Finally, the company may be able to find more value in its leadership as a wi-fi services provider, with its 23,000 hot spots in the United States and 125,000 worldwide.
Reasons for Caution.
The wireless business continues to be very compet.i.tive, with service revenues per unit flat to slightly declining. The company"s apparent attempts to upgrade as many wireless customers as possible to data-connected smartphone services may have appeared more successful than they were because of the iPhone exclusivity, which will end soon. This may lead to an erosion in revenue and profitability unless the company is consistently able to deliver more value through its U-verse bundle, a successful 4G rollout, and broader perceptions of having the best and widest wireless network available. Wireline revenue has been declining for years as well, but those declines have lost momentum. Finally, while some of the cost of new wireless and data networks are already behind the company, AT&T will always face large capital investment requirements.
CONSERVATIVE GROWTH.
Automatic Data Processing, Inc.
Ticker symbol: ADP (NYSE) S&P rating: AAA Value Line financial strength rating: A++ Current yield: 2.9%.
Company Profile.
"The Business behind Business" is the rather apt slogan employed by Automatic Data Processing, or ADP, as it is more widely known. ADP is the nation"s largest provider of outsourced employer payroll, tax processing, employee benefits, and other automated and non-automated human resources (HR) and other business services.
The Employer Services unit accounts for about 72 percent of revenues and is engaged in payroll, tax, and other transaction processing for about 550,000 employers worldwide. These transactions include paychecks, direct deposit, FICA withholding tax payments, retirement and other benefits services, and reporting. About 80 percent of this business is in the United States, 13 percent in Europe, 5 percent in Canada, and 2 percent in Asia and Latin America.
The Professional Employer Organization Services unit provides a more complete, seamless HR back-end solution, branded as "TotalSource," for about 5,600 clients, including personal HR consultation for employees and retirement plan administration. There are forty-seven TotalSource offices in twenty-two states. This unit accounts for about 14 percent of the business.
The remainder of ADP"s business is primarily made up of the Dealer Services unit. Dealer Services provides a comprehensive and integrated dealership management solution (DMS), with bundled hardware and software designed to manage all dealership operations including sales management, inventory, HR, procurement, factory communications, warranty, accounting, and other functions. This DMS product is used by auto, truck, marine, motorcycle, and heavy equipment dealers, among others.
Recently the company has made a series of small acquisitions to expand into other vertical industries. A good example is AdvanceMD, a privately held provider of practice management and electronic health records systems for small and mid-sized medical practices. Another is Byte Software House S.p.A., an Italian payroll and HR software and service provider. Others include Cobalt; Workscape, Inc. DO2 Technologies; OneClick HR; and others in the HR and office processing s.p.a.ce.
Financial Highlights, Fiscal Year 2010.
ADP"s products and services are directly tied to the level of employment, so one wouldn"t have been surprised to see a pretty substantial top and bottom line hit during the 2008-09 time period. Yet, the company didn"t really see any sort of pullback but rather a flattening in both lines. Now, as employment gradually recovers, that should translate directly into demand for payroll and other employee services. The company earned $2.39 per share in FY2010, exactly the same figure as FY2009, on revenues of $8.9 billion, again almost flat revenues. ADP, like many of the companies it supports, learned how to streamline operations during this period. For FY2011, the company expects some acquisition costs, but also expects revenue to grow about 5 percent (9 percent including the acquisitions), with a 5 percent growth in earnings. The company also increased its dividend in late 2010 to an indicated $1.44 per share, and has been fairly aggressive in share buybacks, reducing share counts by about 100 million shares, to 492 million shares, since 2004. The company has only $35 million in long-term debt, less than 0.5 percent of total capital.
Reasons to Buy.
While not an exceptional growth business, ADP is a good, safe, and steady way to play the normal growth in the economy, with a bit of a short-term kicker in the form of the economic recovery. The company has a good brand in the business, and with the exception of PayChex (another 100 Best Stock), has little substantial compet.i.tion, and should own, or co-own, this niche for a long time to come. Outsourcing trends should push more business their way, while acquisitions make the offering more complete and achieve international expansion. The company has been fair to shareholders, giving them "raises" in the form of increased dividends in each of the last seventeen years.
