Reasons To Be Optimistic About These 2 Medical Device Stocks

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Investing in medical companies is seen as an attractive opportunity due to the rising health needs of baby boomers. Both Baxter and Medtronic are leading producers of medical devices that can target this rapidly growth market. But they have different opportunities and trajectories. Here are some of the strengths behind these two companies:

Reasons To Be Bullish On Baxter (NYSE: BAX)

Baxter is a producer of products for treating illnesses and conditions such as immune disorders, hemophilia, trauma, kidney diseases and other medical conditions that are considered acute or chronic. While its Bioscience segment is responsible for producing blood proteins for the treatment of blood disorders, its Medical Products segments deals with a range of drugs, nutritional products, and medical equipment. 

Its stock has proven to have extremely low volatility, as evidenced by the beta of 0.5. But that doesn't mean that investors won't outperform a recovering economy. Since mid-June 2012, Baxter has been on a relentless path upward--soaring nearly 40% in value. This has been backed by performance and innovation...

In late 2012 (October), Baxter announced that it was going to invest about $1 billion on production of Gammagard, a compound made from human plasma and helps the body combat diseases. Earlier production of gammagard had been stopped in 1994 when it was feared that it may have facilitated the spread the hepatitis virus. But now the science behind Gammagard is increasingly becoming popular and is currently in the last stages of clinical testing and trial as a probable treatment for Alzheimer’s disease. 

Baxter has enjoyed the privilege of investing in what may technically be referred to as ‘high end” health products that target high healthcare spending individuals. The company has also been exercising strategic partnerships with relevant companies, such as Onconova for an upfront payment of $50 million and $515 million in potential milestones. The partnership will help bring Phase III cancer drug rigosertib, which treats rare blood and pancreatic tumors, to the market. It adds incrementally to the company's oncology portfolio while complementing the core focus on hematological conditions and targeting the European market.

The core focus on hematological conditions can be seen by how Baxter has placed a lot of emphasis on BAX 326, which is the only treatment available for hemophilia B. To further its ambition, Baxter, in December 2012, bought Gambro, a Swedish company that manufactures medical equipment at an estimated $4 billion--the company's largest acquisition to date. Baxter explained that it expects to cut cost by $300 million annually as a result of acquiring Gambro, which will expand the breadth of dialysis products.

Reasons To Be Bullish On Medtronic (NYSE: MDT)

Medtronic is a peer healthcare company that is notable for its heart pacemakers that correct heart disorder. It also offers alternative to treating vascular diseases. Further, the company also provides neurostimulators, diabetes management and devices that aid in image-aided surgery. Medtronic has been looking forward to acquiring Kanghui Holdings, a Chinese-based company that also provides medical equipment and is currently the leading provider of orthopedic devices in the country. Closing in November 2012, the deal cost Medtronic $816 million in cash but significantly enhanced the firm's global position in orthopedics.

When Medtronic announced a 2% increase of second quarter earnings to $4.095 billion, it translated to a 4.8% increase in value of shares. But it has still substantially underperformed its main competitor Boston Scientific (NYSE: BSX). Over the last 3 months, Boston has gained 28.4% in value--outperforming Medtronic more than 3x over, or by nearly 2,000 basis points. The good news is that Boston Scientific's bull run has made its larger competitor look comparatively cheap. Medtronic trades at only a respective 14.7x and 11.8x past and forward earnings--both lower than Boston Scientific's forward earnings multiple of 15.6x. Part of this has to do with Boston Scientific's slightly steeper growth curve and higher free cash flow yield of 10.7%, but it seems a bit overdone in light of Medtronic's momentum.

Assuming Medtronic meets expectations, 2016 EPS will come out to $4.67. At a multiple of 15.5x, this translates to a future stock value of $72.39. This provides for around 14% average annual returns when you factor in dividend distributions--easily worth an active investment in light to the stock's 12% lower volatility than the broader market.

TakeoverAnalyst 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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