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3 Best Buys from the Prospering Medical Instruments Industry

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The unprecedented nature of the COVID-19 crisis has in a way drastically transformed the fortune of the medical instrument industry in its entirety. Primarily, diagnostic testing lab and non-service providers making significant strides in the field of COVID-19 testing have seen their stocks rally amid the economic volatility. Thermo Fisher Scientific (TMO - Free Report) , IDEXX Laboratories (IDXX - Free Report) and STERIS plc (STE - Free Report) are a few of such stocks.

On the other hand, there are many stocks, which, even in the ninth month of the pandemic-led disruption, are still struggling to cope up with the impact of delayed elective procedures.

Industry Description

The Zacks Medical - Instruments industry is highly fragmented, with participants engaged in research and development of new devices for specific therapeutic areas. This FDA-regulated industry comprises an endless number of products, starting from transcatheter heart valves to orthopedic and trauma products to imaging equipment.

Before the outbreak of COVID-19, the Medical Instruments space was advancing well in terms of research and development (R&D). Among the path-breaking inventions of recent times, wireless brain sensors, Bluetooth-enabled smart inhalers, artificial pancreas, human-brain pacemaker, electronic skin that displays vital signs of the body, needle-free injections, precision medicine and many more are worth mentioning.

However, over the past several months, the pandemic has put a brake on the flow of seamless R&D operations. Many non-coronavirus and non-emergency-line innovations have been stuck or delayed due to the lockdown.  Edwards Lifesciences (EW - Free Report) and Varian Medical (VAR - Free Report) are a few such stocks.

Notably, some of the key players in this industry are Hologic, Inc. (HOLX - Free Report) , Intuitive Surgical, Inc. (ISRG - Free Report) , and Abiomed, Inc. (ABMD - Free Report) .

Here are the four major industry themes:

Trend Improvement Following Initial Growth Disruption: Medical instruments companies’ collective business growth has started to show strong signs of rebound in base sales volumes on gradual lifting of restrictions in many states and regions. Particularly, companies that have invested in virtual physician education, remote clinical support and digital sales enablement suitable for healthcare support amid the pandemic are riding on huge market adoption of their COVID-19-related healthcare-support products and services.Medical instrument companies focusing on critical care equipment have been in the limelight. For example, ventilators and mask sales have been particularly strong for ResMed (RMD) on ramped-up production and sales of the same amid the pandemic.

M&A Trend Continues: The medical instruments space has been benefiting from the ongoing merger and acquisition (M&A) trend. In fact, various reports suggest that M&A has been the key catalyst in the U.S. MedTech space of late. It is a known fact that smaller and mid-sized industry players attempt to compete with the bigshots through consolidation. The big players attempt to enter new markets through a niche product. Smaller tuck-in acquisitions dominated the M&A space in 2020 with STERIS, Medtronic, Stryker and Illumina being a few prime line acquirers. Recently, Stryker completed the previously announced acquisition of Wright Medical, a global medical device company focused on extremities and biologics.

Focus on Emerging Markets: Growing medical awareness and economic prosperity have been increasing the uptake of medical instruments in emerging economies. An aging population, increasing wealth, government focus on healthcare infrastructure and expansion of medical insurance coverage make these markets a happy hunting ground for global medical instruments players. A Mercer Capital report states that although Americas is still the largest medical device market in the world, Asia/Pacific and Western Europe are expected to expand at a quicker pace over the next several years. Going by the pre-pandemic picture, the MedTech market in China, is projected to grow significantly through 2022. India’s MedTech market is currently growing at a rate of 15% annually (per Business Standard). If this continues, India may give tough competition to Japan and Germany by 2022.

Digital Revolution: With an increase in the adoption of digital platforms within the medical device space, robotic surgeries, big-data analytics, bioprinting, 3D printing, electronic health records (EHR), predictive analytics, real-time alerting and revenue cycle management services are gaining prominence in the United States. A June 2019 Health care News report suggests that this market, valued at $123 billion in 2018, is witnessing CAGR of 25%. Various other reports suggest that companies that adopted artificial intelligence technologies witnessed a 50% reduction in treatment costs and also experienced more than 50% improvement in patient outcome.

Amid the pandemic, this line of healthcare is becoming a major choice for contactless healthcare services. Telemedicine stocks received an impressive response, when, in February, the Centers for Disease Control and Prevention asked healthcare service communities to broaden the use of telemedicine. Further, the FDA approved the expanded use of remote patient monitoring technologies with the aim of minimizing hospital visits, thereby reducing the risk of exposure to the virus. MedTech companies are currently collaborating with technology majors like Google, Apple and IBM to grow in this space.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Medical Instruments industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #127, which places it in the top 50% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 & Sector

The industry has outperformed the Zacks S&P 500 composite as well as its own sector in the past year.

The industry has gained 19.2% compared with the S&P 500’s 16.6% increase and the broader sector’s 6.6% rally in a year’s time.

One Year Price Performance

 

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 35.47X compared with the broader industry’s 22.55X and the S&P 500’s 22.79X.

Over the past five years, the industry has traded as high as 41.77X, as low as 22.83X and at the median of 28.96X, as the charts show below.

Price-to-Earnings Forward Twelve Months (F12M)

 

Price-to-Earnings Forward Twelve Months (F12M)

3 Stocks to Buy Right Now

Thermo Fisher Scientific: The company has significantly expanded its global pandemic response. This includes the launch of the Amplitude Solution to automate high-throughput PCR-based testing, significant capacity expansion for viral transport media production in Europe and introduction of two COVID-19 antibody tests that are currently available in the United States and Europe. OmniPath ELISA antibody test received FDA’s EUA for the qualitative detection of total antibodies. In May, the company received an expanded EUA for its multiplex real-time PCR (Polymerase Chain Reaction) test intended for the qualitative detection of nucleic acid from SARS-CoV-2.

Price and Consensus: TMO

The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2020 sales is pegged at $30.61 billion, indicating 19.8% rise year over year. The same for adjusted earnings per share is pegged at $18.09, indicating an increase of 46.5% from the year-ago period. The company has returned 57% in a year’s time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

IDEXX Laboratories: Even amid the pandemic, the company is consistently registering sturdy gains in CAG (Companion Animal Group) Diagnostics recurring revenues, supported by high organic gains in both the United States and International markets. Further, the company’s human health business, OPTI Medical Systems’ COVID-19 human PCR testing is also contributing to the top line. Management is also upbeat about the sustained strong recovery in pet healthcare.

Price and Consensus: IDXX

 

The Zacks Consensus Estimate for this Zacks Rank #2 company’s 2020 sales is pegged at $2.64 billion, indicating 9.7% rise year over year. The same for adjusted earnings is pegged at $6.13 per share, indicating an increase of 25.4% from the year-ago period.

STERIS: The company witnesses solid revenue growth across its Life Sciences and Applied Sterilization Technologies segments on contributions from elevated consumer demand and rebound in procedure volumes, along with strength in segments catering to COVID-19-related products and services.

Price and Consensus: STE

The consensus estimate for this Zacks Rank #2 company’s fiscal 2022 sales is pegged at $3.30 billion, indicating 8.1% rise year over year. The same for adjusted earnings per share is pegged at $6.58, indicating 11.2% improvement from the year-ago period figure.

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