Dessauer's Health Picks

05/16/2003 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

"SARS is focusing investor attention on healthcare again", says John Dessauer, editor of Investor's World. "Viruses are tough targets for medical researchers. But odds are that they will find an effective treatment, perhaps even a vaccine that provides immunity. SARS is the latest global health scare. There will be more. The deadliest bugs adapt, mutate and become stronger. As a result, healthcare treatment is an industry that is here to stay. My advice is to own at least two core holdings." 

"Rite Aid (RAD NYSE) has already made tremendous progress, and I am not the only person who is impressed with its progress. Moody's raised the ratings on Rite Aid debt and said that the rating outlook is stable. Rite Aid still has a lot of debt, more than $3 billion, but it is generating enough surplus cash to reduce its debt by roughly $200 million a year. On April 4, Value Line raised its five-year price target for Rite Aid (now it's $7 to $14). Rite Aid was also upgraded from neutral to buy by Merrill Lynch, and then upgraded by Raymond James . The reason is not just that Rite Aid's balance sheet and cash flows have improved, but that management is making progress on the overall business plan. Rite Aid is leveraged to produce sustained growth in cash flow and earnings in the next several years. When I run the numbers, my calculation is a minimum expectation of $6 by the end of next year. If the retail environment improves, as I expect, we can see $10 a share by late 2004. And, unless Rite Aid is taken over by another company, there is a good chance that it will be a solid investment for many years after that. Rite Aid is a buy.

"My other core healthcare recommendation is Cardinal Health (CAH NYSE), a leading distributor of products and services for the healthcare industry. Cardinal is a very well-managed, highly ethical and extremely successful company in the sweet spot of healthcare. Cardinal distributes pharmaceuticals and medical, surgical, and laboratory supplies. In addition, Cardinal develops drug-delivery technologies and patient care products and packages. In other words, Cardinal is a middle man between patients, consumers, and manufacturers. The balance sheet is strong. Long-term debt is a modest 26% of total capital. Cash flows are very strong, at nearly $4 a share this fiscal year. The earnings growth record is exceptional, at 23.5% year for the last five years. Excess cash flow is being used to buy back stock. Earnings for this fiscal year are on track for $3.19 a share. In the new fiscal year (that begins on July 1), earnings are estimated at $3.80 a share. At roughly 16 times this year's earnings, the stock is attractive. By year-end, Cardinal is likely to rise to $75 and still offer us significant long-term profit potential. Take full advantage of the decline. Add this high-quality healthcare stock to your portfolio."

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