Two Medical Equipment Companies to Own and One to Sell

Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Most investors agree that the economy is recovering nicely, as evidenced by a 7.4% unemployment rate, down after hitting highs of over 10% in 2009. This means a major turnaround for earnings at a number of companies. The story is even brighter for medical equipment firms, which also look to capitalize on other factors.

Investors in medical equipment companies should be excited about the massive number of babies born during the "baby boom" between 1946 and 1964, since those kids are now between 49 and 67 years old; this represents a large number of people who are approaching the age where they need extensive medical care. ObamaCare is another pillar to this growth story as well. The new health care act should increase the number of people receiving medical care, thus increasing the number who require the use of medical equipment.

Before buying any medical equipment stock, however, it's important to take a look to see which firms are at the cutting edge of innovation.

Medtronic looks poised to make a breakthrough

Medtronic (NYSE: MDT) could be set to increase its profits substantially due to the beginning of trials of its Activa PC+S DBS system. The FDA approved the deep brain stimulation devices in 1997, and trials are finally beginning. The device detects where an electrical pulse is needed in the brain and delivers it. 

While the FDA did approve the brain stimulation devices, however, it could be a while before Activa is approved. If trials are beginning now, it could still be several years before Medtronic is able to realize revenues associated with the device. If the system is a success, however, the company will earn a massive revenue uptake.

Analysts don't expect a major surge in revenue in the next couple years. This year, the company's revenue is expected to increase by 2.2%, and next year it is pegged at 3.3%. Earnings per share is also anticipated to realize modest gains. This year it is expected to increase 2%, though next year is pegged at 7.5%.

Boston Scientific is falling behind

Boston Scientific (NYSE: BSX) has not kept up with advancements in cardiac devices as it had done in the past. Other companies are getting the jump on Boston Scientific as the company is now taking between two to five years to get its products to the market. That means that the company is behind on the release of similar devices, and being third or fourth to get an instrument into hospitals means the firm misses out on a price premium.

Furthermore, the company's debt-to-equity ratio has skyrocketed since acquiring several companies in 2011 (see chart below). These acquisitions came at a bad time, and the firm will have problems earning profits as a result. The FDA has continually sent the firm warning letters about the quality of its products, and this has delayed approvals while increasing recalls. In the year after the acquisitions, the company's net loss fell to $4.1 billion.

BSX Debt to Equity Ratio data by YCharts

Analysts anticipate a 1.6% reduction in revenue this year before gaining 3% next year. This could indicate that they believe the company's acquisitions will start paying off next year. The company has a long way to go in order to recover from a $4.1 billion net loss in 2012, however.

Baxter has new releases in sight

Baxter International (NYSE: BAX) has continually shown that it is first to market with many new devices. In fact, with about two-thirds of its revenue coming from new products, it is earning a premium from new equipment. That often translates into a higher return on equity. The firm always appears to be on the brink of releasing a new product, which is good news for investors.

In 2014, Baxter is set to release the Biogen-Idec, giving the company a way to grow its product line and beat competitors to the segment. The system supports a once-per-week dosing schedule, an improvement from the previous three-times-per-week schedule used with many treatment plans. The company's products are designed for people with infectious diseases, immune disorders, hemophilia, kidney disease or trauma, among other ailments. 

Analysts also have faith in the firm--they expect revenue to grow by 7.6% this year and 10.8% next year. An anticipated decrease to the profit margin will eat away at revenue and result in a modest 3% increase to earnings per share this year, however, though an 11% increase is expected for next year.

Where to put your money

Two of these companies are portfolio worthy, with Boston Scientific being the odd company out. In order to increase share value, medical equipment companies need to be the first to market with many of their products. With Medtronic and Baxter being two of the most innovative companies in the field, expect them to take advantage of the anticipated upsurge in people seeking medical equipment. 

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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. 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!

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