Medical Products companies, within the broader Medical sector, are expected to put up an impressive show this earnings season. Per the latest Earnings Preview, Medical sector earnings are expected to be up 3.7% on 5.7% higher revenues.
However, the projections indicate a sequential decline from the third-quarter scorecard, which reflected earnings growth of 6.2% on 7.2% revenue improvement.
The Zacks Medical Product sector, which has rallied 14% in the past year, is one of the attractive areas right now. It currently carries a Zacks Sector Rank in the top 44% (113 out of 256 industries).
Factors Likely to Drive Q4 Earnings
Growth Spurs on Innovation: The past few months have been remarkable for the medical device space in terms of innovation. With AI-powered launches like polyp detector, autonomous AI imaging system for detecting skin cancer, diabetic retinopathy using retinal images, talking algorithm, drugstore chatbots and many more, the medical device space has gone from strength to strength. In this regard, we should mention the path-breaking heart failure predictor HeartLogic, launched by Boston Scientific (BSX - Free Report) . It is the first and only heart failure diagnostic validated to have the ability to provide weeks of advanced notice and low alert burden for detecting early signs of worsening heart failure. Among other remarkable inventions, the launch of Medtronic’s Activa Patient Programmer for Deep Brain Stimulation (DBS) therapy is noteworthy. This apart, Edwards Lifesciences’ Inspiris Resilia for patients with aortic heart valve is expected to have contributed to the company’s top line in the to-be-reported quarter.
Abbott (ABT - Free Report) is expected to have registered accelerated growth on multiple product launches including the latest Proclaim XR recharge-free neurostimulation system in the to-be-reported quarter (earnings scheduled on Jan 22). Johnson & Johnson’s (JNJ - Free Report) Medical Device business is expected to have witnessed strong top-line growth in the to-be-reported quarter driven by recent launches like VISTASEAL Fibrin Sealant.
Encouraging Performance of Emerging Economies: Growing medical awareness and economic prosperity have increased the uptake of medical instruments in the emerging economies in recent times. As stated by Moody’s, in 2019, medical device makers are likely to exhibit mid-single digit revenue growth fueled by product innovation across most of the companies and categories. Additionally, sales in emerging markets are expected to display a double-digit percentage rise this year. This should get reflected in the fourth-quarter results of medical product companies.
At Medtronic, in the last-reported quarter, emerging market revenues represented 16% of total sales. Businesses in China grew 13%, 14% in South Asia, 12% in Southeast Asia and 10% in the Middle East and Africa. Further, Eastern Europe grew 14% including 20% growth in Russia. The company’s strategies of public and private partnerships, optimization of the distribution channel, and localization of R&D and manufacturing in certain emerging markets are expected to have benefited it in the to-be-reported quarter too.
For Varian Medical Systems (VAR - Free Report) , which has a huge overseas presence, in EMEA, orders rose 10% year over year in the last reported quarter. China, East Asia and Korea also witnessed growth in the quarter. This trend is expected to have continued in the to-be-reported quarter.
MedTech Tax Repeal: In the fourth quarter, the government came up with its funding bills where it talked about anew suspension of the 2.3% Medical Device tax. “We have now also repealed the Obamacare Medical Device Tax, which threatened access to cutting-edge devices that save lives and enhance the quality of life for all Americans.” This tax was originally enacted in 2013 as part of the Affordable Care Act (ACA). The burden of this 2.3% tax used to fall on the device manufacturer or importer. The suspension has come as a relief for medical device manufacturers, enabling them to channelize their funds into R&D. This is expected to have impacted fourth-quarter performance of industry players.
Factors to Worry About
Trade War Fiasco Continues: The U.S.-China trade war triggered a short-term downtrend in the Medical Instruments sector. Despite a series of recent exemptions by the U.S. Trade Representative (USTR) and the introduction of the phase one trade deal, the entire community is worried about the impact that it may have had on the fourth quarter. Going by a Forbes report, " medical device makers say there is impact to the industry and the threat of more tariffs to come in an ongoing trade war with China is troubling, hitting various parts of the medtech industry."
Device Suspension on Large Scale Impedes Growth: As seen through the first three quarters of 2019, the last quarter of the year too witnessed mass product recalls by medical device manufacturers. Going by a Medical Device and Diagnostic Industry report of December 2019, “there have been 48 medical device recalls issued in 2019, according to FDA, and the agency reported on four of those recalls just in the past week.” These four suspensions include devices from bigwigs like Medtronic and GE Healthcare. These recalls are expected to have capped revenue generation of the respective manufacturers in the fourth quarter.
Given the high degree of diversity in the Medical Products industry, finding the right stocks with the potential to beat estimates might be quite a daunting task.
However, our proprietary Zacks methodology, makes this fairly simple.
We are focusing on stocks that have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with this combination, chances of a positive earnings surprise are as high as 70%.
Earnings ESP provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Here we present three stocks that are expected to beat earnings estimates in this reporting cycle.
Medtronic PLC (MDT - Free Report) : The company is expected to have benefited from balanced growth across major groups and regions in third-quarter fiscal 2020. Multiple product launches within Diabetes, Neurosurgery, Pacing and TAVR demonstrated strength.
Medtronic is scheduled to report fiscal-third quarter results on Feb 18.
The company has an Earnings ESP of +0.03% and a Zacks Rank #3.
Hill-Rom Holdings, Inc. (HRC - Free Report) : In recent times, Hill-Rom has been witnessing solid growth in domestic revenues, driven by sturdy performance in Patient Support Systems and Front Line Care. Internationally, Asia Pacific, Latin America and EMEA have been registering strong revenue growth.
The company is scheduled to release results for the first quarter of fiscal 2020 on Jan 24.
The combination of Hill-Rom’s Earnings ESP of +1.54% and a Zacks Rank #2 raises the possibility of a positive earnings surprise in the to-be-reported quarter.
Zynex Inc. (ZYXI - Free Report) : The company designs, manufactures, and markets medical devices to treat chronic and acute pain; and activate and exercise muscles for rehabilitative purposes with electrical stimulation. In the soon-to-be-reported quarter, the company is once again likely to have gained from increase in sales representatives, expansion of geographic footprint across the United States and therefore an increase in orders.
Zynex has a Zacks Rank #2 and an Earnings ESP of +23.08%.
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