Tech-Free Friday: The Other Side of Health Care, Part 2

This is part two of David Pyrce's column on investing in health care stocks without having to worry about the ups and downs of the pharmaceutical and biotech companies. Return to part one.

I've urged you to look at the relative attractiveness of two often forgotten health care segments: medical products and health care services. Tech investing is akin to religion so my point may be considered blasphemy; nevertheless, before we get started, I urge you to first consider the following:

1. The economy is weak; earnings estimates are falling -- and will continue to fall.
2. Don't forget that the estimates are built by analysts who get them from -- guess who -- management.
3. Lack of visibility. Management, too, is guessing at the numbers.
4. It could take months, if not years, for many of these stocks to recover -- not weeks, and certainly not days.

As this is not a particularly good time to be a hero, why not look at investing in companies that are less affected by points one through four. Let's look at some of the health care stocks I mentioned earlier:

Valuation Heaven Health care stocks remain reasonably priced, relative to their expected growth.
	Current Price	12-Month Performance	Estimated EPS Growth (Current Fiscal Year)	Estimated EPS Growth (Next Fiscal Year)	Estimated 3-5 Year EPS Growth	Forward P/E	PEG (Price to EPS Growth Ratio)
Baxter Health Care(BAX)	89.54	70.8%	12.8	14.8%	13.4%	23.1	1.7
Cardinal Health(CAH)	95.25	143.3	20.9	21.1	21.6	26.8	1.2
HealthSouth(HRC)	13.26	159.3	-17.1	15.2	13.4	16.4	1.2
Lincare Holdings(LNCR)	54.81	135.7	23.0	20.7	21.6	16.4	0.8
Medtronic(MDT)	47.40	-10.2	16.0	17.5	17.8	37.5	2.1
Tenet Health Care(THC)	39.95	100.0	15.9	14.8	13.6	16.6	1.2
Average		99.8	11.9	17.4	16.9	22.8	1.2
S&P 500		-14.2	3.6	17.3	9.4	19.8	1.8
Source: Company reports, First Call.

Several important points should jump out at you. The first is the share price performance: This group returned 99.8% over the past 12 months, vs. the S&P 500, which was down 14.2%.

Second, look at the PEG ratio. As you can see, these health care stocks trade in a range from a low of 0.8 for Lincare Holdings (LNCR) to a high of 2.1 for Medtronic (MDT), with an average of 1.2. That's about half that of the S&P 500, which is at 1.8.

Third, the earnings part of the P/E of many nonhealth care stocks has been coming down dramatically, with room to go much lower. For example, First Call recently reported that first-quarter 2001 negative preannoucements are running 57% ahead of those issued during the fourth quarter of 2000. Tech earnings -- a large contributor to those preannouncements -- have dropped from expectations of plus 4% two months ago, to minus 8% one month ago, to the current expectation of a 29% decline.

The S&P 500 is not looking much better, with first-quarter 2001 earnings expected to fall 6%. The health care sector, on the other hand, is looking for earnings to grow 12.3% in the first quarter of 2001. Our sample health care group is looking for earnings to rise 11.9% in the first quarter. Now let's look at the stability of these earnings estimates for the March 2001 quarter for these health care companies.

No Cycle Here! Earnings of health care companies tend to remain steady
	Current Quarter (March 2001)	7 days Ago	1 Month Ago	2 Months Ago	3 Months Ago
Baxter Health Care	$0.71	$0.71	$0.71	$0.71	$0.71
Cardinal Health	0.84	0.84	0.84	0.84	0.84
HealthSouth	0.19	0.19	0.19	0.19	0.19
Lincare Holdings	0.59	0.59	0.59	0.59	0.59
Medtronic	0.31	0.31	0.31	0.31	0.31
Tenet Health Care	0.57	0.58	0.57	0.57	0.55
Source: Company reports, First Call.

As you can see, earnings for the current quarter for these stocks instead of falling -- for the most part -- have not changed at all. This, my friend, is what they used to call consistency and predictability, and what we now call visibility. Definitely something investors used to pay up for.

Still not convinced? Let's look at their fiscal year estimates:

Earnings in an Uptrend? Some health care company estimates are actually rising
	Fiscal Year	7 Days Ago	1 Month Ago	2 Months Ago	3 Months Ago
Baxter Health Care Dec. 2001	$3.47	$3.46	$3.45	$3.43	$3.43
Cardinal Health June 2001	3.11	3.11	3.11	3.11	3.11
HealthSouth Dec. 2001	0.81	0.81	0.82	0.82	0.81
Lincare Holdings Dec. 2001	2.66	2.66	2.66	2.66	2.66
Medtronic April 2002	1.25	1.25	1.26	1.26	1.26
Tenet Health Care May 2001	2.18	2.18	2.18	2.15	2.10
Source: Company reports, First Call.

Imagine investing in companies that not only have stable, predictable earnings, but are rising, too. And just think, you can buy many of these stocks, such as Cardinal Health (CAH), HealthSouth (HRC), Lincare and Tenet, at just about one time their growth rates, about half the market multiple of the S&P 500.

Finally: I am not telling you to go out and sell your technology stocks. I am also not telling you to go out and buy these stocks.

Far from it. These stocks are just examples of some long-term investment ideas available in the health care field. But it should at least demonstrate that there is an investment universe outside of technology, pharmaceutical or biotechnology stocks -- and one that offers attractive growth prospect with solid fundamental and reasonable valuations.

Return to part one.

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