Mad Hedge Biotech and Healthcare Letter
June 6, 2023
Fiat Lux
Featured Trade:
(SCRUBBING AWAY DOUBTS)
(STE), (JNJ), (MMM), (BAX), (BSX)
Posts
Warren Buffett has showcased his value-based financial philosophy through his notable investment in Wrigley's gum.
This strategic move allowed him to secure a consistent and dependable cash flow by acquiring a company that produces an evergreen product with high demand and straightforward production processes. It's a testament to Buffett's ability to identify enduring value in the market.
Similarly, in the healthcare sector, there are notable names that align with this philosophy.
Take Steris (STE), a Dublin-based company specializing in sterilization. In the world of healthcare, nothing can replace the importance of a pristine operating room, and Steris plays a critical role in ensuring the cleanliness and safety of these environments.
While our personal use of disinfectant products might have changed over the years, hospitals remain hyper-vigilant in their disinfection protocols.
Steris is a trusted provider, as hospitals understand the significance of maintaining sterile conditions to combat antibiotic-resistant superbugs and ensure successful surgeries. The company's focus on sterilization and related products positions it as a preferred choice among healthcare providers.
Some argue that Steris stock is on the pricier side, trading at 22.3 times 12-month forward earnings compared to the S&P 500 index's 18.3 times. However, the value it offers makes the price reasonable.
As hospital procedures return to pre-Covid levels and supply chains normalize, Steris stands to benefit significantly. Additionally, a substantial portion of its revenue comes from recurring sources, as hospitals consistently require sterilization chemicals and disinfectants.
Despite being a stable company, Steris has recently taken investors on a thrilling rollercoaster ride.
In February, its stock faced a setback when it lowered its full-year revenue guidance. However, the drop was mainly due to ongoing supply-chain challenges, not internal issues or client withdrawal.
The company's resilience became evident in mid-May when Steris delivered impressive fiscal fourth-quarter results. Surpassing expectations both in terms of top- and bottom-line figures, it also provided a conservative yet appealing forecast for fiscal 2024.
Interestingly, despite these positive developments, the stock has dipped around 5% since the May earnings surge. Meanwhile, for fiscal 2024, Steris is projected to achieve earnings per share of $8.66, representing over a 5% year-over-year increase, with revenue expected to climb by more than 7% to $5.33 billion.
These figures would set new record highs for the company, which has consistently achieved double-digit compound annual growth rates over the past five years.
One contributing factor to Steris' success is its ability to maintain stable pricing.
Unlike other healthcare companies that experience negative pricing trends, Steris has the advantage of commanding higher prices due to the unique nature of its sterilization services, which aren't typically targeted for cost-cutting measures.
In fact, Steris has already increased prices by 3.3% in the previous quarter to keep pace with inflation.
Furthermore, Steris' recent acquisition of Cantel Medical has significantly bolstered its operations in the dental industry.
With Cantel's valuable assets, Steris has expanded its expertise in a growing market fueled by technological advancements.
Notably, the company boasts an impressive number of patents, totaling over 2,346 in 2022, highlighting its commitment to innovation.
Although it’s not as exciting as other segments, fierce competition unfolds among industry giants vying for prominence in this vital sector.
Think of the juggernauts like 3M (MMM), Baxter International (BAX), and Boston Scientific (BSX), each flexing their innovative muscles to claim a larger slice of this healthcare pie.
Curiously, despite being the largest player in the U.S. medical sterilization and services market, Steris maintains a modest market capitalization of only $20 billion. This is considerably smaller than healthcare giants like Johnson & Johnson (JNJ).
This aspect, combined with the possibility of being a takeover target, albeit not currently under discussion, serves as additional support for the stock.
Overall, Steris has found a stable position in the market by establishing itself as a provider of essential cleaning products in hospitals and research labs.
Once these relationships are established, Steris continues to generate sales through ongoing demand for its trusted solutions. In times of market volatility, Steris is a reliable investment, offering a safe haven for investors navigating uncertain waters.
