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Introduction

Omnicare, Inc (OCR) is a $2.98 billion company in the retail drug industry. Market capitalization competitors in this industry include Longs Drug Store, Rite Aid, and Express Scripts. The retail drug industry is up 15.57% over the past year compared to the S&P 500 which is up 3.87% during the same period. Over the past month the industry has been down 3.83%, while the S&P 500 has been down 0.52%. After a strong year financial year, there is positive news that drug companies may withstand negative economic sentiment and earn higher-than-average capital gains for investors. In addition, company specific Omnicare�s growth and valuation illustrates the potential for a strong earnings report next quarter.

Business

This section describes what Omnicare produces. According to Reuters, Omnicare �is a geriatric pharmaceutical services company.� Instead of focusing on the general retail consumer, like other competitors in this industry do, Omnicare provides its pharmaceuticals to long-term health institutions. These health institutions include �skilled nursing facilities (SNFs), assisted living facilities, [and] retirement centers.� More generally, Omnicare also offers software, support systems, patient assistance, and pharmaceutical research to other consumers, some outside the United States. Specifically, the company operates in two distinct segments: pharmacy services and contract research organization.

This section begins with pharmacy services, Omnicare�s primary business (97% of revenues). This segment is the main distributor of pharmaceuticals. Omnicare purchases the equipment and other materials from suppliers and �purchases, repackages and dispenses [the] pharmaceuticals.� Moreover, the company does complete recording of its transactions, provides consultant services, and produces case management systems. As the most important segment for the company, Omnicare spends a lot of capital and resources to make sure the delivered products are effective and efficient.

The next segment, contract research organization, is also important, but for different reasons. These services provide �product development and research services to client companies in the pharmaceutical, biotechnology, medical device and diagnostics industries.� However, unlike the pharmacy services, these products are done internationally. Operating in over 30 countries, the proceeds received from these nations may be great business opportunities. With the U.S. currency dropping after lower interest rates and higher commodity prices, there is the potential for this segment to grow and control more market share of Omnicare�s complete business.

A third, less prominent segment, consultant pharmacist services, complements the pharmacy service segment with data management consulting. Software is also created for effective use of records.

Growth

Omnicare�s growth has not been great this past year. However, there is strong potential for this corporation. Compared to the rest of the retail drug industry, Omnicare�s revenue is average at $6.50 billion. This number and the upcoming numbers are therefore a good indicator relative to the industry�s average. Unfortunately, this number is also lower this current fiscal year compared to a year ago. According to Reuters, Omnicare�s sales growth had fallen 3.83% this past fiscal year. Compared to the industry average of 28.40%, this statistic is a bit disheartening. Moreover, earnings growth was also a bit low at 24.21% compared to the industry�s 29.77% number.

However, there are positive aspects of these figures. First, Omnicare�s five year sales growth is 24.36%. This number is much higher compared to the industry�s 13.02% five year average. Therefore, there is a precedent of strong sales growth in the past for Omnicare. Unfortunately, the current year has been vicious to revenue and sales, but if history is a strong indicator, Omnicare will benefit from its past. Secondly, these numbers are not too terrible compared to direct industry competitors. Longs Drug Stores saw only a 4.39% increase in earnings the past fiscal year. Moreover Express Scripts saw a low 2.36% increase in sales, while competitor Rite Aid reported an astonishing negative 103.50% decrease in earnings the past fiscal year. Therefore, lower earnings are not only affecting Omnicare, but its direct market-cap rivals.

In addition, history also plays a positive role when it comes to margins. Looking at gross, operating, and net profit margins, Omnicare reports numbers of 24.99%, 7.71%, and 3.27% respectively. At first glance, investors may question the optimism, as all three numbers are below the company�s five year average. However, all three numbers are also above the industry�s respective averages of 19.83%, 5.31%, and 3.08%, despite the industry increasing its margins over the past year. Therefore, there is more strong historical support that Omnicare is having an off-year and will rebound. Moreover, Omnicare is not the only industry component to report lower margins. Rite Aid�s operating and net profit margins are both below the company�s five year average and Express Scripts only reported a 9.50% gross margin report and a 3.17% net profit report, despite the company�s amazing 106% share price gain in 2007.

ROE is also another question mark investors may have about Omnicare. Already low to begin with, ROE dropped this past fiscal year from an average of 9.69% to only 6.35%. These are quite low compared to the industry�s increase of its average of 15.88% to 18.69%. However, once again, Omnicare was extraordinary successful with an ROE below 10%. In 2005, the company�s share price rose 85%. This rise was during a period when Omnicare had the relatively low ROE. Therefore, there is precedence of investor capital gains if history plays a role. And once again, Omnicare�s competitors have not had terrific ROEs as well. Rite Aid�s current ROE is negative 3.46% and Longs Drug Stores is only slightly higher at 10.71%.

Valuation

Another Omnicare strongpoint is its valuation. According to Reuters, Omnicare has a forward P/E ratio of 13.55 and a forward price to sale ratio of 0.50. These are incredibly low figures, considering the industry�s respective averages are 23.56 and 0.72. Therefore, investors are properly valuing this company, despite history and semi-strong current results. Moreover, none of Omnicare�s current competitors have lower figures in both areas. Longs Drug Stores� numbers are 20.08 and 0.40 respectively. Rite Aid does not even have a forward earnings multiple because of negative net income expectations. And Express Scripts� respective numbers are 30.99 and 1.01, due to the current year�s inflated hype. In addition, Omnicare has a PEG ratio, given a five year growth rate, below one. At 0.96, according to Yahoo! Finance, Omnicare beats out other rivals including Longs Drug Stores (1.09) and Express Scripts (1.79). Therefore, there is more evidence that Omnicare is undervalued, given the company�s figures, and has a strong potential to rise and meet these numbers.

Efficiency

Omnicare is fairly efficient. The company's inventory turnover of 10.73 is comparable to the industry, and that�s important given the nature of the retail drug industry�s business. Longs Drug Stores only reported a 7.14 figure and Rite Aid�s number was lower at 4.53. This means that Omnicare is delivering its goods at a fast rate, given cost of goods sold. In addition, Omnicare is solvent. It�s quick ratio of 3.10 and its current ratio of 3.76 mean that Omnicare can liquidate its assets, but also that Omnicare has more flexibility to buy debt to finance future acquisitions or undertakings. The company already has a capital spending rate of 3.57%--a number that might be favorable to investors, given the cash Omnicare has available. The company will be able to repurchase stock, increasing the ROE, or increase its dividend plan.

Speaking of the dividend plan, Omnicare�s dividend yield at 0.36% is quite nice, given the industry�s response to cash outflows. Both Rite Aid and Express Scripts do not offer dividends. Moreover, investors have realized the strong potential Omnicare has regarding valuation and future growth. Institutional investors own 95% of shares, which is a great sign, as these investors have the most cash to make (or lose) and are able to trust Omnicare shares.

Technical Analysis

Omnicare has not performed well in 2007. The company�s share price has dropped 36.84% year-to-date. However, the low amount has some positive implications. There seems to be some resistance at the 25 dollar share price range. The last time Omnicare reached this amount (2004), the company rebounded and appreciated 100%. There is a possibility a similar situation could occur in the future.

More specific to the current month, Omnicare illustrates strong technical signals. The 50 day SMA and 50 day EMA are both linear over the past three months. Parabolic SAR did recently fall below the market price, but a potential outbreak will boast the SAR upwards, especially with a new upward movement. The company is undervalued compared to the RSI index at 34.71, another positive signal. Therefore, while now isn't the most ideal time to purchase shares of Omnicare according to specialized technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Omnicare is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
December 14th, 2007