Healthy Upside Potential In Medical Devices and Services Stocks

Healthcare stocks have long been a favorite of the advisory community. And while many investors focus on large, well-known pharmaceutical stocks, some of the best opportunities uncovered by MoneyShow.com contributors are in lesser-known niche markets such as medical devices and services. Rich Howe, Spin-Off Stock Investing In November 2019, Recro Pharma spun off its money losing Acute Care Drug business; this business was expensive to operate and masked the strong fundamentals of REPH's remaining business -- an outsource manufacturing and development organization (CDMO). Recro Pharma's remaining business is defensive, on pace to grow revenue 34% in 2019, and generates a 39% EBITDA margin. Despite robust fundamentals, REPH recently traded at about 8.9x estimated 2020 EBITDA and 15.3x estimated 2020 EPS, a massive discount to peers. The secular trend of pharmaceutical companies outsourcing manufacturing in order to cut costs is driving continued growth for CDMO companies. With Recro Pharma, we have three ways to win. First, Recro Pharma is a defensive, high-margin business that will grow earnings 15% to 20% in 2020. Thus, even without multiple expansion, the stock should generate a 15% to 20% return. Second, earnings estimates (both EBITDA and EPS) are way too low for 2020. Consensus EPS is $0.58, but I believe the company will earn $1.13. If REPH beats EPS estimates, Wall Street will have no choice but to re-rate the stock higher. Third, the stock is an excellent acquisition candidate. Five out of seven peers that REPH lists in its 10-K have recently been acquired. The median acquisition EV/EBITDA multiple of 16.5x is significantly above its current valuation of 8.9x. In an acquisition scenario, there could be 50% to 100% upside. Buy Recro Pharma to take advantage of significant upside optionality. Richard Moroney, Dow Theory Forecasts Charles River Laboratories International -- a contract-research organization -- has just joined our Long-Term Buy List. In addition to drug trials, the company also performs safety testing for consumer productions. The shares look timely, reflecting Quadrix category scores of 78 for Momentum, 90 for Earnings Estimates, and 85 for Performance. Industry peers are posting strong results, while the backdrop for biotech funding and research spending remains encouraging. The shares have rallied 19% over the past three months, moving above their previous record high, set in March 2019. Recently trading at 26 times trailing earnings, the stock looks reasonably valued versus S&P 1500 Index life-sciences stocks, carrying a median trailing P/E of around 28. For the December quarter, Charles River is expected to report 23% higher earnings per share on 14% revenue growth. Results are due on Feb. 11. Profit estimates for 2020 are rising, with the consensus targeting 13% growth. ICON says the market for contract-research organizations remains healthy as drug makers keep expanding their budgets for outsourcing drug development. It expects operating profit margins to expand in 2020, resulting in per-share profits climbing 9% to 14% on revenue growth of 6% to 10%. Free cash flow is projected to increase 17% to 23% to $350 million to $370 million. For the 12 months ended September, ICON generated 45% of revenue in Ireland, where it's based, 14% elsewhere in Europe, and 32% in the U.S. Scheduled to announce December-quarter results on Feb. 20, ICON is expected to report per-share profits of $1.83, up 13%, on revenue of $734 million, up 8%. Over the past eight quarters, the firm has missed the consensus profit and sales estimates just once apiece. ICON is the sole foreign stock we recommend; the stock is a long-term buy. Shawn Allen, Internet Wealth Builder CRH Medical (Toronto:CRH) is very much a niche business. It provides anesthesia services for patients undergoing colonoscopies. It currently services 47 walk-in clinics in 11 U.S. states through its team of over 400 registered nurse anesthesiologists. All of its revenues and the great majority of its costs occur in the U.S. For the past five years the company has been pursuing an aggressive growth-by-acquisition business model. It acquires established colonoscopy anesthesia practices. The company continues to grow by acquiring additional anesthesia service providers. It sometimes purchases a 100% interest but more often purchases a 51% interest. Six relatively small acquisitions were completed in 2019. In the most recent two quarters, adjusted earnings per share rose 38% and 54% while revenues per share rose 9% and 12%. This company does not pay a dividend as it retains all earnings to help fund its growth-by-acquisition strategy. The company has bought back 3.5% of its shares in the past two years and the buy-back program is continuing. At my analysis price of US$4.03 (C$5.31), the price to book value ratio, in isolation, is not attractive at 3.9 and the tangible book value per share is negative. However, based on trailing earnings adjusted to add back the amortization of intangibles, the p/e ratio is attractive at 9.0. The company appears set to continue growing its earnings per share over time through acquisitions. This has been a volatile stock. But its recent performance was good, rising 8% in Toronto in 2019 and double-digits this year to date. We rate the stock a buy, but caution that it is a speculative idea. Mike Cintolo, Cabot Growth Investor Diabetes-related stocks remain a strong theme, and Dexcom is our top pick in the group. The shares didn't spike with the market during the middle part of January, but they also haven't taken much a hit during the recent pullback -- all in all, the shares are chopping around as investors await the upcoming earnings report (due Feb. 13). While a big part of this company's story is obviously its own products and