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3 Medical Instruments Stocks to Buy as Inflation Clouds Prospects

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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 healthcare crisis over the past two and a half years has further altered the industry landscape, putting robotic and remote medical services in the limelight. Despite the reopening of the economy, deteriorating international trade, with global inflationary pressure leading to an extremely tough situation related to raw material and labor cost as well as freight charges, has put the industry in a tight spot again. Further, industry watchers are still unable to gauge the magnitude of economic revival due to the emergence of new COVID strains in selective parts of the world, including China and Japan.

A number of medical instrument companies, which confirmed a gradual rebound in their base businesses through the first half of 2022, once again witnessed staffing shortages and supply chain-related hazards in the second half of 2022. Meanwhile, industry players like ShockWave Medical (SWAV - Free Report) , Mesa Laboratories (MLAB - Free Report) and Dynatronics (DYNT - Free Report) that have adapted well to changing consumer preferences are still witnessing an 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 ongoing inflation situation in the form of rising freight, raw material and labor costs, the IMF came up with its October 2022 World Economic Outlook Update. The update noted that a tentative recovery in 2021 was followed by increasingly gloomy developments in 2022. IMF specifically addressed the ongoing cost of living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic, all of which have been weighing heavily on the medical instrument outlook and were evident in the MedTech sector’s sequential business slowdown in Q3. The IMF update noted that global growth is expected to slow down from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. If we exclude the global financial crisis and pandemic phase, this will mark the weakest growth profile since 2001. Accordingly, the industry players are expected to collectively face a more severe setback in terms of logistical challenges and increasing unit cost in the coming months resulting in corporate profitability cuts.

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 big shots through consolidation. The big players attempt to enter new markets through a niche product. Among the significant deals of recent times, ResMed completed the $1-billion Medifox acquisition in Europe in November. This month, Alcon too completed the purchase of Aerie Pharmaceuticals to strengthen its presence in the ophthalmic pharmaceutical space. Other than that, recently, Johnson & Johnson announced its plans of the $16.6 billion mammoth acquisition of Abiomed. In August 2022, Boston Scientific announced the acquisition of privately-held Obsidio, Inc. to expand Boston Scientific’s interventional oncology and embolization portfolio. Despite all these, a MedTech Dive report of October 2022 revealed that “A decline in mergers and acquisitions in the medical device industry this year may continue into 2023 amid “near-term storm clouds” that include continued market uncertainties, according to a report by consulting firm EY.”

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 outcomes. 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.

Zacks Industry Rank Indicates Good 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 encouraging near-term prospects. The industry, housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #87, which places it in the top 35% 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, Sector

The industry has underperformed the Zacks S&P 500 composite and its sector in the past year.

The industry has declined 31.7% compared with the S&P 500’s 12.3% fall in a year’s time. The broader sector has declined 26.2% 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 35.28X compared with the broader industry’s 22.16X and the S&P 500’s 17.81X.

Over the past five years, the industry has traded as high as 45.48X, as low as 27.00X and at the median of 32.79X, 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

Mesa Laboratories: Mesa is a prominent name in the field of design and manufacturing of life science tools and critical quality control solutions for regulated applications in the pharmaceutical, healthcare and medical device industries. Mesa offers products and services to help customers ensure product integrity, increase patient and worker safety, and improve the quality of life globally. The company’s Sterilization and Disinfection Control revenues recovered strongly after labor-based constraints were alleviated at its Bozeman, MT facility.

The consensus estimate for this Zacks Rank #1 (Strong Buy) company’s 2022 sales is pegged at $228.1 million, indicating a 23.8% rise year over year. The consensus mark for Mesa’s 2023 EPS is pegged at $9.15, indicating an increase of 28.9% from the year-ago period.

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

Price and Consensus: MLAB

 

ShockWave Medical: This medical instrument maker, catering to the cardiovascular treatment market, is gaining from continued clinical acceptance and penetration of its IVL technology. The increased adoption of coronary IVL in the United States, continued sales force expansion, growing international expansion and higher adoption of Shockwave products contribute to the company’s performance. The company’s strong global growth highlights the significant clinical need for a better calcium treatment and how well the team at ShockWave Medical is addressing the same with IVL.

The Zacks Consensus Estimate for ShockWave Medical’s 2022 sales is pegged at $488 million, indicating a 105.8% rise year over year. The same for ShockWave Medical’s adjusted earnings is pegged at $2.88 per share against a loss of 26 cents reported in the year-ago period. ShockWave Medical carries a Zacks Rank #2 (Buy).

Price and Consensus: SWAV

Dynatronics: Dynatronics designs, manufactures and sells a broad range of products for clinical use in physical therapy, rehabilitation, pain management and athletic training. Through its distribution channels, Dynatronics markets and sells to orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, hospitals, and consumers.

The consensus estimate for this Zacks Rank #2 company’s 2022 sales is pegged at $46.5 million, indicating a 4.9% rise year over year. The same for Dynatronics’s 2023 earnings is pegged at a loss of 12 cents, comparing favorably with the year-ago period figure of a loss of 26 cents.

Price and Consensus: DYNT



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