There was an article in Barron’s over the weekend about how the Veteran’s Administration is mulling over which company should get a big contract for staph infection tests. Cramer sees only two companies in competition for the bid – Beckton Dickinson and Cepheid. While he’s not sure who will get the contract, he does know who makes the better stock play.
Beckton Dickinson is so big a company the contract would barely “move the needle,” meaning a bid won wouldn’t do much for the stock. On the other hand, Cepheid is a small, $587 million medical diagnostic firm that stands to gain big if the VA gives it the nod.
But what if Cepheid doesn’t get the deal? No matter – it’s already doing incredibly well in a sector (health care) that’s hot right now. CPHD has a test for viral meningitis that just got Food and Drug Administration approval, and its staph test should be next in line. A lot is riding on the staph test approval, but Cramer doesn’t foresee any problems. If it gets approved, Cepheid can get the contract, and the stock should soar.
Cepheid is also part of a consortium that maintains an anthrax test for the postal service. CPHD sells about 2 million anthrax test cartridges a year, which make up most of the company’s revenues. Approval for the staph test will make this money less important and the possibility of a Veteran’s Administration contract could make the stock even more appealing.
But what should really make Cepheid the next Biosite is its potential for a takeover bid. It’ll be hard to top the 30-point premium on the table for that company, but Cepheid is a great acquisition candidate for any medical company looking to expand its diagnostic portfolio – a trend we know is happening in the sector given the huge bid for Biosite.
Bottom Line: We hit big with Biosite, but this is no time for a victory lap. We need a new play with upside. Cramer’s recommendation – switch your Biosite profits into Cepheid.
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