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3 Medical Instruments Stocks Countering Industry Headwinds
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The dynamic nature of the COVID-19 crisis has drastically transformed the medical instrument industry landscape. Through the past one-and-a-half-year long healthcare emergency, this industry continued to swing back and forth between crisis and opportunities. While full-fledged vaccine rollouts are taking place, industry watchers are still unable to gauge the magnitude of economic revival in 2021 due to the emergence of new and more contagious virus strains in several parts of the world including the United States. In such a scenario, a number of medical instrument stocks have confirmed strong rebounds in their base businesses, which were disrupted through the pandemic months. Industry leaders like Intuitive Surgical, Inc. (ISRG - Free Report) , IDEXX Laboratories, Inc. (IDXX - Free Report) and Alcon Inc. (ALC - Free Report) are a few such stocks. However, diagnostic testing labs, which made significant strides in the field of COVID-19 testing through the pandemic period, are now seeing their stock prices plummet on decline in cases.
Industry Description
The Zacks Medical - Instruments industry is highly fragmented, with participants engaged in R&D in therapeutic areas. This FDA-regulated industry comprises an endless number of products, starting from transcatheter valves to orthopedic products to imaging equipment. Prior to the pandemic, the Medical Instruments space was advancing well in terms of research and development (R&D). Among the recent path-breaking inventions, bone growth stimulator, 3D mapping of CT scan, wireless brain sensors and human-brain pacemaker are worth mentioning. However, in the past several months, many non-COVID and non-emergency-line innovations have been stuck or delayed. Edwards Lifesciences (EW - Free Report) is one of the companies whose R&D has taken a hit.
3 Trends Shaping the Future of the Medical Instruments Industry
Business Trend Revival: Per Fed’s June 2021 Economic Projection, the real GDP growth of the United States is expected to be at an impressive level of 7% in 2021, up from the March 2021 prediction of 6.5%. Unemployment rate is pegged at 4.5% for 2021, unchanged from the March prediction. This economic trend revival is evident from the medical instruments sector’s recent business turnovers. Even with the emergence of new virus strains, medical instruments companies’ collective business growth has shown strong signs of recovery in non-COVID legacy base sales volumes. This ramp up is taking place as companies have finally started to meet the pent-up demand following months of suppressed spending. Mainly sectors like cardiac and vascular, neuromodulation, minimally invasive and non-invasive surgeries as well as orthopedic procedures are benefiting from this huge pent-up demand. The ongoing second-quarter earnings reporting cycle is clearly depicting this trend improvement. Although there has been significant reduction in demand for COVID-19 testing due to a drop in new cases, the Q2 results are showing base volume recovery to the 2019 level.
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 are dominating the M&A space even amid the pandemic with Boston Scientific, Medtronic, Illumina and Allergan being a few prime line acquirers. Among the colossal deals, Varian Medical’s $16.4 billion acquisition by Siemens Healthineers closed in April 2021.
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 became 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
The Zacks Medical Instruments industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. The industry, housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #207, which places it in the bottom 18% of more than 250 Zacks industries. 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 Underperforms S&P 500, Outperforms Sector
The industry has underperformed the Zacks S&P 500 composite but outperformed its own sector in the past year.
The industry has gained 12.6% compared with the S&P 500’s 36.7% increase in year’s time. The broader sector has declined 2.1% in the said time frame.
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 41.87X compared with the broader industry’s 23.39X and the S&P 500’s 21.34X.
Over the past five years, the industry has traded as high as 42.10X, as low as 22.76X and at the median of 30.56X, 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
Intuitive Surgical, Inc.: Growing adoption of the company’s robot-based da Vinci surgical system through the pandemic months acts as a strong upside. In second-quarter 2021, Intuitive Surgical recorded an uptick in da Vinci procedure volume and compound annual growth rate of 16.5% for procedures (from Q2 2019 to Q2 2021). The company would have expected this kind of growth rate in absence of the pandemic.
The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2021 sales is pegged at $5.65 billion, indicating 29.5% rise year over year. The same for adjusted earnings is pegged at $14.72 per share, indicating an increase of 44.9% from the year-ago period.
IDEXX Laboratories, Inc.: The company is seeing strong growth in its Companion Animal Group (CAG), Livestock, Poultry and Dairy (LPD) and Water businesses. It is particularly registering sturdy gains in CAG Diagnostics’ recurring revenues, supported by sustained strong global trends in pet healthcare. IDEXX’ performance in major geographies is also encouraging. Further, veterinary software, services and diagnostic imaging systems revenues are growing driven by improvement in subscription-based service revenues and strong growth in new veterinary software system placements and recurring software services.
The consensus estimate for this Zacks Rank #2 company’s 2021 sales is pegged at $3.19 billion, indicating 17.9% rise year over year. The same for adjusted earnings per share is pegged at $8.35, indicating 24.4% improvement from the year-ago period figure.
Price and Consensus: IDXX
Alcon, Inc.: Through the initial phase of the pandemic, the company experienced COVID-related forward purchasing. The business experienced robust growth on the pre-emptive stocking of OTC products by the U. S. retailers and consumers. Without considering this, the company is currently seeing strong market adoption of its newly-launched Precision1 sphere and toric contact lenses and the newest allergy eye drop, Pataday Extra Strength.
The Zacks Consensus Estimate for this Zacks Rank #2 company’s 2021 sales is pegged at $7.93 billion, indicating 16.9% rise year over year. The same for adjusted earnings per share is pegged at $1.91, indicating an increase of 83.7% from the year-ago period. The company has returned 21.9% in a year’s time.
