The global medical devices industry is fairly large, with annual worldwide sales in 2009 in excess of $220 billion. The U.S. accounts for approximately 41% of this market. The industry is divided into different categories such as Cardiology, Oncology, Neuro, Orthopedic, Aesthetic Devices, Healthcare IT, etc.
We recommend companies providing life-sustaining products to investors in the medical devices space. These companies provide a strong recurring stream of revenues as patients are unable to forego these products due to their life-sustaining nature. Furthermore, investors should allocate funds to companies with high-earnings-quality profiles.
Large companies with a wide portfolio of products are also better poised for improved returns. These companies have a greater capability of withstanding a downturn in the economy.
We advise investors to avoid companies that have grown historically through acquisitions. These companies may find it difficult to fund acquisitions in the future. Also, they face increasing challenges in delivering operational synergies from these acquisitions, which are considered to be the prime reason for failures of mergers & acquisitions. Additionally, the financial statements of these companies have a large number of one-time items that affect the quality of earnings.
OPPORTUNITIES
In our portfolio, we see growth potential in companies dealing with cardiovascular devices, Neuro, blood-related and disposable products. Names in this list include Medtronic, Inc. (MDT), Haemonetics Corporation (HAE), Boston Scientific Corporation (BSX), St. Jude Medical Inc. (STJ) and Becton, Dickinson and Company (BDX). These are all producers of life-sustaining products and are less affected by economic turbulence. Among these names, Medtronic has a diversified presence in Cardiovascular, Neuro, Spinal, Diabetes, ENT, etc.
The above-mentioned names are all leaders in their respective fields and are potential winners in the long run. Although these companies have Neutral ratings as per the Zacks Rank (#3), we will closely monitor their performances in the current quarter. They are all strong candidates for upgrades.
Another area which is interestingly poised for growth these days is Healthcare IT. The landscape has changed since the Obama Administration passed as part of the Stimulus Package initiatives to encourage hospitals and physicians to modernize their health record keeping. Name in this area include Allscripts-Misys Healthcare Solutions, Inc. (MDRX) and Omnicell Inc. (OMCL).
We have already upgraded Omnicell to a Buy. Allscripts-Misys Healthcare Solutions presently holds a Neutral rating, but is a strong candidate for an upgrade.
WEAKNESSES
We advise investors to avoid companies in the orthopedic domain until we see a complete economic recovery. Companies in this space have suffered from the economic downturn as patients deferred their elective procedures. Names on this list include CONMED Corporation (CNMD), Stryker Corporation (SYK), Zimmer Holdings, Inc. (ZMH), Symmetry Medical, Inc. (SMA) and Wright Medical Group, Inc. (WMGI).
With the economic recovery underway, most of these names have already been upgraded to Neutral over the past few months. However, the economic indicators are pointing that the economy is not out of the woods yet. Hence, we recommend investors avoid these companies until the second half of 2010 when we hope to see a complete recovery.Zacks Investment Research