Reasons for Caution.
Aside from not being a growth star, the company is also somewhat vulnerable to economic downturns. That said, the most recent one didn"t hurt them much.
CONSERVATIVE GROWTH.
C.R. Bard, Inc.
Ticker symbol: BCR (NYSE) S&P rating: A Value Line financial strength rating: A++ Current yield: 0.8%.
Company Profile.
Founded in 1907 by Charles Russell Bard, the company markets a wide range of medical, surgical, diagnostic, and patient-care devices. It markets its products worldwide to hospitals, individual health care professionals, extended care facilities, and alternate site facilities. Most of Bard"s products fall into the category of consumables/suppliesintended to be used once and then discarded. The company operates in four core segments: Urology, Oncology, Vascular, and Surgery.
Urology (27 percent of sales)The company offers a complete line of urological diagnosis and intervention products including Foley catheters (the market leader and their largest-selling product), procedure kits and trays, urethral stents, and specialty devices for incontinence.
Oncology (27 percent of sales)Bard"s products are designed for the detection and treatment of various types of cancer. Products include specialty access catheters and ports, gastroenterological products, and biopsy devices. The company"s chemotherapy products serve a well-established market in which Bard holds a major market position.
Vascular (27 percent of sales)The company"s line of vascular diagnosis and intervention products includes peripheral angioplasty stents, catheters, guide wires, introducers and accessories, vena cava filters, and implantable blood vessel replacements. They also sell electrophysiology products such as cardiac mapping and laboratory systems, which support sales of the consumables.
Surgical Specialties (15 percent of sales)Surgical specialties products include meshes for vessel and hernia repair; irrigation devices for orthopedic and laparoscopic procedures; and topical hemostatic devices.
Bard markets its products through twenty-two subsidiaries and a joint venture in over a hundred countries outside the United States, with international comprising about 31 percent of sales. Princ.i.p.al markets are j.a.pan, Canada, the United Kingdom, and continental Europe.
Financial Highlights, Fiscal Year 2010.
The company continued a steady march forward in sales and per-share earnings for 2010, although total earnings stalled a bit at $509 million for the year. Bard is also raising R&D expenditures in line with sales and has made a few pinpoint acquisitions to bolster its product lines. The company continued to do share buybacks, reducing outstanding share counts approximately 3 percent after a 5 percent reduction in 2009.
Reasons to Buy.
Bard has a broad and well-diversified product line of consumables in a market that has been nearly recession-proof. No single segment dominates the business. Health care spending continues to grow ahead of inflation, and the majority of Bard"s products fall into the area of non-discretionary purchases.
They have the number one or number two market position across nearly 80 percent of their product line, and their product line recognizes and addresses a number of compelling trends: an aging demographic and the shift to lower-cost, patient-a.s.sisted (in-home) therapy.
The company has been successful with recent acquisitions, and remains well positioned to continue this strategy. They have large reserves of capital and low levels of debt. Bard has stated its intention to grow its R&D investment by up to 400 basis points (4 percent) through the next two to three years, and acquisitions have been one of the favorite tools.
We also like the company"s stability, with a beta correlation of only 0.32, the shares are downdraft-resistant. Additionally, compared to many medical product manufacturers, Bard"s products entail relatively little risk of recalls or events of that sort.
Reasons for Caution.
Bard cannot afford to out-research their much larger compet.i.tors (St. Jude Medical, Boston Scientific, Johnson & Johnson) and so tends to acquire R&D properties on the open market. This is a more expensive method of funding R&D, to be sure, and it"s an operating model that requires far more liquidity than internally developed IP might. The model works for Bard, but if for whatever reason maintaining this high liquidity becomes an issue, it could hamper Bard"s top-line growth. We also feel the dividend, which lags sales and earnings growth considerably, could be a bit more generous given the industry, cash flow, and solid financials. While some cash is being used for share repurchases, the combination of cash flow and low dividends tends to signal "acquisition," which brings some risk to the business.
