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Two Under-The-Radar Reports In Med-Tech
Healthcare is an enormous sector, so it is not surprising that a few companies do not get quite all the attention they might merit. Two examples that reported within the last two weeks are Becton Dickinson (NYSE: BDX) and ICU Medical (Nasdaq: ICUI). Both companies tend to be under-appreciated because of what investors regard as low-potential and unexciting markets. A closer look, though, suggests there is still more than meets the eye with both stories.
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The Quarters That Were
Becton did not help its case much this quarter with a performance that was okay but not great. Revenue rose 4% (in constant currency terms), with the strongest growth once again in the biosciences segment (up 12%, but only about 16% of overall revenue). Both the medical and diagnostic segments are suffering from difficult year-over-year comps due to last year's flu scare and an ongoing decline in physician office visits.
Margins at BDX were likewise mediocre - gross margins dropped about 100 basis points (BPS), and operating margins fell 30 points. All in, then, operating income rose just 2% and earnings per share (EPS) were down by 6.5%.
By Comparison ...
ICU Medical had an excellent quarter. Sales jumped 29% as the company benefited from integrating a business it acquired from Hospira (NYSE: HSP) last year. Sales in the company's major categories all increased by double-digit amounts, including a very strong performance in its custom products segment.
Margins likewise improved very significantly. Looking at just the sequential comparison (the annual comparison is moot because of that acquisition), gross margin was up almost 500 BPS, and operating margin was up more than 700 BPS. That ultimately fueled over 47% annual growth in EPS and almost 83% sequential growth.
Where To From Here?
Just as the performances this quarter were divergent, so too are the near-term prospects for these two companies. BDX faces a number of challenges as some of the company's markets are not growing strongly, and the company is still waiting for some significant product launches. While BDX should be in place to compete well with the likes of Hologix (Nasdaq: HOLX) in women's health, Gen-Probe (Nasdaq: GPRO) in STD testing and Cepheid (Nasdaq: CPHD) and Abbott (NYSE: ABT) in diagnostics, investors will need time to get over management's reduction in near-term top-line growth guidance.
For ICUI, though, things are looking up. Acquiring the critical-care business from Hospira should reduce volatility, as will the company's ongoing success in diversifying its sales channels away from Hospira. Nevertheless, Hospira is still a major partner, and if Hospira can gain share in drug pumps due to Baxter's (NYSE: BAX) recall, there should be pull-through for ICUI's tubing business. Longer term, the company's new European plant should build its overseas custom products business, while new safety products in oncology continue to gain traction.
Changes Would Increase Interest To Buy
Gauging BDX is a little difficult now. If you believe the company's revenue growth will decline to 6% over the next five years and the company will boost its free cash flow margin only by a couple of percentage points, then the stock is not interesting enough to buy. Add just 1% to the growth estimate and 0.5% to the cash flow margin assumptions, though, and the undervaluation goes from a not-interesting 14% to a much more interesting 20%.
ICUI is in a similar fix since the stock has performed well in the wake of earnings. If you think the company has seen its best growth and will not match prior growth rates, the stock is modestly undervalued. But if you believe that the company's efforts to expand its distribution, overseas production and critical-care opportunities will bear fruit, the stock goes from "cheap enough to hold" to "cheap enough to buy" fairly quickly.
Bottom Line
As both of these companies seem to be perennially under-appreciated by Wall Street, my inclination is to expect that they will grow better than the consensus thinks. If I am right, these stocks should work well over the next three years. Even if I am wrong, the low expectations should cushion the downside risk. (To learn more, check out our Checklist For Successful Medical Technology Investment.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 6 Hot Careers With Lots Of Jobs
The Quarters That Were
Becton did not help its case much this quarter with a performance that was okay but not great. Revenue rose 4% (in constant currency terms), with the strongest growth once again in the biosciences segment (up 12%, but only about 16% of overall revenue). Both the medical and diagnostic segments are suffering from difficult year-over-year comps due to last year's flu scare and an ongoing decline in physician office visits.
Margins at BDX were likewise mediocre - gross margins dropped about 100 basis points (BPS), and operating margins fell 30 points. All in, then, operating income rose just 2% and earnings per share (EPS) were down by 6.5%.
By Comparison ...
ICU Medical had an excellent quarter. Sales jumped 29% as the company benefited from integrating a business it acquired from Hospira (NYSE: HSP) last year. Sales in the company's major categories all increased by double-digit amounts, including a very strong performance in its custom products segment.
Margins likewise improved very significantly. Looking at just the sequential comparison (the annual comparison is moot because of that acquisition), gross margin was up almost 500 BPS, and operating margin was up more than 700 BPS. That ultimately fueled over 47% annual growth in EPS and almost 83% sequential growth.
Where To From Here?
For ICUI, though, things are looking up. Acquiring the critical-care business from Hospira should reduce volatility, as will the company's ongoing success in diversifying its sales channels away from Hospira. Nevertheless, Hospira is still a major partner, and if Hospira can gain share in drug pumps due to Baxter's (NYSE: BAX) recall, there should be pull-through for ICUI's tubing business. Longer term, the company's new European plant should build its overseas custom products business, while new safety products in oncology continue to gain traction.
Changes Would Increase Interest To Buy
Gauging BDX is a little difficult now. If you believe the company's revenue growth will decline to 6% over the next five years and the company will boost its free cash flow margin only by a couple of percentage points, then the stock is not interesting enough to buy. Add just 1% to the growth estimate and 0.5% to the cash flow margin assumptions, though, and the undervaluation goes from a not-interesting 14% to a much more interesting 20%.
ICUI is in a similar fix since the stock has performed well in the wake of earnings. If you think the company has seen its best growth and will not match prior growth rates, the stock is modestly undervalued. But if you believe that the company's efforts to expand its distribution, overseas production and critical-care opportunities will bear fruit, the stock goes from "cheap enough to hold" to "cheap enough to buy" fairly quickly.
Bottom Line
As both of these companies seem to be perennially under-appreciated by Wall Street, my inclination is to expect that they will grow better than the consensus thinks. If I am right, these stocks should work well over the next three years. Even if I am wrong, the low expectations should cushion the downside risk. (To learn more, check out our Checklist For Successful Medical Technology Investment.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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