Long Idea - OMI

Long Idea - Owens and Minor (OMI)

OMI is one of the largest hospital supply chain businesses in the United States.

Shares of OMI are cheap due to the slowdown in the hospital business caused by high unemployment (loss of insurance coverage) and budget cuts. Many sell side analysts are modeling this as a permanent condition because management can't yet quantify when a pick-up in patient volumes might start.

The current stock price suggests that the market is under-pricing future growth potential which has at least 3 levers: 1) expansion into new markets such as ambulatory care centers 2)unemployment rates falling and/or more people gaining access to health care and 3) a continued mix shift towards high margin private label supplies.

The hospital supply market is becoming a duopoly where, on a national scale, the only other large competitor to OMI is a division of Cardinal Health. This national scale creates a competitive moat. As the trend towards consolidation of hospitals and doctor practices continues, logistics managers are looking to consolidate supply chains. OMI's scale and national footprint give the business both a scope advantage and a cost advantage that is difficult to replicate. In the latest earnings conference call, management tried to communicate this growing opportunity to analysts but they were not able to quantify the near term effect on quarterly earnings. The analysts on the call were therefore more interested in talking about things they can model into their earnings forecast such as the numbers of selling days in this quarter versus the quarter a year ago.

OMI's balance sheet is very conservative (probably too conservative) with very little debt. The company just funded the remaining pension liability and terminated the defined benefit plan. The under-levered balance sheet and steady cash flows of the business might attract private equity interest. Capital IQ gives OMI a below average rating for takeover defenses.

The main catalyst for higher share prices is a pick-up in employment that drives patient volumes back to a more normalized level. Assuming this happens sometime over the next three years (caused by on or both a drop in unemployment or some version of Obamacare actually taking effect) the company could earn $2.70+ a share. A 15 multiple, would price OMI shares at $40 giving investors a 30%+ total return including the 2.4% annual dividend.