Stock Analyst Notes
by Matthew Coffina | 10-27-09 | 5:24PM |
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On the surface, Owens & Minor's OMI third-quarter results looked solid. However, margins benefited from a large inventory valuation adjustment, without which margins would have deteriorated significantly. We continue to believe O&M is among the most insulated health-care companies from both the economy and major regulatory reform, and we are maintaining our fair value estimate.
Excluding an $11.5 million credit related to a price reduction by a supplier, we estimate that O&M's third-quarter gross margin would have declined by approximately 56 basis points relative to the prior year, to 9.5%, and that its operating margin would have declined by a similar amount to around 2.2%. Considering the company's slim margins, even small changes to profitability can have a drastic effect on the bottom line. Management attributed the decline to lower margins on new customers, including those from the Burrows acquisition. If what we saw in the adjusted third-quarter margin persists, and the firm cannot squeeze out savings through its selling, general, and administrative expenses or from acquired operations, then we may consider lowering our fair value estimate.
Management reiterated its outlook for 2009 earnings per share of between $2.55 and $2.70, excluding the effect of the third-quarter inventory valuation credit. Given the weak third-quarter performance, we note that even the low end of this projection may be difficult to achieve.
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