Medical Device Providers For Your Portfolio
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are a number of Medical Device manufacturers trading at deep discount to their highs. The big name amongst the also-rans is Boston Scientific Corporation (NYSE: BSX), which recently grabbed the headlines after enjoying a consecutive period of buying to take the stock above $5.90, once the end-of-year tax loss selling was complete. In its heyday, Boston Scientific Corporation traded in the high $40s, but a drop in demand for heart stents and implantable heart defibrillators, combined with litigation issues, have taken their toll on the company. The company is also restructuring, laying off 1,200 staff and outsourcing those jobs to China in a $150 million investment in the country.
Guidant was the big acquisition for Boston Scientific in 2006, but that wasn't without its problems. There was also the June acquisition of Cameron Health, which offers lead-less defibrillators that are expected to see FDA approval in the first half of 2013. The big thing working in Boston's favor is the beat down share price. Much of the trouble has already been priced into the stock. After four years of annual losses, Boston returned to net profit in 2011, although 2012 will come in as a loss following two losing quarters, with a significant impairment charge of $3.4 billion on its non-US units, due to "macroeconomic factors." The company is looking to its U.S. operations to deliver a strong Q4--no pressure!
While Boston Scientific hogs the headlines, money flowing into the device sector should find its way towards some of the smaller names, which may offer more potential upside. Indeed, some of these names may become potential takeover candidates for the likes of a Boston Scientific Corporation or a St Jude Medical.
One of the names in the cardiac space is CryoLife (NYSE: CRY). The company also distributes human tissue for transplantation. While the company has steadily grown revenue over the past 5 years, its stock price has meandered below $10 for the same period without any real conviction on the part of buyers.
Over the past 2 years, the company has geared itself towards higher margin markets, focusing on products targeting cardiovascular surgery and end-stage renal disease. This strategy has boosted revenue by double digits from the prior year. Direct sales from Europe and an expanding market for PerClot (although PerClot accounts for only 2% of revenues) have contributed to the improved Q3. U.S. clinical trials for PerClot are set for the first half of 2013, with ultimate FDA approval expected to come in 2014. Cryolife is also seeking regulatory approval for PerClot in Japan. Tissue sales still account for over half of Cryolife's revenues, but even here there was a 22% increase in revenue.
Cryolife's medical device segment is growing nicely, albeit from humble beginnings as individual products have revenues around the $1 million mark, but collectively these should continue to contribute to Cryolife's steadily improving earnings. September saw the launch of HeRO Graft, with revenues expected to roll in from Q4 onwards. The company is also seeking a CE mark from the EU, potentially coming in the second half of 2013, which would open the European market for ValveXchange. In addition, the company has limited debt and has started paying a quarterly dividend. All signs the company has a bright future on a number of revenue paths.
If Cryolife's $180 million Market Cap is a little small, there is CONMED Corporation (NASDAQ: CNMD) to consider. This $800 million medical device maker has one of the most consistent stock price histories of any stock out there. The real 'blow-away-the-cobwebs' move would come on a break of $32.50, but while it's knocking in the high $20s it has attractive accumulation potential.
It's larger size hasn't protected it from some erratic (yet still profitable) revenues and earnings. Analysts have high hopes for Q4 at $0.51 a share, although the company did beat on similar raised guidance in 2011. The company saw strong sales in single-use products (up 7.6%), which account for 80% of total sales (or $145 million). The company also completed the acquisition of Viking Systems, which offers the only stand-alone 3D-HD surgical visualization system cleared for sale in the U.S. However, the acquisition is unlikely to make a significant contribution to earnings, as in the quarter ended June 2012 Viking Systems had only booked $2.2 million in Sales. There also restructuring costs to consider as manufacturing is moved to Mexico.
Company guidance for Q4 is for sales of around $200 million, which is around analyst estimates, but cites "external headwinds" from the weak economy as impacting on healthcare utilization. FX rates add another layer of uncertainty to earnings, along with the excise tax on medical devices. The company is projecting earnings growth of just 5% versus the 15% previously, but within this lowered expectation CONMED could surprise, even if the boost was attributed to an non-company event such as a favorable shift in FX rates.
Where the company looks unattractive is its P/E ratio. Every $180 you invest in the stock buys you $1 in revenue, and this is well above the sector average P/E of 21.1. The company's cautious earnings outlook doesn't inspire confidence either. If the stock was to break above $32.50, it would only push this ratio out further. For this reason, it may be another few months (years?) before it has the momentum to generate rapid price appreciation. However, the stock is resilient, and has weathered the tech crisis and credit crunch relatively nimbly. A yield of 2% isn't going to excite, but it might be enough to at least hold and build on.
fallond has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!