Marsh has headed
health care services group since 1999. Prior to that, he was at
Salomon Smith Barney
Wheat First Butcher Singer
Industry Outlook and Style
With his most recent industry report bearing the title "Party in the Kitchen," Marsh describes his outlook for the sector as "upbeat." He warns that these stocks may experience some volatility in the spring, however, as a Medicare drug benefit is debated.
Several factors contribute to his overall positive stance. First, the Lehman analyst sees a healthier hospital customer. He explains that with the government footing the bill for about half the health care in the U.S., hospitals and nursing homes have been feeling the squeeze since budgetary belt-tightening in 1997. But last year the government switched course, opting to give more money back to hospitals in the form of market basket adjustments. So health care distributors, who had built up bad debt reserves for their hospital customers, should find themselves in a healthier position as well.
Marsh also observes that lower interest rates and more predictable pricing during the past several years have bolstered the group's fundamentals. And with Y2K in the past and Internet distribution a fading threat, two big worries have been "put to bed," he says. Another positive, he says, is the fact that the Federal Trade Commission recently approved
. Marsh says this could "imply a thawing in FTC sentiment toward future company consolidation."
But despite all the good news, the top-ranked analyst has concerns as well. "The biggest issue of variability this year in the distribution and associated technology names will revolve around a proposed Medicare drug benefit," he says. The group could see some volatility, he says, as the proposal leads to debates on pricing. "We hold some concern that an ultimate workable proposed Medicare drug plan could be more assertive around greater inclusion and standardization, away from Bush's suggested state-run system."
While noting that the group is trading at a 10% premium to the market, Marsh singles out several stocks with upside potential. His calls his top pick, Cardinal Health, the industry's "gold standard." He also likes
, which, given its stock price, he says is in a very interesting position. "The company completed a very ill-timed acquisition two years ago and that's really hurt them, but it looks like the worst is behind them, and getting back to the whole customer discussion, their systems business is really benefiting from a pickup in customer demand," the analyst observes. (Lehman has done investment banking for McKesson.)
Two other stocks he mentions as turnaround candidates are
Favorite stock for next 12 months:
Cardinal to me is the gold standard in this industry. By that I mean they have the best mix of business, the best track record, they've got what I consider to be a CEO who is outstanding, and they've probably got the most conservative balance sheet. So it's a combination of consistency and long-term record, profitability and, really, positioning.