Need Defense? Think Medical Supplies
Conventional wisdom says investing in health care is a smart way to defend against tough economic times.
These days, however, purchasers of many defensive stocks, from major pharmaceuticals to large biotechs to big-name device makers, are suffering from offensive returns.
Still, there's an island of cheer amid this medical malaise. When it comes to a good defense, you can't beat catheters, syringes, needles, instruments and hospital supplies. In other words, you can't beat companies like C.R. Bard (BCR) and Becton Dickinson (BDX).
Many analysts forecast a continuing, comparatively strong showing for these firms and some of their peers. "Historically, falling
Tough CompetitionBard, Becton Dickinson and their peers battle on many treatment fronts, including urology, diabetes, hernia repair, circulatory system problems and cancer care, as well as drug-delivery products and general surgical supplies. Competitors can be small companies focusing on few treatment areas, or health care conglomerates such as Johnson & Johnson (JNJ) and Baxter International (BAX). Because of the commodity-like nature of many products and the maturing of U.S. markets in certain treatment areas, Bard and Becton Dickinson have succeeded by improving old products, finding new markets and diversifying. "In the rapidly evolving medical-device field, continuing innovation is the key to prolonged success, as differentiation advantages erode quickly and rivalries intensify," says Alex Morozov of the independent research firm Morningstar, in a recent report. Diversification has obvious benefits, but it also holds risks, because efforts to develop more complex, higher-margin products could backfire, analysts say. Becton Dickinson, for example, entered the blood-glucose monitor field in 2003 and quit three years later. Wall Street also wonders whether the hospital-supply companies can sustain or improve their growth rates or whether their current share prices have outpaced their fundamentals. Bard, which has a market capitalization of $9.9 billion, has a buy-hold ratings ratio of 3-to-7, according a Thomson First Call poll of analysts. Becton Dickinson, whose market cap is $21 billion, has a buy-hold ratio of 6-to-5. Becton Dickinson's path to continued growth depends partly on its ability to sell traditional surgical products in "rapidly growing European and Asian markets," says Morozov, in a research report. But the biggest source of growth will be its roster of products used in pharmaceutical and biotech R&D and its diagnostics business. In recent years, Becton Dickinson acquired two small companies to improve the diagnosis of cancer and drug-resistant bacterial infections.
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