MILLBURN, N.J. (Stockpickr) -- I have spent the better part of the last week sitting in the hospital with my wife, who had surgery, which gave me an opportunity to observe what goes on within a hospital and take notice of the products used by the clinicians and patients.
Heath care is currently estimated to account for about 16% of the U.S. gross domestic product. That amount is only expected to grow once the recently passed health care legislation takes effect and as our nation's population ages.
Based on my recent time at the hospital, I've gathered together a portfolio of
. I am not a big fan of the pharmaceutical industry, but I foresee the medical devices and technology sectors as a source of stable low-risk growth in the future as more money is focused on health care and baby boomers enter their golden years.
While in the pre-op room, my wife had to sign several documents. One of them was a waiver for a surgical device (I believe it was for a screw or pin) manufactured by medical device and equipment company
Despite its nearly $20 billion in market capitalization, Stryker is a relatively unknown company. The medical device industry is rather large but tends not to contain household names. However, as the population continues to age, as medical technology continues to improve and as more people are covered by health care, the medical device industry will likely grew at a faster pace.
If you or someone you know has had a hip, knee or shoulder joint replacement, then a Stryker product might have been used. Such was the case for my wife, daughter and sister-in-law, all of whom have had spinal fusion surgeries this year. Stryker delivers pretty consistent earnings growth of 10% to 12% and is priced at about 15 times the current year's earnings estimates.
Don't expect any surprises -- good or bad -- from Stryker, because the company quite predicably delivers earnings that are spot on with Wall Street analysts' consensus estimates. The company sports a balance sheet with nearly $4 billion in cash and short-term investments, which more than covers its $1 billion in long-term debt.
I would note that the long-term debt was issued this year for general corporate purposes, including acquisitions, stock repurchases and other business opportunities. I believe that Stryker was just taking advantage of historic low levels of interest rates as have other companies in the past year that have issued debt.
is a smaller but close competitor to Stryker. Zimmer delivers consistent 10% annual earnings growth and sells for about 13 times the current year's earnings, making it a bit cheaper than Stryker.
Zimmer's balance sheet is not as strong, with about $1 billion in cash and $1.1 billion in long-term debt. Zimmer has an acquisitive history and still carries more than $2.6 billion in goodwill, compared with just over $900 million for Stryker.
I would not rule out either company making an acquisition, nor would I rule out either company being the target of an acquiring firm
When it comes to hospital beds, one company has a virtual lock on the business:
, which makes the hospital beds that allow patients to control head and foot elevation, communicate with nursing staff and remotely access the in-room television. Hill-Rom also manufactures a variety of surgical, orthopedic and other medical devices and products.
Hill-Rom is expected to grow earnings by nearly 40% in fiscal-year 2010 and 17% in 2011. The company has beaten consensus estimates by a wide margin in each of the past four quarters. Given its earnings growth, HRC is selling for a reasonable 22 times current-year earnings.
Demand for Hill-Rom products should continue to grow in the future as more money is deployed into health care and as product replacement cycles kick in to upgrade existing equipment. The balance sheet is in good condition, sporting about $35 million of cash net of debt. With a market cap of only $2.3 billion, Hill-Rom could be an attractive acquisition target as well.
>>Who Owns Hill-Rom?:
If you have ever watched Showtime's
, you're familiar with the Pyxis machine, which is sort of like
. On the TV show, the nurses try to revolt against the machine, but in real life, Pyxis machines are widely accepted by the nursing community.
Pyxis was a standalone company in the 1990s before being acquired by
in 1996. In 2009, Cardinal Health spun off its
business, which owns Pyxis as well as other surgical, medical and critical care products and technologies.
Cardinal has not had a good track record for investors, but CareFusion is growing earnings at a mid-teen rate while selling for only 15 times the current year's earnings estimates. This implies a PEG ratio of only about 1, which is cheap. The company has net debt (cash plus short-term investments less long-term debt) of just about zero.
Savvy hedge fund manager
recently increased his stake in CareFusion to 6%. I think that CareFusion is worth at least 20 times earnings, putting a valuation of about $32.50 on the stock. It is my favorite of this group.
-- Written by Scott Rothbort in Millburn, N.J.
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At the time of publication, Rothbort had no positions in stocks mentioned, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
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. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
TheStreet.com's RealMoney Silver
website and has frequently appeared as a professional guest on
Fox Business Network
and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.