AGGRESSIVE GROWTH.
Baxter International, Inc.
Ticker symbol: BAX (NYSE) S&P rating: A+ Value Line financial strength rating: A++ Current yield: 2.5%.
Company Profile.
Baxter International develops, manufactures, and markets biopharmaceuticals, drug delivery systems, and medical equipment. Their products are used to treat patients with hemophilia, immune deficiencies, infectious diseases, cancer, kidney disease, and other disorders. Based in the United States, Baxter has operations in over 100 countries and operates in three main segments: Bioscience, Medication Delivery, and Renal.
The Bioscience segment comprises 45 percent of the business and produces pharmaceuticals derived from blood plasma. The bulk of the product line is devoted to treatments for hemophilia and other bleeding disorders, and plasma-based therapies to treat immune deficiencies, burns and shock, and other chronic and acute blood-related conditions. It also includes biosurgery products and vaccines.
The Medication Delivery business is about 37 percent of the business and produces a wide range of equipment used to apply, inject, infuse, and otherwise deliver fluids and medications to the patient. Products include intravenous administration sets, premixed drugs and drug-reconst.i.tution systems, and prefilled vials, syringes for injectable drugs, IV nutrition products, infusion pumps, inhalation anesthetics, and pharmacy compounding and packaging technologies.
The Renal business is about 18 percent of the total and is focused on the treatment of patients with kidney failure who are undergoing peritoneal dialysis treatment. They supply a range of products, including home PD machines and all of the accessories and disposables a.s.sociated with them, as well as equipment and supplies for clinical dialysis facilities.
Product sales are split fairly evenly between the United States and Europe with the rest of world making up the balance. International sales are about 58 percent of the total.
Financial Highlights, Fiscal Year 2010.
Despite the recession, Baxter had earnings in 2009 even with a modest 2 percent increase in revenues. Reduced hospital admissions and fewer surgical procedures have diminished the BioScience division somewhat, but the Medical Delivery segment continues strong. Earnings are on track for a 2011 EPS of $4.25, up from just $1.52 in 2005 and representing a healthy 14.5 percent compounded earnings growth rate over the past five years. Operating and net profit margins have increased steadily through this period.
Reasons to Buy.
Baxter is a solid play on medical supplies for recurring or chronic diseases, and will do well as the population ages.
Over the past five years, Baxter"s total shareholder return is nearly 85 percent, while the S&P 500"s return over the same period is, not surprisingly, down 9 percent. What is surprising is Baxter"s performance against the S&P Healthcare Sector, which over the past five years is up a rather paltry 5 percent. Why is Baxter beating its sector index? Baxter"s focus on treatments for long-term, chronic, life-threatening conditions has largely insulated them from demand fluctuations; their international market presence has allowed them to serve the fastest growing markets; and their high market penetrations offer further protection from smaller, local compet.i.tion.
The company has thirty products in its pipeline with targeted peak sales of $250 million each, and over half of those are already in Phase III clinical trials, including a treatment for some of the most debilitating symptoms a.s.sociated with Alzheimer"s disease. Baxter"s steadily improving cash flow (up 18 percent in 2009) looks to be more than sufficient to grow its R&D budget while continuing to fund share repurchase and its steadily growing dividend.
The company"s ADVATE product continues to gain momentum and reached sales of $2.05 billion in 2009. It holds leadership positions in the United States, Europe, j.a.pan, and several other markets. Looking forward to continued growth, the company believes that some 70 percent of the world"s hemophilia patients are currently undiagnosed and that only 25 percent of those diagnosed are receiving adequate care.
The company is gaining strength in the lucrative plasma market, and is hopeful to bring a major new Alzheimer"s drug to market after trials expected to be completed in 2012.
Reasons for Caution.