OCR: Is Omnicare Fit as a Fiddle?

My latest column is up at RealMoney.

Omnicare (OCR) provides pharmaceuticals and pharmacy services to a variety of health care providers. It also offers contract research services to drug manufacturers. Earnings have been a bit rocky, but free-cash-flow yield and other valuation metrics make this stock worth a checkup.

The company’s primary competitor is PharMerica (PMC) , and it lists its peers as AmerisourceBergen (ABC) , Parexel (PRXL) , Pharmaceutical Product Development (PPDI) , PSS World Medical (PSSI) , and Sunrise Senior Living (SRZ) . There is also some competitive overlap with retail pharmacy companies such as Walgreens (WAG) and CVS Caremark (CVS) .

The long-term care industry is poised to benefit from aging boomers. However, investors won’t need to wait to reap the benefits. As I’ve pointed out recently, health care facilities are one of the few areas of the economy seeing employment growth. Presumably, they aren’t hiring for the sake of hiring.

Omnicare is trading at a reasonable multiple of 15 times this year’s earnings estimates. Given that the company has hit a speed bump, that doesn’t seem particularly cheap, but the stock begins to look enticing when you look at measures beyond earnings.

Even after deducting cash paid for acquisitions, however, the $280 million in free cash flow offers a healthy 8.75% yield.

Omnicare is currently trading below book value, which seems silly given that the industry average price-to-book multiple is above 2.0. Meanwhile, analysts expect the company to grow approximately 15% annually over the next five years. That estimate is in line with the company’s sustainable growth rate based on fundamentals.

Even if the company only grows at the 10% level forecast by the most pessimistic sell-side analyst, the low valuation could boost total returns to 20% or more annually if the price-to-book multiple converges with the industry average.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

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