Markets & Finance

Health-Care Supply Stocks: Not So Robust


S&P says the subindustry's share-price momentum has weakened, and its fundamental outlook is neutral

From Standard & Poor's Equity ResearchLike an engine that's "just not running right," sometimes a stock, industry, or sector is no longer firing on all cylinders. Today, that may be the case for the S&P 1500 Health Care Supplies subindustry index. In the past year, it has gone from being among the top 10% of subindustries based on trailing 12-month price performance (and thus received a Relative Strength Ranking of "5"), to the next 20%, (an RSR of "4") and now has slipped into the middle 40% (an RSR of "3"), implying but not guaranteeing that its performance in the period ahead will likely only keep pace with the broader U.S. equity market.

Take a look at the accompanying chart. As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the index's long-term mean relative strength.

There are seven large-, mid-, and small-cap stocks in the S&P 1500 Health Care Supplies subindustry index. S&P analysts cover two of those stocks, and also follow two industry names that are non-index components: Alcon (ACL), ranked 3 STARS, or hold; Align Technology (ALGN), ranked 1 STARS, or strong sell; Cooper Industries (COO), ranked 3 STARS; and Dentsply International (XRAY), ranked 2 STARS, sell.

Recession-Prone Products

Robert Gold, who follows this group for S&P, has a neutral fundamental outlook on the health-care supplies subindustry for 2009. Gold believes many categories of the supplies group are historically largely recession-resistant. These include areas such as basic hospital supplies, diagnostic testing equipment, sterilization equipment, beds and stretchers, and blood-collection products. However, S&P thinks other areas will be hurt by the slowing U.S. economy and reduced levels of consumer confidence, most notably laser vision correction products, which are classified in the supplies category.

Gold is also concerned about pressure on hospitals to contain costs, and S&P does not believe there will be a meaningful increase in the number of U.S. hospitals over the coming decade. On a more positive note, many of the companies in this group derive a significant portion of revenues from non-U.S. markets, which we believe remain strong.

In vision care, Gold thinks 6% growth in the contact lens segment is sustainable, and believes that growth opportunities remain in the specialty lens segment. Yet S&P thinks shares of companies that also have exposure to laser vision correction markets will struggle with flagging consumer demand as economic weakness reduces the number of elective medical procedures during 2008 and 2009.

Standard & Poor's outlook for suppliers of equipment to hospitals and other health-care facilities is also neutral. Gold sees demand for products such as hospital beds and stretchers, blood analyzers, and sterilization equipment continuing to be driven by rising patient admissions, increasingly fueled by an aging baby boomer generation. However, Gold also sees risks, including flattening reimbursement rates and tight credit market conditions that likely will restrict capital spending by hospitals.

Amid slowing U.S. economic growth, S&P sees significant budgetary pressures both on government (Medicare and Medicaid) and on private pay customers. S&P believes the situation is exacerbated by accelerating health-care cost inflation. Gold is concerned about a potential backlash against rate hikes implemented by the hospital industry over the past two years.

So there you have it. The group's fading relative strength is supported by a neutral fundamental outlook, in S&P's view.

Industry Momentum List Update

Here is this week's list of the subindustries in the S&P 1500 with Relative Strength Rankings of "5" (price changes in the past 12 months that were in the top 10% of the S&P 1500), along with an index component with the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry Company Ticker S&P STARS Rank Price (1/16/09)

Automotive Retail O'Reilly Automotive ORLY 4 $29

Biotechnology Genzyme GENZ 5 $68

Brewers Molson Coors TAP 4 $42

Education Services DeVry DV 4 $59

Environmental & Facilities Services Waste Management WMI 4 $32

Home Improvement Retail Lowe's LOW 4 $21

Homefurnishing Retail Bed Bath & Beyond BBBY 3 $26

HyperMarkets & Super Centers Wal-Mart WMT 5 $52

Insurance Brokers Aon AOC 4 $42

IT Consulting & Other Services CACI CAI 4 $45

Packaged Foods & Meats Kraft Foods KFT 5 $29

Restaurants McDonald's MCD 5 $60

Trading Companies & Distributors Fastenal Co. FAST 5 $33

Water Utilities Aqua America WTR 3 $20

Source: Standard & Poor's Equity Research


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