By Sam Stovall Companies that supply products and services for the health-care market have enjoyed a robust advance thus far in 2003. Year-to-date through May 23, the S&P Health Care Supplies subindustry index gained 12.8%, vs. a 6% rise for the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes). That solid advance has enabled the group to join the Industry Momentum portfolio -- the list of industries with top S&P Relative Strength rankings.
Robert Gold, who heads S&P's Health Care analyst group, is neutral on the overall near-term investment outlook for the health-care supplies industry. But he does believe that the group is poised for above-average revenue growth in coming quarters, reflecting the expected favorable effect of the weaker U.S. dollar vs. other major currencies, as well as steady growth in such categories as diabetes, vision care, blood collection, and medical-equipment sterilization.
CLEAR VISION. In vision-care markets, S&P is concerned about the industry's reliance on commodity-type products, such as contact-lens cleaning and lubricating solutions, and about the maturation of the contact-lens industry. However, the shares of outfits with exposure to laser-vision correction markets have been strong in 2003, aided by the expectation that improved economic conditions will help boost the volume of procedures performed.
In addition, the Food & Drug Administration has recently granted marketing approval to both Alcon (ACL) and VISX (EYE) for equipment that allows for customized laser-vision correction procedures that expands the patient population into those with astigmatism and irregular eye shapes. While evidence of rising procedure volumes has yet to be seen, S&P believes that these stocks can appreciate further, due to the bullish expectations stemming from the FDA actions.
S&P's outlook for suppliers of equipment to hospitals and other health-care facilities is positive. Demand for products such as hospital beds and stretchers, blood analyzers, and sterilization equipment continues to be driven by rising patient admissions and higher occupancy levels, increasingly fueled by an aging baby-boomer generation. The principal risk for this segment is the prospect of flattening reimbursement prices paid by government and private-sector health-care insurers, which may restrain capital spending among the hospitals.
RATE BACKLASH. Amid the broad economic slowdown in the U.S., significant budgetary pressures are facing both governmental (Medicare and Medicaid) and private-pay customers, exacerbated by ongoing acceleration in health-care cost inflation. According to Gold, S&P is concerned about a building backlash against rate hikes implemented by the hospital industry over the past two years. However, such a development isn't anticipated prior to 2004.
S&P's top choices in the group are Alcon and SurModics (SRDX), which licenses its coating technology to makers of medical devices such as stents. Each is ranked 4 STARS (accumulate) by S&P analysts.
Among other members of the industry subindex, Edwards Lifesciences (EW), a supplier of products to treat cardiovascular disease, carries a 3-STAR (hold) opinion, while drug-discovery technology concern Millipore (MIL) is ranked 2 STARS (avoid). Vision-care outfit Bausch & Lomb (BL) carries a 1-STAR (sell) recommendation.
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 116 industries in the S&P 1500) as of May 23, 2003.
S&P STARS* Rank
Computer Storage & Peripherals/Info. Tech.
Storage Technology (STK)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Genuine Parts (GPC)
Fertilizers & Agricultural Chemicals/Materials
IMC Global (IGL)
Health Care Supplies/Health Care
KB Home (KBH)
Internet Software & Services/Info. Tech.
Office Electronics/Info. Tech.
Philadelphia Suburban (PSC)
* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (strong buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's