Just as Warren Buffett sought enduring value in his investments, Steris represents a company with a strong foundation in a critical sector. If you also want a slice of the pie, I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
March 14, 2023
Fiat Lux
Featured Trade:
(A MARKET LEADER SELLING AT A DISCOUNT)
(GE), (GEHC), (MTD), (DHR), (BSX), (TMO)
The spanking new multibillion-dollar healthcare spinoff from General Electric (GE) is gradually turning into a favorite in the industry.
The healthcare company, GE HealthCare (GEHC), was officially spun out of GE last January 4, but its shares began trading around mid-December. To date, GEHC is up about 30%. The stock has been trading for roughly 23 times its projected earnings in 2023.
While that value is already above the market multiple, GEHC is still anticipated to boost its earnings at an average of approximately 15% per year until 2026.
GEHC’s fourth-quarter earnings report was pretty solid. The company recorded $4.94 billion in revenue, rising by 8% year over year compared to the previous $4.59 billion. Most of the growth came from its imaging division, which climbed 11% from $2.44 billion to $2.71 billion thanks to the increasing demand.
For this year, GEHC is projected to generate over $19 billion in sales. This estimate is conservative since the company has yet to gain traction on Wall Street. Given its solid performance thus far, the company is expected to post a higher figure in the coming months.
Not much is known about GEHC yet. Aside from being an Illinois- based healthcare company focusing on medical technology, healthcare software and analytics, patient monitoring systems, and medical equipment maintenance and repair services, the spinoff only describes itself as “a leading global precision care innovator.”
That’s a relatively vague explanation that could cover much ground, but it appears to be focused on artificial intelligence (AI) in healthcare. After all, this is a lucrative and growing market that has sustained the ever-increasing demand.
Based on its records, GEHC generates the majority of its revenue from ultrasound and imaging services and products. These segments comprise about 75% of the company’s overall revenue. The rest are from various services, including clinical networking systems and financial solutions.
At the moment, more than 4 million of GEHC’s products are installed across the globe, lending support to over 2 billion patients since 2022.
Although this sounds less exciting than the other developments in the healthcare industry, the total addressable market for the medical imaging segment is impressively huge.
In 2021, this market was projected to reach $28 billion and will reach $47.4 billion by 2030. This represents a promising compounded annual growth rate of 4.9%. Critical to this growth and expansion is the climbing number of chronic diseases, which triggered earlier and more frequent checkups.
GEHC notably ensures that it sustains its momentum and gains a larger market share. The company has invested aggressively in research and development, allocating $2.7 billion to this effort alone from 2020 to 2022.
In February, the spinoff shelled out $3 billion to acquire Caption Health, a healthcare technology company developing AI software for medical imaging. The company's flagship product, Caption AI, is an FDA-approved medical imaging software that uses AI to guide healthcare professionals in acquiring and interpreting ultrasound images.
Basically, Caption AI is designed to help healthcare professionals who may need more specialized training in medical imaging, such as primary care physicians and nurses, to accurately and confidently perform and interpret ultrasound exams.
Apart from those, Caption Health's AI technology can assist in acquiring cardiac, lung, abdominal, and musculoskeletal images. It is intended to improve patient access to quality care by reducing the need for specialized medical personnel to conduct ultrasound exams.
By leveraging AI, these services could increase the speed and accuracy of diagnoses and treatment, ultimately improving patient outcomes. Needless to say, this deal significantly bolstered GEHC’s lineup and is expected to generate more than enough revenue to cover the price the company paid for the acquisition.
Despite its promising performance, GEHC remains under the radar and underappreciated. Comparing it to its peers, such as Mettler Toledo (MTD), Danaher (DHR), Boston Scientific (BSX), and Thermo Fisher (TMO), the company’s valuation looks discounted. Considering that it has the potential to become a long-term compounder, I suggest you buy the dip.
