Inverness Diagnosed as New Buy

... Count the Ways

The professional diagnostics side presents the greatest opportunity, but the company's consumer diagnostics group, set up as a 50/50 joint venture with Procter & Gamble (PG Quote), is also interesting. The transaction provides Inverness with a much-needed cash infusion of around $300 million (after taxes) to help offset the debt it took on to finance its recent buys (and lower interest expenses).

It also allows Inverness to leverage P&G's substantial marketing and distribution capabilities. The venture currently markets digital pregnancy tests under the ClearBlue label, but is also rumored to be working on an over-the-counter strep test, which would have an enormous end market.

Not all analysts have updated their earnings estimates to reflect the recent transactions. But I'm confident that Inverness will earn north of $2.50 in 2008, meaning the stock currently trades for only 20 times next year's earnings. Given the incredible growth opportunities in the markets Inverness serves, I believe this is way too cheap. I expect that as investors become more comfortable with the ongoing integration of Inverness' recent acquisitions and realize its earnings power, the stock will trade much higher -- north of $60-$65.

Speaking to the larger view of the portfolio, this does increase my health care exposure but isn't a field bet on the sector. This is an event-driven decision -- the recent deals and the opportunity to buy on a pullback made me say "I've got to be part of this."