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Health care stocks: As boomers age, a booming sector emerges

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Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients.

What are we looking for?

For the next 18 years, 8,800 Americans will turn 65 every single day. According to the Health Care Cost Institute, they will each spend $142,000 (U.S.) in medical expenses over the next 20 years. My colleague Rob Belanger and I thought it was time to take a look at health care facility companies.

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The screen

We looked at companies in North America with more than $250-million in market capitalization.

The operating profit margin indicates how much profit a company makes after paying for the costs of production, and is indicated as a percentage of sales. We have sorted our companies by this metric with the higher number being the more efficient company.

Price to cash flow (P/CF) compares a corporation's stock price to its cash flow. A high ratio indicates that the stock price is expensive relative to its cash flow. A smaller ratio is preferred.

Return on equity (ROE) measures a firm's profitability by revealing how much profit it can generate with the cash shareholders have invested. Those showing a high ROE are more profitable.

The enterprise value divided by earnings before interest, taxes, depreciation and amortization (EV/EBITDA) is a more important metric than the P/E ratio for determining value because it is unaffected by a company's capital structure. We are looking for a low number.

What did we find?

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One of the best operating profit margins, and the best EV/EBITDA, is Toronto-based Medical Facilities Corp. It is majority owner of five specialty surgical hospitals in Dakota, Oklahoma and Arkansas, and an ambulatory surgery centre in California.

The largest company on the screen, DaVita HealthCare Partners, delivers services for 575,000 patients in California, Nevada and Florida, and trades at a pricey 11.2 times cash flow.

The stock of HealthSouth has gained more than 47 per cent in the past 12 months, but looking at all of our ratios combined, it is still good value at these prices.

Based on several of the metrics, Capital Senior Living is the most overvalued company on our screen.

Two other Canadian firms made our list. Leisureworld Senior Care operates 33 long-term care facilities in Ontario and British Columbia, and sports a negative ROE. Amica is focused on luxury independent living for senior citizens with 23 properties in Ontario and Western Canada. There is nothing luxurious, however, about its negative ROE and operating profit margin.

Investors should be taking a serious look at this growth sector. Next week, we will highlight health care REITs.

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