Back to top

Image: Bigstock

3 Top Medical Instruments Stocks to Counter Industry Headwinds

Read MoreHide Full Article

The dynamic nature of the COVID-19 crisis has drastically transformed the medical instrument industry landscape. Through the nearly two-year-long healthcare emergency, this industry has been swinging back and forth between crisis and opportunities. Despite the full-fledged vaccine rollouts, industry watchers are still unable to gauge the magnitude of economic revival due to the emergence of new and more contagious strains in several parts of the world including the United States.

A number of medical instrument companies, which had confirmed a gradual rebound in their base businesses earlier in 2021, are once again seeing staffing shortage and supply-chain related hazards in the past couple of months, thanks to the emergence of the Omicron variant, which has been identified by WHO, as a variant of concern. Meanwhile, industry players that have well-adapted to changing consumer preference or have a COVID-19-based businesses like Thermo Fisher Scientific Inc. (TMO - Free Report) , STERIS plc (STE - Free Report) and Accuray (ARAY - Free Report) are still witnessing a continued uptrend in their stock prices.

Industry Description

The Zacks Medical - Instruments industry is highly fragmented, with participants engaged in research and development (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 R&D. Among the recent path-breaking inventions, bone growth stimulators, 3D mapping of CT scan, wireless brain sensors and human-brain pacemakers are worth mentioning. However, in the past several months, many non-COVID and non-emergency-line innovations have been stuck or delayed. Edwards Lifesciences is one of the companies whose R&D has taken a hit.

3 Trends Shaping the Future of the Medical Instruments Industry

Business Trend Disruption: Considering the deteriorating trade situation on continuing emergence of new and more contagious COVID-19 variants like Delta and Omicron, the Federal Reserve’s September 2021 Economic Projection outlined real GDP growth of 5.9% for 2021, a reduction from the June 2021 projection of 7%. The unemployment rate expectation is pegged at 4.8% for 2021, a rise from the June prediction of 4.5%. This deteriorating economic outlook is evident from the medical instruments sector’s recent business slowdown. The industry players who had witnessed a strong rebound in product demand across its core business segments during the first half of 2021 are collectively facing a setback in the second half in terms of disrupted procedure volumes and staffing shortage due to the back-to-back emergence of the new COVID-19 variants in major international geographies and the United States. The majority of the industry players  also project these more contagious strains of COVID-19 to widely affect their legacy non-COVID businesses in the fourth quarter ending December 2021, particularly in the United States.

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, in December, Thermo Fisher completed its $17.4 billion acquisition of PPD, Inc., a renowned global contract research organization, providing clinical research services to the biopharma and biotech industry.

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 a 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 Indicates Dull Prospects

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 #173, which places it in the bottom 32% 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 sector in the past year.

The industry has gained 7.4% compared with the S&P 500’s 27% increase in a year’s time. The broader sector has declined 13.3% 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 22.19X compared with the broader industry’s 43.90X and the S&P 500’s 21.65X.

Over the past five years, the industry has traded as high as 43.93X, as low as 23.21X and at the median of 32.16X, 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 been delivering stable business performance, leveraging on a significant rebound in its base business. Thermo Fisher’s Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services all have registered strong growth in the recent quarters. In the last-reported third quarter, Thermo Fisher generated $2.05 billion in COVID-19 response-related revenues. With the surge in the Delta and Omicron variants, the company projects strong testing demand globally in the fourth quarter. Thermo Fisher is also playing a meaningful role in vaccines and therapies for COVID-19, generating just over $500 million in the last-reported quarter in this space.

The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2021 sales is pegged at $37.13 billion, indicating a 15.3% rise year over year. The same for Thermo Fisher’s adjusted earnings is pegged at $23.40 per share, indicating an increase of 19.7% from the year-ago period.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: TMO

STERIS: STERIS is currently registering solid revenue growth across three of its reporting segments viz. Healthcare, Applied Sterilization Technologies (AST) and Life Sciences. Elevated demand from medical device customers drove CER organic revenue growth in the Applied Sterilization Technologies segment. The seamless integration process of Cantel Medical buoys optimism for the stock. Further, STERIS’ bullish fiscal 2022 guidance is indicative that this growth momentum will continue.

The consensus estimate for this Zacks Rank #2 company’s fiscal 2022 sales is pegged at $4.60 billion, indicating a 48% rise year over year. The same for STERIS’ adjusted earnings per share is pegged at $7.87, indicating a 27.6% improvement from the year-ago period figure.

Price and Consensus: STE

Accuray: In recent months, Accuray has been registering upticks in both its overall top line and its revenue sources. Receipt of the FDA’s 510(k) clearance for the VOLO Ultra enhancement to the Accuray Precision treatment planning system for the Radixact System, followed by its full commercial launch, is impressive. Strong demand for the ClearRT Helical kVCT Imaging for the Radixact System and new integration with the RayStation treatment planning system for the CyberKnife M6 and S7 Systems raise optimism on the stock. Strength in Accuray’s TomoTherapy and CyberKnife platforms is encouraging.

The Zacks Consensus Estimate for this Zacks Rank #2 company’s fiscal 2022 sales is pegged at $425.6 million, indicating a 7.4% rise year over year. The same for Accuray’s adjusted earnings per share is pegged at 7 cents, indicating an increase of 75% from the year-ago period.

Price and Consensus: ARAY

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Accuray Incorporated (ARAY) - free report >>

Thermo Fisher Scientific Inc. (TMO) - free report >>

STERIS plc (STE) - free report >>

Published in