Medical sup­ply stock is good long-term bet

The Oklahoman (Sunday) - - BUSINESS -

Dear Mr. Berko: What is your opin­ion of Owens & Mi­nor, which is in the medical sup­ply busi­ness? I have $9,600 in cash sit­ting in my in­di­vid­ual re­tire­ment ac­count, and my dopey stock­bro­ker, who has never been right in 12 years, rec­om­mends 400 shares. Please ad­vise ASAP.

—BC, Ok­la­homa City

Dear BC: Of­ten­times cus­tomers be­come con­fused about who is the dope.

Com­pa­nies sell­ing non­in­va­sive medical sup­plies to the end user (hos­pi­tals, re­search labs, clinics, physi­cian/ pa­tient co­op­er­a­tives) can have some of the most at­trac­tive risk-ad­justed re­turns on the mar­ket. Medical sup­plies are nondis­cre­tionary ne­ces­si­ties, and their rev­enues tend to be in­su­lated from in­fla­tion­ary pres­sures, the busi­ness cy­cle and po­lit­i­cal in­ter­fer­ence. And un­like the phar­ma­ceu­ti­cal in­dus­try, medical sup­ply com­pa­nies have low cap­i­tal needs rel­a­tive to net in­come, which presages ro­bust free cash flows and strong bal­ance sheets. Re­sul­tantly, some of the pub­lic com­pa­nies in this in­dus­try pro­vide share­hold­ers with less volatile and more de­pend­able fu­ture re­turns com­pared with most other mar­ket sec­tors.

Owens & Mi­nor (OMI$19) was founded in 1882, the same year Congress passed the Ed­munds Act, out­law­ing polygamy, and the same year that P.T. Bar­num bought Jumbo the ele­phant. Founded by O.O. Owens and G.G. Mi­nor, this For­tune 500 com­pany, with $9.5 bil­lion in ex­pected 2017 rev­enues, dis­penses over 220,000 var­i­ous medical and sur­gi­cal sup­plies from 52 ware­houses to over 4,400 hos­pi­tals and in­te­grated health care net­works. Wall Street be­lieves that in 2018, OMI will sell over $10 bil­lion worth of stuff. That stuff in­cludes exam room prod­ucts, staff and pa­tient ap­parel, anes­the­sia ap­pli­ances, mea­sur­ing de­vices, waste re­cep­ta­cles, mo­bile work sta­tions, treat­ment and in­stru­ment ta­bles, IV stands and ac­ces­sories, blan­ket warm­ers, in­con­ti­nence prod­ucts, wound treat­ment and dress­ing prod­ucts, pro­fes­sional dis­pos­ables (gloves, nee­dles, masks, booties) — nearly all the non­in­va­sive sup­plies a hos­pi­tal and staff need to treat a pa­tient from ad­mis­sion to dis­charge. Whew, that's a page­ful!

OMI's rev­enues have in­creased in 18 of the past 20 years, and earn­ings have im­proved in 16 of those 20 years. How­ever, OMI's earn­ings for the third quar­ter will be lower be­cause of re­cent merger and ac­qui­si­tion ex­penses plus non­re­cur­ring costs. OMI has en­joyed a good run since trad­ing at $6 in 1997. It split once (3-for2), and the div­i­dend, 11 cents 20 years ago, has been in­creased in each of the past 20 years, to $1.03 today. Go­ing out to 2022, OMI an­a­lysts ex­pect rev­enues of $11.5 bil­lion, earn­ings of $4.70 a share and a div­i­dend of $1.25. Based on today's price, that in­creased div­i­dend would have a darn at­trac­tive 6.5 per­cent yield. OMI's op­er­at­ing en­vi­ron­ment should re­main sta­ble over the fore­see­able fu­ture, al­low­ing man­age­ment to build a solid plat­form of growth and fu­ture ac­qui­si­tions.

Though im­prove­ment in the above num­bers does not in­clude po­ten­tial ac­qui­si­tions, it does re­flect the po­ten­tial dou­bling of OMI's net profit mar­gins in the com­ing four years, from 1.2 per­cent to 2.4 per­cent. It also re­flects that cash flow and re­turn on equity may also dou­ble — to $6.25 a share and 23 per­cent, re­spec­tively. And with an ex­pected 40 per­cent drop in long-term debt, to $350 mil­lion, OMIwatch­ers can ex­pect a re­turn on cap­i­tal of 19 per­cent, which would be a 250 per­cent gain from this year's 7.5 per­cent. So, fig­ur­ing an av­er­age priceearn­ings ra­tio of 16-to-1 dur­ing the past 20 years, some on the Street think that OMI's stock price could run to $80 by 2022. Even the es­timable Value Line agrees. (I'm not so san­guine; I be­lieve $65 is a more re­al­is­tic share price.) If you're a share­holder, this should be an easy three- or four-year wait while you're get­ting a swell div­i­dend. And be sure those div­i­dends are au­to­mat­i­cally rein­vested. The above pro­jec­tions are cer­tainly re­al­is­tic, as OMI has strong re­la­tion­ships with the big play­ers in this in­dus­try — and this im­pres­sive ad­van­tage is en­vied by its com­peti­tors.

I like OMI as a longterm, low-risk stock for in­come growth, and Morn­ingstar and Zacks agree. Black­Rock, Van­guard and J.P. Mor­gan own over 25 per­cent of OMI's 61 mil­lion shares. Take your dopey bro­ker's ad­vice and buy 400 shares of OMI for your IRA.

Please ad­dress your fi­nan­cial ques­tions to Mal­colm

Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ya­hoo.com.

Mal­colm Berko mjberko@ ya­hoo.com

TAK­ING STOCK

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