Source: Unknown
The healthcare supply industry brings in a large amount of money each year. It's usually led by companies such as Abbot ($ABT) or Medtronic ($MDT), but a company from 1882 may be seeing overperform ratings. Owens and Minor ($OMI) have some great numbers to hint that they may be undervalued in this bull market. Today we’ll focus on the business, revenue growth, value statistics, and new management that signify this possible value investment.
How do they make money?
Source: Owens and Minor In terms of revenue, OMI is listed number 332 on the Fortune 500, which is an annual ranking of the top 500 largest organizations in the United States. In 2020 they posted $8.48 billion in revenue. So how do they produce their revenue? One stream of earnings for OMI is through their brand called Halyard. This part of their business creates and sources medical equipment such as masks, wraps, gowns, and gloves. OMI also profits from its cloud-based supply chain management system called QSight. Lastly, they own Byram Healthcare which is a delivery service for in-home medical devices and equipment. Now that we have a general understanding of how they generate revenue, let’s see how it translates onto paper.
So they make money, but are they growing?
Source: Owens and Minor Owens and Minor have a market cap of $2.37 billion while producing $8.48 billion in revenue. Between the five years from 2005 to 2009, OMI nearly doubled its revenue. In 2005 they earned $4.82 billion, and in 2009 that number was $8.04 billion. They continued to show modest revenue growth year-over-year, but in 2016 that trend stopped. In 2015 revenue was $9.77 billion before dropping slightly to $9.72 billion. Since then, the company had bounced up and down in the $9 billion range. They broke below when they reported the $8.48 billion in 2020. It should be noted that EBITDA stayed consistent at around $200 million for the past ten years, but in 2020 they reported growth here. The company finally broke $300 million for EBITDA in 2020. This growth shows that the company may have found ways to become more profitable for its shareholders. This is an excellent sign as companies like MDT also saw decreased revenue for the year 2020 and experienced a decline in EBITDA. This also stays true with other companies in the medical field, such as Stryker ($SYK).
It doesn’t seem to be growing fast; these other numbers make up for that, right?
Source: iStock / siraanamwong
We promised you some other significant numbers that may display OMI as an undervalued business. One of those statistics we wanted to look at was their P/E ratio. OMI is currently sporting a P/E of 8.92. This means OMI is selling roughly 9x earnings, that doesn’t seem so bad. In a market where a P/E of 20 is considered in line with value investing, a P/E of 8.92 seems like a blessing. It could be the case that the medical supply industry just isn’t supporting businesses trading over 10x earnings. Well, let’s look at some of the industry’s leaders. The P/E for SYK is 33.49, MDT is 35.76, and ABT is 39.04. While these companies have proven to have greater growth potential, we don’t believe that justifies a perfectly profitable company to trade at 9x earnings while others are tripling that. If we took the average of the entire sector, OMI would still have a significantly lower P/E ratio. The industry’s standard is 26.05. While OMI has traded at 24x earnings, the 8.92 P/E is the lowest.
Lastly, we’ll introduce a new measurement of value to this newsletter. We want to analyze OMI’s price to book value (P/BV), but since this is the first time we’ve discussed this measure, we must first define it. P/BV is a ratio between the current market price of a stock and the book value. Okay, so what’s book value? Book value is an accounting measure that takes assets and subtracts all claims (liabilities) above the common shareholders. A low P/BV is typically seen as an indicator of an undervalued stock. Historically, investors like to see a P/BV of 1.0, but this could often be stretched to about 3.0. In a bull market, especially today’s bull market, a P/BV of 3.0 may be just as good a 1.0 in prior years. Well, OMI has a P/BV of 2.94. This seems fantastic, but actually, OMI has traded at an even lower P/BV as low as 1.02. In March, the company held a P/BV of 3.59. It has since dropped, as we’ve been experiencing sell-offs in the market. Compared to their peer’s whose average is 3.68, a 2.94 seems like a bargain. Let’s compare this to the industry leaders once more. SYK has a P/BV of 7.05, MDT is at 3.33, and ABT is at 6.15. Let’s reiterate this, these companies are priced higher because of their growth potential. Since OMI hasn’t shown this same potential for growth, they are priced at these current values.
Okay, they’re priced attractively, but what do they need to do to grow again?
Source: Muskingum.edu The company has made it clear that they recognize its failure to drive growth. On February 19, 2019, OMI announced that they would be naming Ed Pesicka as president and CEO. Pesicka has a proven history in the industry with 25 years of experience with Thermo Fisher Scientific ($TMO). His work shares the same core that OMI provides, logistics and distribution, manufacturing, and sales. OMI believes that Pesicka could be the CEO the company needs. Craig Smith was the CEO that led most of the companies growth from 2005 to 2015. Since he departed, the role has not been filed for a long enough time to demonstrate growth. James Bierman held the position for a few years before retiring. That was followed by an interim CEO and president in Robert Sledd. Now that the company has finally settled on an established CEO, he can finally expand the business.
So what’s the verdict?
Source: Times / Joe Mahoney Owens and Minor is a business that has been around for over a century. They have experienced extraordinary growth in the past but recently slowed that rate. Wall Street has adjusted the price of OMI according to this loss of growth, which has made OMI very appealing to many value investors. Comparing current P/E ratios and P/BV amongst the sector proves the company is trading at an attractive number. If their new CEO can reinvent the growth seen from 2005 through 2009, OMI will be a very steady value investment.
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