execution, perhaps an even larger part is the entire industry -- thanks to a wave of innovation, diabetics are shifting away from multiple daily injections and toward continuous glucose monitors (or pumps that use them). And that trend has a long way to go. Just 40% or so of Type 1 (and fewer Type 2) diabetics use a CGM (continuous glucose monitor), but that's quickly changing due to the benefits of keeping glucose levels within the normal range. Thus, we have high hopes that this stock's best days are ahead of it, but as usual, we'll just take it as it comes. With the stock acting well here, we'll stay on a buy rating; the next big event is earnings. Meanwhile, one of the other names we keep a distant eye on is Tandem Diabetes , which was nearly a penny stock a couple of years ago before going on a huge run as it released what many believe is the best insulin pump on the market. Dubbed the t:slim x2, it not only has better features and metrics (far smaller and lighter than the competition; has a larger touchscreen than others; uses Dexcom's CGM; can be updated remotely), but also comes with some predictive software. The stock had a gigantic run through early 2019, but it deserved a rest and that's what it did over a nine-month stretch, with a very reasonable sideways consolidation. Just recently, though, Tandem powered to new highs, though the sour market pulled it back down. Even so, it seems like it wants to go higher if the market stabilizes. Earnings are due out Feb. 24. John Eade, Argus Research Over the past decade, the combined biotechnology, biopharma and pharmaceutical (Bio/Pharma) industry has been transformed by the growth of biopharma outsourced services (BPOS), which have become crucial in bringing new drugs to market. In fact, the BPOS industries are growing at about twice the rate of Bio/Pharma despite limited penetration of the addressable market opportunity. BPOS firms don't own drugs or build product pipelines. They're not household names, with large ad budgets or rows of products lining drugstore shelves. Nor are they the targets of presidential candidates, in contrast to Big Pharma firms and healthcare insurers. But they are working behind the scenes, playing a critical role in nearly every aspect of drug development and manufacturing, e.g., screening potential drugs, managing clinical trials, designing manufacturing processes, providing packaging and distribution -- and even handling sales and marketing. Moreover, as BPOS firms have increased the number of compounds under development, they have developed enhanced process and product expertise, widening their cost, operational and capital efficiency advantage over their Bio/Pharma customers. Despite this rapid growth, BPOS remains a new industry in the early stages of development, as outsourced services still represent a small percentage of overall R&D and manufacturing spending. It is also highly fragmented, with hundreds of firms seeking to grow market share and add new capabilities. We expect this to lead to accelerated industry consolidation over the next few years, and to provide substantial opportunities for BPOS firms and their Bio/ Pharma customers, as well as for private equity investors and public shareholders. Companies in Argus coverage that are poised to benefit include: Bio-Techne Corp. , Charles River Laboratories , Integer Holdings Corp. , IQVIA Holdings Laboratory Corp. of America , Quest Diagnostics , and Thermo Fisher Scientific . We will look to add coverage in this sector in 2020. Ryan Irvine, Internet Wealth Builder Viemed Healthcare , through its wholly owned subsidiaries Sleep Management and Home Sleep, is a participating Medicare durable medical equipment supplier that provides post-acute respiratory care services in the United States. In layman's terms, the company places respiratory therapists inside the home to treat patients with very sick lungs. Many of these patients are unfortunately at the end stage of their life, at a time when they are most likely to visit the hospital. The service prevents these hospital readmissions from occurring. The primary disease treated is COPD or chronic obstructive pulmonary disease. With almost 25 million Americans reporting that they have been diagnosed with COPD, it is the country's third largest killer behind cancer and congestive heart failure. The company provides a solution for people who suffer from this debilitating disease. Viemed uses non-invasive ventilators (NIV) which allows caregivers to ventilate the patient with a mask versus forcing them to be in the bed intubated. The quality of life is better, and the healthcare costs decrease. Viemed continues to expand geographically into new states and further expand its presence in existing territories, the company expects continued growth in an active ventilator patient base and ventilator rental revenue accordingly. Given the company's clean balance sheet and solid cash position, we shift our fair value over the next year to the to the range of $10.75. We expect similar to slightly higher EBITDA margin in 2020, which could lead to an increase in our fair value if revenues continue to grow organically at 30%+ rates. We expect 2020 to be a volatile year for Viemed. The organic growth remains very strong and the company has faced significant challenges in the past and has come out ahead in the long term. We expect a similar result over the next several years. We maintain our Speculative Buy recommendation. We continue to see long-term value in the current range with a 2-5 year holding period outlook.

Healthy Upside Potential In Medical Devices and Services Stocks

Some of the best opportunities are in lesser-known niche markets such as medical devices and services.

Columnist Conversation

Trifecta Trades

Tuesday Morning Fibocall for 10/20/2020

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.