A growing part of healthcare is diagnostics, the ability to clinically test and probe the human body. Occupying this very competitive field are Alere (NYSE:ALR) and Bio-Rad Laboratories (NYSE:BIO).
Between the two, I believe investors should opt for Bio-Rad. Here’s why:
While Alere earned $2.48 a share in the third quarter, most of that profit came from a one-time gain of $289 million from its 50-50 joint venture with Procter & Gamble (NYSE:PG). Without the gain, its actual earnings were 67 cents a share, a 13.6% increase year-over-year.
Now consider its revenue. At the end of 2005, the company generated $422 million. At the end of 2010, it was $2.2 billion, a more than fourfold increase in just five years.
However, in those same five years, it incurred cumulative operating losses of $906 million. To be fair, these losses include a $1 billion goodwill impairment charge in 2010 related to its health management reporting unit. Subtract the charge and you have a company that’s made cumulative operating profits of $94 million on $6.9 billion in revenue. At the end of the day, despite the interesting things Alere is doing, it’s hard to get excited when there’s little or inconsistent profitability.
Bio-Rad, on the other hand, hasn’t grown nearly as quickly as Alere, but it’s made a heck of a lot more money. In fact, in the past nine years it’s increased operating profits on seven occasions.
So far this year, its revenue is still growing, up 9.3% to $1.5 billion in the first three quarters. Unfortunately, it appears the economy is starting to have an effect on operating margins, which actually shrank 160 basis points in the third quarter to 14.3%. Analysts expect it to deliver $2.08 billion in revenue in 2011 and earnings per share of $5.78. That’s down from $6.24 a year ago, but still decent.
While Alere has sexier products, its ability to generate consistent profits is questionable. Bio-Rad has relatively boring products and is growing at a much slower pace. However, its earnings are far healthier while possessing a strong balance sheet that includes more cash than debt. It’s this consistency that’s enabled its stock to generate double-digit returns in seven out of the last 10 years. Despite short-term margin constraints, Bio-Rad’s the better stock to own at this point.
As of this writing Will Ashworth did not own a position in any of the stocks named here.
