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4 Healthcare Stocks For Your Portfolio
I came upon a micro-cap medical instrument company recently that got me thinking about other stocks in this extremely competitive industry. I don't spend a great deal of time on healthcare, but nonetheless, here are my thoughts on four stocks of varying size that investors might want to consider.
IN PICTURES: 8 Great Companies With Top-Notch Healthcare Benefits
Micro Cap - Harvard Bioscience (Nasdaq:HBIO)
Its history dates all the way back to 1901, when Dr. William T. Porter invented a number of different scientific instruments in the basement of theHarvard Medical School
The fiscal year before it went public (1999), revenues were $26.2 million with operating income of $1.2 million. Move ahead a decade and its revenues were $85.8 million with operating income of $8.05 million. Operating margins have doubled and yet its stock price is less than half its offering price 10 years earlier. Thanks to its acquisition of Danville Scientific in September 2009, its 2010 revenues should be well above the $100-million mark and operating income close to double-digits. By most valuation metrics, the stock is trading below its five-year averages. I don't see much downside here.
Small Cap - ICU Medical (Nasdaq:ICUI)
Internist Dr. George Lopez created the Click Lock, a mechanism that locked IV systems in place so that they wouldn't disconnect, threatening both the patient and the health care worker. This was in 1984. Twenty-six years later and the company is a player in critical care with revenues of $232 million in 2009, and well on its way to $280 million in 2010. In its third quarter report, sales jumped 40.3% to $75.7 million and earnings per share were up 54.8% to $0.65. This is a company with positive free cash flow in the last decade. Most importantly, the man who started it all owns 21% of the company. This is a small cap to own for a long time.
Mid Cap - Hill-Rom Holdings (NYSE:HRC)
I first wrote about Hill-Rom in May 2008. At the time, I was commenting on Hillenbrand Industries decision to split itself into two separate public companies - Hill-Rom, its healthcare services division, and Hillenbrand Inc. (NYSE:HI), its funeral services division. I thought it was wise decision at the time and both stocks have beaten the S&P 500 sinceApril 1, 2008 , when the split became official. Most impressive is Hill-Rom's positive return versus a 12.5% loss for the index.
How did it do it? By continuing to grow sales organically, increasing its gross margins, accelerating research and development, maintaining a tight grip on SG&A costs and, most importantly, creating sustainable growth in its operating cash flow. For instance, in the fourth quarter it increased its adjusted operating margin by 570 basis points to 16.4%. These improvements help pump-up the bottom line, expected to be between $2.05 and $2.15 a share in 2011. I wouldn't say its stock is cheap right now, but long-term it is a winner.
Large Cap - Becton Dickinson (NYSE:BDX)
Large cap stocks are always the toughest for me because their businesses are so enormous that it's difficult to tell the difference between the players and the posers. I remember Becton Dickenson because I used to get allergy shots as a kid and the "BD" on the needle is forever etched in my brain. Obviously, it's grown some since then and its stock price with it.
Over a 15-year period, its stock's total annual return is 10.6%, 4.1% higher than the S&P 500 and 2.2% higher than the medical instrument industry. Year-to-date, however, it's down 1.6% and badly trailing the index. The Motley Fool believes this presents an opportunity and I'd have to agree. According to an article it ran November 10, Becton Dickenson's current enterprise value is 13.8 times free cash flow versus a five-year average of 19. Based on this average, its current market cap would be $24.2 billion, 36% higher than today. I'd say that's a bet worth taking given the strength of its balance sheet along with its ability to grow free cash flow.
Bottom Line
As I said in the beginning, I don't pretend to be a healthcare expert. However, having taken a closer look at all four companies, I'm thinking maybe I should get to know the industry a little better. There's a lot to like. (Medical discount plans can help the uninsured or underinsured afford better healthcare. Check out Get Sale Prices On Healthcare With Discount Plans.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Micro Cap - Harvard Bioscience (Nasdaq:HBIO)
Its history dates all the way back to 1901, when Dr. William T. Porter invented a number of different scientific instruments in the basement of the
The fiscal year before it went public (1999), revenues were $26.2 million with operating income of $1.2 million. Move ahead a decade and its revenues were $85.8 million with operating income of $8.05 million. Operating margins have doubled and yet its stock price is less than half its offering price 10 years earlier. Thanks to its acquisition of Danville Scientific in September 2009, its 2010 revenues should be well above the $100-million mark and operating income close to double-digits. By most valuation metrics, the stock is trading below its five-year averages. I don't see much downside here.
Small Cap - ICU Medical (Nasdaq:ICUI)
Internist Dr. George Lopez created the Click Lock, a mechanism that locked IV systems in place so that they wouldn't disconnect, threatening both the patient and the health care worker. This was in 1984. Twenty-six years later and the company is a player in critical care with revenues of $232 million in 2009, and well on its way to $280 million in 2010. In its third quarter report, sales jumped 40.3% to $75.7 million and earnings per share were up 54.8% to $0.65. This is a company with positive free cash flow in the last decade. Most importantly, the man who started it all owns 21% of the company. This is a small cap to own for a long time.
Mid Cap - Hill-Rom Holdings (NYSE:HRC)
I first wrote about Hill-Rom in May 2008. At the time, I was commenting on Hillenbrand Industries decision to split itself into two separate public companies - Hill-Rom, its healthcare services division, and Hillenbrand Inc. (NYSE:HI), its funeral services division. I thought it was wise decision at the time and both stocks have beaten the S&P 500 since
Large Cap - Becton Dickinson (NYSE:BDX)
Large cap stocks are always the toughest for me because their businesses are so enormous that it's difficult to tell the difference between the players and the posers. I remember Becton Dickenson because I used to get allergy shots as a kid and the "BD" on the needle is forever etched in my brain. Obviously, it's grown some since then and its stock price with it.
Over a 15-year period, its stock's total annual return is 10.6%, 4.1% higher than the S&P 500 and 2.2% higher than the medical instrument industry. Year-to-date, however, it's down 1.6% and badly trailing the index. The Motley Fool believes this presents an opportunity and I'd have to agree. According to an article it ran November 10, Becton Dickenson's current enterprise value is 13.8 times free cash flow versus a five-year average of 19. Based on this average, its current market cap would be $24.2 billion, 36% higher than today. I'd say that's a bet worth taking given the strength of its balance sheet along with its ability to grow free cash flow.
Bottom Line
As I said in the beginning, I don't pretend to be a healthcare expert. However, having taken a closer look at all four companies, I'm thinking maybe I should get to know the industry a little better. There's a lot to like. (Medical discount plans can help the uninsured or underinsured afford better healthcare. Check out Get Sale Prices On Healthcare With Discount Plans.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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