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3 Medical Instruments Stocks to Buy Despite Industry Headwinds

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The medical instrument industry has witnessed a significant transformation in the nature of business lately, leading to increased investment in R&D for the development of cutting-edge technologies. The dynamic nature of the COVID-19 crisis has further altered the industry landscape. Through the more than two-year-long healthcare emergency, this industry has been swinging back and forth between crisis and opportunities. Industry watchers are still unable to gauge the magnitude of economic revival due to the emergence of new COVID 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, once again witnessed staffing shortages and supply-chain-related hazards in the last few months of 2021 and the beginning of 2022, thanks to the emergence of the more contagious variants of coronavirus. Meanwhile, industry players like Alcon (ALC - Free Report) , STERIS plc (STE - Free Report) and Abiomed that have adapted well to changing consumer preferences 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 scans, 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 more contagious COVID-19 variants like Delta, Omicron and XE, the IMF came up with its January 2022 World Economic Outlook Update. The update noted that global growth is expected to moderate from 5.9% in 2021 to 4.4% in 2022—half a percentage point lower for 2022 than in the October World Economic Outlook (WEO), largely reflecting forecast cuts in the two largest economies—the USA and China. Per the report, the withdrawal of fiscal and monetary support as well as the ongoing supply shortages is dragging the growth rate down in the United States. On the other hand, in China, the pandemic-led disruptions related to the zero-tolerance COVID-19 policy and financial stress among property developers have induced a slowdown in the growth trend. 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 core business segments during the first half of 2021 faced a setback from the second half till the beginning of 2022 in terms of disrupted procedure volumes and staffing shortages due to the back-to-back emergence of the new COVID-19 variants in major international geographies and 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. Among the colossal deals, in December 2021, 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 suggested that this market, valued at $123 billion in 2018, has been 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 2021, 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.

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 #159, which places it in the bottom 37% 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 lost 6% against the S&P 500’s 5.5% increase in a year’s time. The broader sector has declined 12.2% 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 37.18X compared with the broader industry’s 43.90X and the S&P 500’s 19.16X.

Over the past five years, the industry has traded as high as 37.18X, 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

Alcon: This eye-care product developer is currently seeing growth across all sales categories in Surgical and Vision Care, primarily banking on the growing demand for new products, solid commercial execution and strong market recovery in the United States. In Surgical, the company remains the market leader in presbyopia-correcting IOLs on the strength of both PanOptix and Vivity. In Vision Care. Alcon continues to see strong demand for PRECISION1 and PRECISION1 for Astigmatism.

The Zacks Consensus Estimate for Alcon’s 2022 sales is pegged at $8.80 billion, indicating a 7.01% rise year over year. The same for Alcon’s adjusted earnings is pegged at $2.40 per share, indicating an increase of 11.6% from the year-ago period. Alcon carries a Zacks Rank #2 (Buy).

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

Price and Consensus: ALC

 

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 $4.55 billion, indicating a 46.6% rise year over year. The same for STERIS’ adjusted earnings per share is pegged at $7.90, indicating a 28.04% improvement from the year-ago period figure.

Price and Consensus: STE

 

Abiomed: Impella, Abiomed’s flagship product line, continues to be a growth driver. In January 2022, the company announced that regulators in three countries granted approvals to Impella surgical products. In the United States, the FDA granted an Early Feasibility Study (EFS) Investigational Device Exemption (IDE) to Impella BTR (Bridge-to-Recovery). In Asia, Impella 5.5 with SmartAssist received approval from Japan’s Pharmaceuticals and Medical Devices Agency (PMDA) and Hong Kong’s Medical Device Division (MDD).

The consensus estimate for this Zacks Rank #2 company’s fiscal 2022 sales is pegged at $1.03 billion, indicating a 21.3% rise year over year. The same for Abiomed’s adjusted earnings per share is pegged at $4.36, indicating an increase of 75% from the year-ago period.

Price and Consensus: ABMD



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