Impact of health care reforms
Significant reforms to the U.S. health care system were adopted in 2010 in the form of the Patient Protection and Affordable Care Act. The PPACA requires the company to pay a 2.3% excise tax on most U.S. medical device sales beginning in 2013. Based on forecasted 2013 annual U.S. sales, the excise tax is expected to be approximately $40 million.
The full enforcement of the act will take place from Jan. 1, 2014 onward. As a result of this, it will become mandatory for the U.S. citizens to get health insurance. As per the Congressional Budget Office’s estimate, the new act will reduce the number of uninsured people by around 25 million by 2023. This will increase the number of patients opting for receiving medication, as expensive urology and oncology treatments will now be paid by insurance companies rather than by the patients themselves.
This is expected to increase the company’s sales in multiple folds. Although this tax will be eating up the company’s profits in 2013 and in the future, the benefit derived from the higher sales turnover from 2014 is expected to be way higher.
Fair value projection
In my opinion, the stock of C.R. Bard, Inc. (NYSE:BCR) upholds a high growth potential of 55.07%. I have employed the modified dividend discount model to derive the fair value of the company based on its strong dividends and share repurchase program.
This company is currently undergoing a high growth phase, and this growth will slowly decline to a normal sustainable level in the next few years. I have utilized the modified version of the model in order to incorporate the share repurchases. The current payout ratio of the company is abnormally high, and I expect it to decline gradually. However, the rising earnings and share buyback program will ensure that the absolute return to a single investor does not begin to decline.
I have employed CAPM to calculate the required return. The market return is the annualized return of S&P 500 in the past four years. Risk-free rate is the 10-year Treasury bond return. Based on my calculations, I have derived an intrinsic value of $183.91 for the company while the stock is currently trading for $118.60. I foresee this company to register high returns in the future, which is expected from a company with high financial risk. To sum up, I think the risk is worth the potential return.
The article Oncology and Urology Products: Double-Digit Future Growth Drivers originally appeared on Fool.com and is written by Awais Iqbal.
Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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