More Upside For Owens & Minor Stock After 120% Rally?

by Trefis Team
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Despite over a 120% rise over the last month or so, at the current price of around $17 per share we believe Owens & Minor stock (NYSE:OMI), a global healthcare logistics company, has more room for growth. OMI stock has rallied from $7.50 to $17 over the last month compared to the S&P which moved 3%, with the resumption of economic activities as lockdowns are gradually lifted. OMI stock is also up 170% from levels seen in early 2019. Despite the healthy rise, we feel that the company’s stock still has potential, because of its preliminary Q2 update, and a very positive outlook for the full year.

The rise since early 2019 can largely be attributed to P/E expansion from 6x to 30x now based on trailing adjusted earnings. This more than offset over a 50% decline in adjusted EPS. The decline in EPS was primarily due to margin contraction of 51%, clubbed with a 2% revenue decline over the same period. However, based on the company’s recently provided outlook, 2020 will likely see massive earnings growth. Our dashboard, ‘What Factors Drove 170% Change in Owens & Minor Stock between 2018 and now?‘, has the underlying numbers.

So what’s the likely trigger and timing for further upside?

The global spread of coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries were being postponed, resulting in lower demand for medical devices and related products. However, the situation on the ground has changed over the recent weeks, with an earlier than expected increase in elective procedures in the U.S. resulting in increased demand for Owens & Minor products, which includes distribution & warehousing, inventory solutions, logistics, and data analysis, among other products and services.

The company in its preliminary Q2 update stated that it now expects its adjusted earnings to be in the range of $1.00 to $1.20 per share for full year 2020, up from its previous guidance of adjusted earnings between $0.50 and $0.60 per share. At the mid-point of the new range, EPS will roughly be 2x that of in 2019. This means that the stock at current levels of $17 is trading only at 15x its forward earnings. While this figure appears to be higher than the levels seen over the recent years, 9.2x as late as 2019 end, it is much lower when compared to its peers, Patterson Companies trading at 20x its average consensus 2020 earnings, and Henry Schein trading at 31x.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors focusing their attention on 2021 results and beyond. Given Owens & Minor stock is trading at an attractive valuation, when compared to some of its peers, the stock will likely see more upside in the near term. Also, continued growth in elective procedures over the coming months will likely bode well for OMI stock. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.

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