The Best Companies Of The Medical Industry – September 2015

While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best companies of the medical industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 31 were identified as being closely related to the medical industry.  Of those, only three are suitable for the Defensive Investor, fourteen are suitable for the Enterprising Investor, and the remaining fourteen are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 152.5% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 27.18.  The industry as a whole, therefore would appear to be overvalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

None of the companies reviewed were found to be both undervalued and suitable for either the Defensive Investor or the Enterprising Investor.

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

Baxter International Inc. (BAX)

Baxter International qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor’s only initial concern is the insufficient earnings growth over the last ten years, while the Enterprising Investor is only concerned with the level of debt relative to the net current assets.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.24 in 2011 to an estimated $3.41 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 1.02% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.  (See the full valuation)