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 now 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 of itself. 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
healthcare stocks.
Here are three companies I've found that appear nicely positioned
to capitalize on that trend.
1. American Oriental Bioengineering (AMEX:
AOB
)
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 this purveyor of plant-based drugs and
neutraceuticals. Chinese consumers greatly prefer traditional
organic remedies, some of which go back more than one 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 pushshares above $10 a few years
ago.
But as the company grew, a major flaw appeared: ABO's acquisition
spree was taking it into ever-lowerprofit margin niches. EBITDA
margins that had been around 35% likely fell down to 20% in
2010.Earnings per share (
EPS
) looks to have fallen by half in 2010 to around $0.26. 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-growthbusiness
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
theproductivity of its distribution network. Those efforts are
starting tobear 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, soEPS is
expected to rise roughly 20% in 2011 (to $0.31) on a projected 12%
increase in sales. Current R&D efforts are focusing on
improving the efficacy of AOB's existing products -- money likely
better spent than yet another acquisition.
Meanwhile, $92 million in cash holdings accounts for more than half
of the company'smarket value , and shares trade at about 60% of
tangiblebook value . Back out that cash, and shares trade for less
than five times projected 2011cash flow . Shares look capable of
rising roughly 40% to the $3.50-$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.)
2. Concord Medical (NYSE:
CCM
)
Here's a sobering stat: Nearly 3 million people in China are
diagnosed with cancer every year, and nearly 2 million people die
from the disease annually. Early detection remains the key factor
behind whether someone can survive cancer and this company aims to
play a big role.
Concord operates more than 100 radiotherapy and diagnostic centers
throughout China, with plans to open another 100 during the next
five years. Analysts at Brean Murray expect the diagnostic industry
to double in size by 2015, driven by wider medical insurance
coverage for many middle-class Chinese citizens.
Shares look to have 15% to 20% upside if you look at current
trends. But shares likely have significantly more upside for
patient investors wanting to ride out the company's five-year
growth plan. This $7.50 stock could hit $9 in a year, but I look
for it to move past $12 in a few years as
EPS
rises up to $1 by 2013.
3. China Jo-Jo Drugstores (Nasdaq:
CJJD
)
This is a micro-cap stock and may not appeal to everyone. China
Jo-Jo aims to become the "CVS of China," though it currently
operates less than 50 retail pharmacies, with plans to grow the
base to 75 by 2012. The company sells both traditional herbal
remedies and modern pharmaceuticals, along with other wares
typically found at a drug store. Each store has a licensed
physician on-site, paving the way for China Jo-Jo to start bolting
urgent care facilities onto each of its drug stores.
Despite high levels of staffing, it's a very profitable business,
with gross margins exceeding 50% and operating margins exceeding
20%. Each of those metrics is roughly twice as high as what
U.S.-based drug stores typically post. That said, as the company
grows, margins are likely to come down to a moderate extent as the
company opens stores in more competitive areas. Shares, which trade
for less than half of the 52-week high, look quite cheap at around
four times projected fiscal (March) 2012 profit forecasts.
Action to Take -->
Each of these three stocks represents a unique growth and risk
profile, so the most appealing name for you depends on your risk
tolerance. Concord Medical appears to be the most solid
business model
, though it will likely take several years for shares to rise by a
significant amount. American Oriental Bioengineering and China
Jo-Jo Drugs are more speculative, but look significantly
undervalued.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.