EUR 850.00 For Business Accounts Only

Morningstar | Owens & Minor Contract With Its Largest Customer Winding Down in 2019

The distribution of healthcare products can be lucrative for niche players with dominant market positions. However, we believe Owens & Minor currently lacks any competitive advantages and thus an economic moat. Additionally, we are not enthusiastic about the growth prospects for the firm’s core domestic U.S. operations, which participate in very mature markets. Although healthcare spending growth continues to exceed GDP growth, this is not the case for the low-tech and consumable medical products distributed by Owens (such as disposable gloves, syringes, sterile procedure trays, and surgical gowns), which generally experience market growth in the low single digits.Most importantly, we expect competition will continue to pressure Owens over the coming years as Cardinal Health, a major pharmaceutical distributor and much larger rival, has aggressively expanded its own medical distribution operations, which includes its own private-label brands of commodity-like consumable supplies. Given Cardinal’s ability to produce robust free cash flow from its core drug distribution segment, it will have the ability to meaningfully compete with Owens, in our opinion. This dynamic was on full display as Owens has recently lost material business to Cardinal. This tougher operating environment is likely to hinder Owens' ability to improve profit margins.Additionally, we're uncomfortable with the increasing consolidation of O&M's key customers--the GPOs. Three major GPOs account for nearly three fourths of O&M's total revenue.During the past two years, Owens has reported significant retrenchment in top- and bottom-line results. Moreover, the firm recently turned over its executive suite and is in the midst of a major restructuring. We believe these trends reflect the poor competitive position of the firm, and we are concerned that it may not recover fully from aforementioned issues, no matter which management team is in place. We believe the best course for Owens may be to pursue alternative strategic options, including a partial or total sale of its businesses.