MALLINCKRODT MEDICAL SUPPLY FIRM TO CONSIDER

Every day we are apprised of some event of national, regional or local interest concerning our health care system. However, we seldom hear much about the companies that produce and supply basic materials that make it possible for our local health care providers to do their jobs. St. Louis-based Mallinckrodt Inc. is one of those companies. It was formed in St. Louis in 1867 and evolved over the years into an international company with common stock traded on the New York Stock Exchange under the symbol MKG.

If you are looking for a medical supply company to add to your portfolio, this is one to consider. When Mallinckrodt was formed by brothers Edward, Otto and Gustav, it was the only chemical manufacturer west of Philadelphia. They incorporated in 1882 as Mallinckrodt Chemical Works, had facilities in New York and New Jersey by 1885 and became the largest producer of anhydrous ammonia as a refrigerant. Though anhydrous is still used in some commercial refrigeration applications, it is primarily used by agriculture in fertilizing processes today.

Through the years, the company became a major producer of barium sulfate for X-ray diagnosis, potassium bromide, iodinated contrast media, ether, bismuth salts and mercurials. During the 1940s, it purified all of the uranium oxide used in the first nuclear reactor. It got out of the uranium business in 1967.

Mallinckrodt grew by developing new products and processes in addition to acquiring other companies during the 1960s and 1970s. By 1982, it was the leading supplier of specialty chemicals and health care products as well as food products, flavors and fragrances. Avon Products bought the company that year only to sell it to International Minerals and Chemical Corp. in 1986. International Minerals and Chemical changed its name to IMCERA Group. The Mallinckrodt component split into two independent companies, Mallinckrodt Medical and Mallinckrodt Specialty Chemicals. Both units grew during the 1990s, and IMCERA Group changed its name to Mallinckrodt in 1994.

The company is now focused in the health care area producing imaging agents, pharmaceutical specialties and critical care products, with only 18 percent of its total 1997 revenue derived from specialty chemicals. On Jan. 12, a "groundbreaking development collaboration" with EPIX Medical and General Electric Medical Systems was announced. Ten days later, Jan. 22, Chairman and CEO C. Ray Holman announced that the industrial specialty chemicals business may be divested. European approval of a new ultrasound imaging agent and acquisition of a South African medical products distributor further emphasize the company's commitment to the health care focus.

The stock peaked in late 1996 at around $44 and has traded in the $35 to $39 range since August. It is currently priced about $37.50 with a price to expected earnings ratio of about 15. The market average and industry average P/E ratios are about 25 and 43 respectively. Those two ratios suggest Mallinckrodt's stock could be priced between $62 and $100. I put its appropriate market price closer to $51.

From a technical perspective, the stock seems to have strong support around $35 and may have formed what technicians call an "inverted head and shoulders."

If I owned Mallinckrodt's stock, I would certainly hold it. If I were looking for an undervalued medical supply stock that may be establishing an upward trend to add to my portfolio, I would consider adding Mallinckrodt. Of course, there is always some risk. In this case, most of the risk seems to be associated with a general market downturn.

Dividend Reinvestment Plan: Yes

Web Site: http://www.mallinckrodt.com

Bill Walker is president and CEO of Walkrich Investment Advisors and completes a market appraisal of over 5,000 common stocks each week. (573) 651-9196 (walkrich@mvp.net)

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.