Mon. Apr 5th, 2021
3 Top Medical Instruments Stocks to Beat COVID

The unprecedented nature of the COVID-19 crisis has in a way drastically transformed the fortunes of the medical instrument industry. While full-fledged vaccine rollouts are going on, industry watchers are still unable to gauge the magnitude of economic revival in 2021 because of the emergence of new virus strains. In such a scenario, primarily, diagnostic testing lab and non-service providers making significant strides in the field of COVID-19 testing have seen their stocks rally amid the economic volatility. Natus Medical (NTUS Free Report) , IDEXX Laboratories (IDXX Free Report) and Hologic Inc. (HOLX Free Report) are a few such stocks.

On the other hand, there are many stocks catering to specialized non-COVID niches like Intersect ENT and Dexcom, which, even after one year of the pandemic, are still struggling to cope up with the impact of delayed elective procedures.

Industry Description

The Zacks Medical – Instruments industry is highly fragmented, with participants engaged in research and development of new devices for specific therapeutic areas. This FDA-regulated industry comprises an endless number of products, starting from transcatheter heart valves to orthopedic and trauma products to imaging equipment.

Before the outbreak of COVID-19, the Medical Instruments space was advancing well in terms of research and development (R&D). Among the path-breaking inventions of recent times, wireless brain sensors, Bluetooth-enabled smart inhalers, artificial pancreas, human-brain pacemaker, electronic skin that displays vital signs of the body, needle-free injections, precision medicine and many more are worth mentioning.

However, over the past several months, the pandemic has put a brake on the flow of seamless R&D operations. Many non-coronavirus and non-emergency-line innovations have been stuck or delayed due to the lockdown.  Edwards Lifesciences and Varian Medical are among the companies whose R&D has taken a hit.

Notably, some of the key players in this industry are Thermo Fisher Scientific (TMO Free Report) , Intuitive Surgical, Inc. (ISRG Free Report) , and Abiomed, Inc. (ABMD Free Report) .

4 Trends Shaping the Future of the Medical Instruments Industry

Trend Improvement in the Cards: Even amid the new waves, medical instruments companies’ collective business growth has started to show strong signs of rebound in base sales volumes. Particularly, companies that have invested in virtual physician education, remote clinical support and digital sales enablement suitable for healthcare support amid the pandemic are riding on huge market adoption of their COVID-19-related healthcare-support products and services. Per Fed’s latest Economic Projection, average economic growth is expected to be 6.5% in 2021, a significant rise from December 2020 prediction of 4.2%. Unemployment rate is pegged at 4.5% for 2021, a reduction from December prediction of 5%. Core PCE inflation (the percentage rates of change in the price index for personal consumption expenditures excluding food and energy) is now expected to be 2.2% (up from 1.8% projected earlier). The Fed’s upbeat forecast is particularly based on the latest $1.9 trillion stimulus package known as the America Rescue Plan with once again possibility of near-zero interest rate. This has significantly bolstered investors’ confidence across sectors including medical instruments.

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 Medtronic, Stryker and Exact Sciences being a few prime line acquirers. Among the colossal deals, Varian Medical’s previously announced acquisition by Siemens Healthineers is expected to close in the first half of calendar year 2021.

Focus on Emerging Markets: Growing medical awareness and economic prosperity have been increasing the uptake of medical instruments in emerging economies. An aging population, increasing wealth, government focus on healthcare infrastructure and expansion of medical insurance coverage make these markets a happy hunting ground for global medical instruments players. A Mercer Capital report states that although Americas is still the largest medical device market in the world, Asia/Pacific and Western Europe are expected to expand at a quicker pace over the next several years. Going by the pre-pandemic picture, the MedTech market in China is projected to grow significantly through 2022. India’s MedTech market is currently growing at a rate of 15% annually (per Business Standard). If this continues, India may give tough competition to Japan and Germany by 2022.

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 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 is becoming 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 Bright Prospects

The Zacks Medical Instruments industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #127, which places it in the top 50% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects. 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 own sector in the past year.

The industry has gained 42.9% compared with the S&P 500’s 55.6% increase and the broader sector’s 21% rally in a year’s time.

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 34.10X compared with the broader industry’s 21.57X and the S&P 500’s 22.44X.

Over the past five years, the industry has traded as high as 41.56X, as low as 22.81X and at the median of 29.94X, 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

Natus Medical: Even amid the changing economic and business environment through the pandemic months, Natus Medical business began to recover from the second half of 2020. In 2021, Natus Medical expects to continue to bring innovative products and solutions to market, including a new handheld newborn hearing screener, cloud telemedicine capability for certain products and a variety of product software enhancements.

Price and Consensus: NTUS

The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company’s 2021 sales is pegged at $465.7 million, indicating 12% rise year over year. The same for adjusted earnings per share is pegged at $1.18, indicating an increase of 202.6% from the year-ago period. The company has returned 6.9% in a year’s time. You can see the complete list of today’s Zacks #1 Rank stocks here.

IDEXX Laboratories: The company is consistently registering sturdy gains in CAG (Companion Animal Group) Diagnostics recurring revenues, supported by high organic gains in both the United States and International markets. The company’s performance in major geographies is also encouraging. Further, the company’s human health business, OPTI Medical Systems’ COVID-19 human Polymerase Chain Reaction (PCR) testing is also contributing to the top line. The upbeat initial financial outlook for 2021 instills investors’ confidence in the stock.

Price and Consensus: IDXX

The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2021 sales is pegged at $3.09 billion, indicating 14.3% rise year over year. The same for adjusted earnings is pegged at $7.59 per share, indicating an increase of 13.1% from the year-ago period.

Hologic: Robust demand for COVID-19-related products and ongoing recovery in other arms have enabled Hologic to provide a strong outlook. Recently announced buyouts of Biotheranostics and SOMATEX Medical Technologies GmbH, along with the receipt of a slew of regulatory approvals bode well for the company. Expansion of both margins looks encouraging.

Price and Consensus: HOLX

The consensus estimate for this Zacks Rank #2 company’s fiscal 2021 sales is pegged at $5.70 billion, indicating 50.8% rise year over year. The same for adjusted earnings per share is pegged at $8.81, indicating 121.4% improvement from the year-ago period figure.

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