The pathway to profitability for suppliers may often involve removing the middleman. Medical distributors like Owens & Minor (NYSE:OMI) have become adept at playing that middle role between medical suppliers and healthcare providers. A closer look at Owens & Minor and the volatility measure beta will give investors an idea and a tool that can be used to build a defensive portfolio. (For more information about "beta" check out Beta: Know The Risk.)
Medical Supplier
Owens & Minor recently announced its receipt of federal regulatory approval to complete its acquisition of The Burrows, a privately held Chicago-based distributor of medical and surgical supplies. Owens & Minor is already one of the country's largest medical and surgical suppliers primarily serving acute-care hospitals. Typical products include disposable gloves, needles and syringes, sterile procedure trays and wound-closure products. The company typically has three- to five-year contracts with its customers. Its ability to secure contracts and its 2006 acquisition of the McKesson (NYSE:MCK) medical-surgical distribution business helped the medical supplier increase revenues 22.9% to $6.8 billion in 2007.
Notes On Beta
Beta can be thought of as a measure of volatility assigned to each stock against a broad index like the S&P 500. Let’s say the S&P 500 rises 5% and on the same day a stock rises 5%. That stock would have a beta equal to “1” since it mirrors the index's performance. A relatively young tech company like Google (Nasdaq:GOOG) has a higher beta of 2.14, suggesting greater market volatility, while an older and less-volatile Coca-Cola (NYSE:KO) has a beta of 0.48. A stock with a negative beta suggests it would move in the opposite direction of the broad index. (Speaking of the S&P 500, be sure to check out How Can I Buy An S&P 500 Fund?)
Medical Suppliers' Beta
Owens & Minor has a beta of 0.1, suggesting that if the S&P 500 falls 30%, the company should only fall approximately 3%. Looking at returns since the beginning of the year reveals that Owens & Minor has fallen less than 1%, while the SPDRS S&P 500 Index ETF (AMEX:SPY) has fallen 32.72%. Conversely, when the S&P 500 Index is rising, Owens & Minor, given its low beta, should not do as well. Competitors including Cardinal Health (NYSE:CAH) and McKesson (NYSE:MCK) have betas of 1.0 and 0.6. Cardinal Health is down 24.58% while McKesson is also down 31.47% since the beginning of the year.
Final Thoughts
Beta alone cannot predict the performance of a stock, but it can be used as a reference point when building a portfolio. The position Owens & Minor holds between suppliers and acute-care providers is a pivotal one that has proven to be profitable. Investors should search for other companies benefiting from playing in the middle.
