52 week low of $58.48.  A review of filings and other documents on its website shows Mednax to be a good buy.  First is the acquisition of 50,000 shares at market by one of its directors totaling nearly $3.3 million.  Anytime an insider is buying, especially on the open market, it's good because that insider (hopefully) knows that he/she is going to make money even paying market price. 

Mednax has had steadily increased revenues and EPS since 2006.  It has also made seven strategic acquisitions this FY paying cash.  Those acquisitions have been going right to helping to increase Mednax’s revenues.  In the deals certain bonuses are built in, totaling nearly $9 million, which will pay out if certain performance measures are met within four years.  This is smart because it gives the newly purchased practices reasons to continue to increase performance.  With nearly $35M of cash still on the books, look for Mednax to continue buying up smaller companies that will immediately contribute to its bottom line.  I like Mednax here; I would like to see a pullback to $65 before buying.  I see this stock by the end of 2012 near the $80/share range.

Medco Health Solutions (UNKNOWN: MHS.DL): Shares traded around $60 at the time of this writing.  The price is just below their 52 week high of $66.38 and above their 52 week low of $44.60.  According to company documents, Medco agreed to be acquired by Express Scripts (NASDAQ: ESRX) for $28.80 in cash and 0.81 shares of ESRX stock.  At Express Script’s current price of $49.15, that translates to a value of $68.61 for each Medco share.  Express Scripts shares would have to drop $10 if someone bought Medco right now before there was a loss when the conversion happens. 

Medco recently lost its contract with UnitedHealthcare of $11B, which is about 17% of revenues, so if the merger doesn’t occur, Medco’s shares would have to plummet because of the mass loss in revenues.  I see the merger going through and I don’t see ESRX dropping $10.  I don’t think we’ll see much if any pullback in Medco, so if you like ESRX and don’t mind buying on merger speculation, buy in here and it’s at least an $8 upside. 

Amgen Inc. (NASDAQ: AMGN): Shares traded around $67.60 at the time of this writing.  This price is pennies shy of their 52 week high of $67.78 and $20 above their 52 week low.  Amgen offers an annual dividend of $1.44 for a 2.10% yield and a 7% payout ratio.  Amgen has about 44 products in its pipeline, according to its website.  Nine of them are in phase 3.  The hope is that some of these phase three drugs will get approved and pushed out because sales of one of its main drugs (Epogen) have dropped 20% so far this year compared to 2010. 

In addition, Amgen’s longtime CEO said he will retire by the end of 2012.  Unless Amgen has a super-winner I see small steady annual growth in the 3%-5% range.  For the end of 2012, I think we’ll see a share price around $73 based off of a discounted cash flow analysis using a 10% cost of equity.  I wouldn’t buy unless they report a new drug find; if you already own some, hold on and enjoy the new dividend.

CorVel Corp (NASDAQ: CRVL): Shares traded around $52 at the time of this writing.  This is just below their 52 week high of $54.64, and above their 52 week low of $38.04.  For this period revenues increased 11.9% while cost of revenues increased 12.5%.  CorVel’s gross margin is 25% versus 70% for its peers.  It also lags versus its peers in net profit margin, 6.32% versus 18.77%.  Regardless, net income increased 5.1% year over year. 

As long as CorVel can fix things so expenses do not increase more than revenues, the recent numbers won’t mean anything.  It is a nice story in that it has no debt and $8 million cash on the books.  According to info on its website, CorVel boasts 44% insider ownership.  I like that there have been no recent sales by insiders, they’re just holding on because they must know it’s only going to go up in value.  I see shares making it to $60 by the end of 2012.  If you have them you can keep them, if you’re looking at buying, don’t as there are definitely some much better candidates out there.

Onyx Pharmaceuticals Inc. (NASDAQ: ONXX): Shares were trading around $44 at the time of this writing.  This is just shy of their 52 week high of $46.07 and well above their 52 week low of $27.17.  Onyx currently has four drugs in the pipeline, two of which have been FDA approved.  It's working on getting those approved for other types of cancer and most of those are in phase 3 trials.  The stock is up $10 since September 2011 and has been noted as an attractive buy and takeover target.  Its CFO is touting it as such.  I think they’re overbought as it’s apparent that Onyx is more focused on being sold than it is at developing additional drug candidates and a manufacturing capability.  I say stay out if you’re not yet in, if you own already, hold and hope for a high priced buyout.

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