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 non-discretionary 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-for-2), 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, OMI-watchers 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 price-earnings 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 long-term, 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 email@example.com.