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MAY 31, 2004
Hospira Just May Put You In The Pink Time to add another synthetic word to your investment vocabulary. It's Hospira, which is defined as: 1) a recent spin-off of health-care giant Abbott Laboratories (ABT ); 2) the latest member of the Standard & Poor's (MHP ) 500; and 3) an antidote to this spring's fever-inducing outbreak of initial public offerings. In April, Abbott handed out to its stockholders 100% of the shares in Hospira. They began trading above $31, then promptly sank to $26, about where the shares change hands now on the New York Stock Exchange. If Hospira's first steps hardly seem promising, that's one reason why I see the Lake Forest (Ill.) company as worth much more of the intelligent investor's attention than the long calendar of pending tech and biotech IPOs. Few investors know much about, or have even heard of, Hospira. Some Web sites will tell you its ticker symbol, HSP, belongs to Hispanic Broadcasting (which last year became Univision Radio). Search Google, and a link to Hospira's home page does pop up. But the first listing is: "Did you mean: hospital." THAT'S A LOT CLOSER TO THE MARK. When Abbott decided last year to focus on its higher-risk, higher-reward operations that develop patented drugs and medical devices, it bundled into Hospira its generic-drug and more mundane hospital-supply businesses. These units' roots reach back 70 years to the development of the anesthetic sodium pentothal. Together, they collected $2.4 billion in revenue last year, not counting an additional $159 million in sales to Abbott. Some of that came in contract manufacturing. Two other Hospira divisions -- injectable drugs and infusion and intravenous therapy products -- produce most of the revenue. These sales, derived from long-term contracts, are the very definition of steady, but they grow slowly, and profit margins have narrowed as Hospira's hospital customers have grouped together to buy in bulk and drive down prices. Hospira CEO Christopher Begley, an 18-year Abbott veteran, told me that a key objective is to reverse the profit margin trend (table). How? First, Begley has boosted spending on research and development. In Hospira's first-quarter results, set to be released in late May, investors will see a 25% jump in R&D outlays. Begley added that in future quarters, they will rise at a double-digit rate, until annual spending on R&D as a percentage of sales rises to perhaps 5% from 3% to 4% historically. Some of that will go to generic versions of more than 30 injectable drugs that will lose patent protection in the next few years. A year ago, Begley said, Hospira's former parent, Abbott, had allocated funds to develop just four such drugs. Hospira also hopes to widen margins by exiting some less profitable lines, and sales abroad -- now just 15% of the total -- may begin to grow meaningfully by 2006. Despite higher spending on research, Hospira still expects to have cash from operations of at least $300 million this year. Even after some capital projects, there figures to be cash enough for a dividend, details of which the board has yet to announce. Earnings this year will be dented by startup costs, which Begley puts at 15 cents to 19 cents a share. Excluding them, earnings may reach $1.50 a share or so. In 2005 and 2006, Begley sees profits growing maybe 8%, despite flattish sales. So the question for prospective investors is: How is the market valuing Hospira? To compare it with some of its public-company rivals, I figured Hospira's current enterprise value (the sum of its stock market value and net debt), which came to $5.1 billion, or 13 times its latest 12 months' earnings before interest and taxes. This is a discount to comparable multiples commanded by the likes of Becton Dickinson (BDX ) (17 times), Alaris Medical Systems (AMI ) (17.6 times), and Baxter International (BAX ) (19.6 times). In other words, Hospira appears to be one of those occasional new issues that comes to market with low expectations and trades down to a discount. Which reminds me, I forgot to give you the investment dictionary's listing for Hospira's antonym. That would be Google.  By Robert Barker
BW MALL
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