Price and Consensus: ALC
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3 Medical Instruments Stocks Countering Industry Headwinds
The dynamic nature of the COVID-19 crisis has drastically transformed the medical instrument industry landscape. Through the past one-and-a-half-year long healthcare emergency, this industry continued to swing back and forth between crisis and opportunities. While full-fledged vaccine rollouts are taking place, industry watchers are still unable to gauge the magnitude of economic revival in 2021 due to the emergence of new and more contagious virus strains in several parts of the world including the United States. In such a scenario, a number of medical instrument stocks have confirmed strong rebounds in their base businesses, which were disrupted through the pandemic months. Industry leaders like Intuitive Surgical, Inc. (ISRG - Free Report) , IDEXX Laboratories, Inc. (IDXX - Free Report) and Alcon Inc. (ALC - Free Report) are a few such stocks. However, diagnostic testing labs, which made significant strides in the field of COVID-19 testing through the pandemic period, are now seeing their stock prices plummet on decline in cases.
Industry Description
The Zacks Medical - Instruments industry is highly fragmented, with participants engaged in R&D in therapeutic areas. This FDA-regulated industry comprises an endless number of products, starting from transcatheter valves to orthopedic products to imaging equipment. Prior to the pandemic, the Medical Instruments space was advancing well in terms of research and development (R&D). Among the recent path-breaking inventions, bone growth stimulator, 3D mapping of CT scan, wireless brain sensors and human-brain pacemaker are worth mentioning. However, in the past several months, many non-COVID and non-emergency-line innovations have been stuck or delayed. Edwards Lifesciences (EW - Free Report) is one of the companies whose R&D has taken a hit.
3 Trends Shaping the Future of the Medical Instruments Industry
Business Trend Revival: Per Fed’s June 2021 Economic Projection, the real GDP growth of the United States is expected to be at an impressive level of 7% in 2021, up from the March 2021 prediction of 6.5%. Unemployment rate is pegged at 4.5% for 2021, unchanged from the March prediction. This economic trend revival is evident from the medical instruments sector’s recent business turnovers. Even with the emergence of new virus strains, medical instruments companies’ collective business growth has shown strong signs of recovery in non-COVID legacy base sales volumes. This ramp up is taking place as companies have finally started to meet the pent-up demand following months of suppressed spending. Mainly sectors like cardiac and vascular, neuromodulation, minimally invasive and non-invasive surgeries as well as orthopedic procedures are benefiting from this huge pent-up demand. The ongoing second-quarter earnings reporting cycle is clearly depicting this trend improvement. Although there has been significant reduction in demand for COVID-19 testing due to a drop in new cases, the Q2 results are showing base volume recovery to the 2019 level.
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 are dominating the M&A space even amid the pandemic with Boston Scientific, Medtronic, Illumina and Allergan being a few prime line acquirers. Among the colossal deals, Varian Medical’s $16.4 billion acquisition by Siemens Healthineers closed in April 2021.
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 became 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
The Zacks Medical Instruments industry’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. The industry, housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #207, which places it in the bottom 18% of more than 250 Zacks industries. 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 Underperforms S&P 500, Outperforms Sector
The industry has underperformed the Zacks S&P 500 composite but outperformed its own sector in the past year.
The industry has gained 12.6% compared with the S&P 500’s 36.7% increase in year’s time. The broader sector has declined 2.1% in the said time frame.
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 41.87X compared with the broader industry’s 23.39X and the S&P 500’s 21.34X.
Over the past five years, the industry has traded as high as 42.10X, as low as 22.76X and at the median of 30.56X, 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
Intuitive Surgical, Inc.: Growing adoption of the company’s robot-based da Vinci surgical system through the pandemic months acts as a strong upside. In second-quarter 2021, Intuitive Surgical recorded an uptick in da Vinci procedure volume and compound annual growth rate of 16.5% for procedures (from Q2 2019 to Q2 2021). The company would have expected this kind of growth rate in absence of the pandemic.
The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2021 sales is pegged at $5.65 billion, indicating 29.5% rise year over year. The same for adjusted earnings is pegged at $14.72 per share, indicating an increase of 44.9% from the year-ago period.
Price and Consensus: ISRG
IDEXX Laboratories, Inc.: The company is seeing strong growth in its Companion Animal Group (CAG), Livestock, Poultry and Dairy (LPD) and Water businesses. It is particularly registering sturdy gains in CAG Diagnostics’ recurring revenues, supported by sustained strong global trends in pet healthcare. IDEXX’ performance in major geographies is also encouraging. Further, veterinary software, services and diagnostic imaging systems revenues are growing driven by improvement in subscription-based service revenues and strong growth in new veterinary software system placements and recurring software services.
The consensus estimate for this Zacks Rank #2 company’s 2021 sales is pegged at $3.19 billion, indicating 17.9% rise year over year. The same for adjusted earnings per share is pegged at $8.35, indicating 24.4% improvement from the year-ago period figure.
Price and Consensus: IDXX
Alcon, Inc.: Through the initial phase of the pandemic, the company experienced COVID-related forward purchasing. The business experienced robust growth on the pre-emptive stocking of OTC products by the U. S. retailers and consumers. Without considering this, the company is currently seeing strong market adoption of its newly-launched Precision1 sphere and toric contact lenses and the newest allergy eye drop, Pataday Extra Strength.
The Zacks Consensus Estimate for this Zacks Rank #2 company’s 2021 sales is pegged at $7.93 billion, indicating 16.9% rise year over year. The same for adjusted earnings per share is pegged at $1.91, indicating an increase of 83.7% from the year-ago period. The company has returned 21.9% in a year’s time.
Price and Consensus: ALC