Stack and Moroney: Bets on Biomet

09/05/2003 12:00 am EST

Focus:

James Stack

President, Stack Financial Management

"The market for surgical implants is one of the hottest healthcare sectors, as the graying of America and improved medical techniques have spurred tremendous demand for hip and knee replacements," says Richard Moroney. Meanwhile, Jim Stack also sees opportunity in this growing market. Both advisors pick the same stock to benefit. 

"We're just sticking with our time-tested value approach to investing," says  Jim Stack, editor of Investech Market Analyst. "We would focus on companies with low debt and solid growth prospects. In our model stock portfolio, we are recommending the addition of Biomet Inc. (BMET NASDAQ) --which exemplifies this focus on low debt and future growth. This innovative designer and manufacturer of surgical implants for the replacement of hip and knee joints finished fiscal 2002 with over $386 million in cash and no long-term debt. The company has posted record earnings every year since it went public in 1981. For the past 10 years, sales and earnings per share have grown at an average annual rate of 15% and 16%, respectively. The outlook appears just as promising, as favorable demographics and more active lifestyles should generate strong demand for its products."

Biomet is also the latest "Focus List Buy" recommendation from Richard Moroney in Dow Theory Forecasts. "Biomet is coming off a solid fiscal 2003 ended in May; revenue rose nearly 17% to $1.39 billion. Per-share profits jumped 25% to $1.10. For fiscal 2004, the consensus estimate is $1.27, up 15%. Per-share results will get a bump from the firm's aggressive stock-repurchase program. Biomet's board recently approved the repurchase of an additional two million shares over the next 12 months as well as an additional $100 million repurchase program. The company certainly has the financial firepower to fund buybacks. Biomet has no long-term debt, and cash flow is ample. The strong finances and solid earnings growth are two reasons the firm was able to boost its annual dividend 50% in July to $0.15 per share. Biomet trades at less than 23 times consensus fiscal 2004 earnings estimates, a substantial discount to the P/E ratios of other players in the surgical-implant market. The stock has been marking time over the last year; and is now trading at a discount to its peer group. We view this stock as a quality holding for 12-month gains."

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