Even though many sectors of the economy have shown some signs of life in recent quarters, a real recovery has yet to take hold in the healthcare space. Hospitals saw their capital funds decimated by investment losses, insurance companies have fought hard to minimize their medical loss ratios, and would-be patients have stayed at home because they either lost health insurance, could not afford the co-pays or did not want to risk taking time off work for recuperation.

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All of this is bad for a company like CareFusion (NYSE:CFN). While it is true that CareFusion does not sell multi-million dollar equipment like Intuitive Surgical (Nasdaq:ISRG) or Varian (NYSE:VAR), drug pumps are not exactly free and the company - along with peers Baxter (NYSE:BAX) and Hospira (NYSE:HSP) - have suffered from sluggish procedure volume. Selling a lot of relatively low-priced disposables and instruments is a great business, but it is not an invulnerable one.

The Quarter That Was
All of that being said, CareFusion still managed to deliver a very strong quarter. Revenue jumped 19% this quarter, basically matching the estimate, as the company paired strong mid-teens growth in MedTech with over 20% growth in Critical Care. Although "Critical Care" is somewhat ill-defined and broad as an overall segment of medical devices, a look at the performance from companies also in that area like ICU Medical (Nasdaq:ICUI) and Edwards Lifesciences (NYSE:EW) suggests CareFusion is doing quite well for itself.

CareFusion likewise did not post any major surprises below the top line. Gross margin improved almost three full percentage points from last year, R&D spending stayed flat, and EBITDA grew 58% to $191M. All in all, net of some "one time" expenses, CareFusion beat the Street by a penny.

The Road Ahead
Analysts and institutional investors seemed rather cheerful that the company announced further efforts to restructure costs out of the business (business-speak for firing people and making the survivors do more work for the same pay). Perhaps I am an oddball, but I never have quite understood why the "professionals" get so excited about these moves - after all, this is the same management (more or less) that hired the supposedly excess workers in the first place. Now, I grant that things may have been different when CareFusion was still a part of Cardinal Health (NYSE:CAH), but were they really that different?

Packing away my soapbox, there certainly are reasons to be optimistic and positive on this company and the stock. Baxter is in the middle of a significant recall of its pumps and CareFusion stands to gain a healthy share of that business. Hospira will also be competing for this business, but CareFusion has had very strong win rates of late and seems willing to cut prices to get share - not such a bad decision in the long-run considering the flow of disposables (tubing, connectors, etc.) that the company can expect to sell into this customer base.

Apart from that, CareFusion is not afraid to invest in new product development and the company enjoys a broad base of business, supported by a sizable sales effort.

The Bottom Line
Due most likely to the aforementioned fact that the fundamental trends in health care have not rebounded yet, there are plenty of bargains to be found throughout the sector. CareFusion is not expensive by any fair standard, and I think that a buyer today could expect something on the order of a 25% gain if the stock moves to fair value. That is certainly not the best opportunity available for would-be healthcare investors, but considering the stable growth outlook it might be not be a bad idea for investors with somewhat more conservative leanings. (For related reading, see Investing In The Healthcare Sector)

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Tickers in this Article: CFN, BAX, HSP, ISRG, VAR, EW, CAH, ICUI

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