(By Mani) PSS World Medical Inc.
) is set to be a virtual pure-play physician office medical distributor following the announcement to divest its slower-growth, nursing home distribution business.
Jacksonville, Florida-based, PSS World Medical distributes medical and surgical supplies solely within the United States, primarily to office-based physicians and skilled nursing, hospice and home healthcare facilities.
Following recent quarterly results that were somewhat disappointing relative to expectations, shares of PSS are now down 19 percent year-to-date, making PSS one of the worst performing stocks within the entire healthcare distribution sector, which is up 13 percent year-to-date overall. However, shares have about 35 percent upside potential from current levels.
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Overall, the company's physician business has generated better organic growth for the company over the past several years, while the Eldercare business has been weaker due primarily to sluggish results in the nursing home segment.
Since the company has decided to exit nursing home business, it would allow for more rapid growth over the next several years from the remaining faster growth businesses within the company.
PSS has done a good job of managing through the economic downturn over the past few years by cutting costs while still retaining a full sales force to supplement declining volumes with new customers. The core physician distribution remains steady with the exception of tough flu comps this past quarter.
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Specifically, the company will focus on physician, laboratory, in-office dispensing, and the home care and hospice markets. Once the EPS base is "reset," PSS should generate faster EPS growth over the next few years.
"With the associated downdraft in the stock in relation to the moving parts around the restructuring, we see an excellent entry point into the stock," UBS analyst Steven Valiquette wrote in a note to clients.
Meanwhile, the company's growth in the North American physician office distribution business has been consistently robust with the overall scope of healthcare. PSS witnessed a nice recovery in 2011, and is expected to deliver robust growth in 2012-2014, as well.
The analyst expects PSS will able to generate more rapid growth in the fiscal 2014- 2017 period without the anchor of the slower-growth, nursing home distribution business. PSS is also expected to pursue acquisitions aggressively in the short-term with the proceeds from the asset sales.