Two Good Stocks to Buy Direct

07/03/2008 12:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, finds a medical equipment maker and drilling contractor he thinks look attractive and which both have direct-purchase plans.

Hill-Rom Holdings (NYSE: HRC) is a result of the split-up of Hillenbrand Industries into two companies—Hill-Rom, which makes medical equipment; and Batesville Casket, which manufactures caskets and products for funeral homes.

Hill-Rom is a leading manufacturer of medical technologies, including patient-support systems, beds, stretchers, and related equipment. The firm also provides noninvasive therapeutic products, medical-equipment rentals, and information-technology solutions. Products are used in hospitals, extended-care facilities, and home health-care environments to enhance safety and quality of patient care.

The firm recently raised the low end of its adjusted profit outlook for 2008 to $1.18 from $1.13 per share and reaffirmed a high-end estimate of $1.32 per share. (The consensus estimate is $1.26.) Revenue is expected to range from $1.46 billion to $1.49 billion, up from prior estimates of $1.43 billion to $1.48 billion. In the fiscal second quarter, revenue rose 12%. Excluding charges, the company earned 26 cents a share, versus 25 cents in the year-earlier quarter.

Based on the company’s low-end estimate of $1.18 per share, the stock trades at 24x 2008 earnings—not exactly bargain priced. However, the stock has behaved fairly well in recent trading, and further recognition from Wall Street is likely as more analysts begin to follow these shares [because] the company [has become] a pure play in the medical sector.

I have to admit that I’m intrigued by the stock. It is not easy these days finding decent health care stocks. While I would prefer to buy in the mid-$20s, investors who want health-care exposure may want to nibble on the shares at current prices. (It closed at around $26.50 Wednesday—Editor.) The company currently pays a quarterly dividend of  $0.1025, or 41 cents per year, giving these shares a yield of 1.5%.

Hill-Rom’s direct-purchase plan has a minimum initial investment of $250. There is no enrollment fee.

[Meanwhile,] Transocean (NYSE: RIG) is the world’s leading offshore drilling contractor. The stock is well positioned to benefit from surging oil prices. Prices for drilling rigs have been extremely strong. The consensus earnings estimate for the company is $14.28 per share. The stock trades at [about] ten times that estimate.

Of course, a sudden plummet in oil prices would impact these shares. Still, drilling for oil should be highly profitable for oil companies even if oil prices retreat toward $100, which means steady demand for the company’s products. Investors should buy at these levels. (It closed just above $146 Wednesday—Editor.) The company does not currently pay a dividend, although it would not be surprising if the firm initiated a dividend at some point as a result of its huge profit growth.

Transocean’s direct-purchase plan has a minimum initial investment of $500.

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