Wednesday, April 23, 2003

Risky Procedure: Buying Medical Supply Stocks

Stocks of companies doing business in medical equipment and supplies are often described as "defensive" or a "safe haven." Truth is, they're not all that safe.

"You can be a long-term investor in this business," says analyst Ryan Rauch of Boston investment bank Adams Harkness & Hill. "You just have to be able to stomach volatility."

One example is Inamed, a Santa Barbara, Calif.-based maker of products for cosmetic procedures, such as saline-filled breast implants, collagen implants for wrinkles and silicone bands used to reduce the stomach capacity of obesity sufferers.

Like many of its peers in the medical equipment business, Inamed stands to benefit from a demographic tailwind as millions of baby boomers head toward their golden years. In 2002, Inamed's facial aesthetics sales grew 10%, to $74 million.

Moreover, Inamed's business extends well beyond the U.S. and Canada. In fact, the company pulls in one-third of its revenue from outside North America. Should the dollar continue its recent weakening trend, Inamed's results will get a boost.

Not surprisingly, expectations for the company's financial future run high. Analysts reporting to Thomson First Call think the firm will enjoy an annualized earnings growth rate of 17% over the next three to five years.

So what's wrong with the "safe haven" argument? In a sense, medical supply companies may suffer from their own success. Since 1998, health care equipment stocks in the S&P 500 have risen 39%, versus a 19% drop for the entire index. With those results, however, come rich valuations and high hopes. At the first sign of something amiss, these stocks often get dumped.

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