Who Will Win This Triple Threat Match?
Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Before writing this article, I went through portfolio of many hedge fund managers to find a suitable stock for analyzing. I found out that many of these portfolios have at least one stock from medical technology industry. So, I did a thorough research to find out the reasons for which top Hedge Fund and Mutual Fund experts like the Medical Equipment Industry and I found out that growth in emerging markets and new products launch are the main growth propellers in this business. Now, the next question arises about the stock that will be the most beneficial from the supportive growth trend. I think it is an easy job to pin down good among the bad but pointing out “bestest among the best” needs real brainstorming. The same theory applies while dealing with stocks of medical equipment industries as I believe many medical technology industries will benefit from the growing demand, but who will benefit the most is a challenging question to answer . Thus, I have set up a match between the top names of this business and the judging criteria will be the pace with which each industry is growing in emerging markets and the visibility over successful product launches.
The medical devices industry consists of different segments including oncology, cardiology, neuro, orthopedic and aesthetic devices. Among these divisions, orthopedic, neuro and aesthetic are the fastest growing categories. The United States, Japan, Germany, France, and Italy are some of the major markets for medical devices. Stryker Corp. (NYSE: SYK), Zimmer Holdings Inc. (NYSE:ZMH) and Medtronic Inc. (NYSE: MDT) all are the top cultivators in this business. Before going further, let me describe more about these three contenders.
The following table summarizes the EPS growth, forward PE and dividend yield of Stryker, Zimmer and Medtronic:-
|
Company |
EPS growth next 5 years |
Forward PE |
Dividend Yield |
|
Stryker |
10.84% |
14.59 |
1.6% |
|
Zimmer |
10.35% |
14.43 |
1.17% |
|
Medtronic |
6.24% |
12.36 |
2.56 |
The following chart shows the stock price movement of the concerned companies and the S&P 500 over the last twelve months:-
Round I
Demand of medical instruments is almost certain to grow in China, India and other emerging markets due to fast-growing middle class population in these countries. The cost of products offered by international companies like Stryker, Zimmer and Medtronic is generally higher than that of local manufacturers of markets. However, higher prices attribute to the cost of attaining high standards and with improving macroeconomic conditions, the focus on attaining higher standards (which was not a concern earlier) is increasing in these emerging markets. Thus, I expect these companies to outweigh the local market in the coming years. I believe Stryker is best positioned among its peers in these markets to capture any opportunity in the near future as its diverse revenue mix (derives 40% of its sales internationally) and favorable geographic footprint will back its growth. Medtronic also has ample exposure to these markets and thus, I expect it to grow with an increasing demand. On the other hand, Zimmer’s over exposure to the reconstructive business and less exposure to emerging markets make me constantly anxious about its relative performance in the coming years.
Round 2
It becomes an obligation for good hospitals to buy new and improved medical technology as patients put more trust in most advanced technology available in the market. Thus, innovation is a very important propeller for medical equipment manufacturers. I think Medtronic is leading on this front. Medtronic’s primary products include pacemakers, ICDs, CRT devices, heart valves, coronary stents, spinal devices, insulin pumps, neuro-stimulation devices and implantable drug pumps. Therefore, in my view, the company has a strong product portfolio. Going forward, I believe Medtronic’s strong pipeline products and clinical trials in coming quarters will drive upside to the earnings. Stryker and Zimmer also have good R&D spend but I think there is lack of visibility over their pipeline products.
The Bottom Line
I believe the medical instrument sector has huge potential to grow in the near future. Although, Stryker and Medtronic both have ample catalysts to show good results in near term, I expect Medtronic to outperform Stryker due to visibility over Medtronic’s successful Corevalve (TAVI). But for the long term, I would suggest Stryker due to its superior outlook, diversified class of products, good R&D spending and strong footprints in emerging market. However, I would suggest avoiding Zimmer in both the near and long term.
ankitagrawal has no positions in the stocks mentioned above. The Motley Fool owns shares of Medtronic and Zimmer Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
