This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

3 Plays on Health Care in China

By David Sterman

NEW YORK (StreetAuthority) -- The health care industry has been on a steady growth path for nearly two decades. That's been good news for investors who have enjoyed almost non-stop gains from the sector. But now, cost pressures are putting heat on the sector and gains have been much harder to come by. In contrast, the party's just beginning for China.

Chinese health care is far earlier on the growth curve and appears to have a long growth path ahead. Chinese per-capita spending on health care is the lowest of any of the 20 largest global economies. Off that low base, key companies look set to grow at a double-digit clip for a number of years to come and offer investors the same consistent gains once offered by American health care stocks.

Here are three companies I've found that appear nicely positioned to capitalize on that trend.

American Oriental Bioengineering

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

Growing through acquisitions can be winning strategy if it helps a company develop a broad and compelling set of products. That was the plan for American Oriental Bioengineering (AOB) , a purveyor of plant-based drugs and neutraceuticals. Chinese consumers greatly prefer traditional organic remedies, some of which go back more than a thousand years. AOB hoped to become the leading seller of these traditional remedies. Sales grew from just $32 million in 2004 to more than $250 million by 2008. That helped push shares above $10 a few years ago.

But as the company grew, a major flaw appeared: ABO's acquisition spree was taking it into ever-lower profit margin niches. Margins on earnings before interest, taxes, depreciation and amortization that had been around 35% likely fell down to 20% in 2010. Earnings look to have fallen by half in 2010 to around 26 cents a share. Roughly half of the company's deals have worked out well, and the other half have been disappointing. Sensing the company had been pursuing growth for growth's sake, investors have fled and shares now trade for around $2.40. The luster of this high-growth business model has surely dimmed, but shares now look quite oversold.

Chastened from its buying spree, management now plans to generate organic growth by expanding its national footprint and improving the productivity of its distribution network. Those efforts are starting to bear fruit. In the third quarter of 2010, sales rose 16%, the highest organic growth rate in several years. In fact, all three operating divisions (pharmaceuticals, nutraceuticals and distribution) saw sales rise at least 10% from a year earlier. But profit margins are lower than a year earlier, which explains the downturn in profits. Margins now appear to have stabilized, so EPS is expected to rise roughly 20% in 2011 (to 31 cents) on a projected 12% increase in sales.

Current research and development efforts are focusing on improving the efficacy of AOB's existing products, money likely better spent than on yet another acquisition.

Meanwhile, $92 million in cash holdings accounts for more than half of the company's market value, and shares trade at about 60% of tangible book value. Back out that cash, and shares trade for less than five times projected 2011 cash flow. Shares look capable of rising roughly 40% to the $3.50 to $4 range, assuming AOB can continue to generate the more stable results in posted in the third quarter of 2010. (Fourth-quarter results will likely be released in about a month).

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,083.80 -2.83 -0.02%
S&P 500 1,987.98 +0.97 0.05%
NASDAQ 4,472.1080 -1.5890 -0.04%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs