Omnicare (OCR, $33) is the leading supplier of pharmacy services to the long-term care facility industry. Many investors like to talk about the heavy hitters in the pharmaceutical industry, such as Pfizer (PFE) or Johnson & Johnson (JNJ). I prefer to find excellently managed small and mid-size companies that have the power of earnings growth. Higher earnings will fuel a higher dividend over time. Omnicare fits that focus.
Annual revenues are $2.6 billion and OCR operates two businesses. The largest segment, Pharmacy Services, distributes pharmaceuticals, related pharmacy consulting, patient data management services and medical supplies. Pharmacy Services provides specific patient and drug history, and drug interaction management services. This expertise is becoming more desirable as drug interaction develops into a more acute problem for the elderly. OCR serves the needs of over 800,000 patients in 45 states.
The second business is contract research organization services. With its access to a large geriatric population, OCR offers product development and research by conducting tests of geriatric-related drugs and medical devices.
I have followed Omnicare since 1997 and have been a shareholder of an increasing number of shares since 1998. What I liked about them then is why I am still increasing my stock position today. I like OCR’s management. Times got tough between 1999 and 2001. The Feds cut Medicare disbursements to companies such as OCR. This loss of revenue forced the company to take some drastic actions. They consolidated facilities, exited marginal businesses and generally cleaned house. Management started expanding its patient drug interaction and individual patient record-keeping services. These programs save money for Medicare, the patient, and the long-term care facility. The company struggled with profits that shrank from $0.90 a share in 1998 to $0.53 in 2000.
With a change of heart on the part of Congress, Medicare has reinstated most of the disbursement cuts of 1998. In addition, non-Medicare business has improved, and OCR is finally reaping the rewards of its restructuring.
Earnings are expected to increase from $0.79 in 2001 and $1.48 last year to $1.98 this year and $2.48 in 2004. Earnings growth going forward is expected to expand by an average of 20 percent annually. Operating cash flow has grown an average of 16% a year since 1998.
While OCR offers a small dividend of $0.09 a year, its DRIP program is more of a direct stock purchase tool. For example, I initially bought OCR at $28, just before it reached an all time high of $40 in 1998. It then began a precipitous slide downward. In 1999, I bought again at $18 and more at $8. In 2001, I sent in an additional purchase at around $18. In 2002, I twice sent in an additional OCP (Optional Cash Plan ) sum when Omnicare was trading close to $20. It has moved upwards ever since. I believe the stock has the potential to advance to $45 when earnings of $2.48 a share are closer at hand.
Using the "What if I Had Invested" tool on sharebuilder.com, a $100 monthly investment in OCR since June 1997 would have cost an investor $7,600. That position would be worth $12,700 today, for a gain of 67 percent. A similar investment in the S&P 500 would have a money-losing value of $6,100.
Although OCR has had a great run, it is probably not too late to buy into it. OCR has proven its staying power and should continue to grow over the next 5 years. New investors could be amply rewarded down the road.
George Fisher, author of The StreetSmart Guide to Overlooked Stocks (McGraw Hill, 2002) and All About DRIPs and DSPs (McGraw Hill, 2001), Sagamore Beach, MA
Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 613-352-7448 - Published October 2003
Copyright North Shore Associates 2003