Should You Buy These 2 Medical Device Stocks?

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

Medical device stocks are an excellent place to be if you are still wary of the macro-economy. They are exposed to inelastic demand and don't have pipelines full of "hit-or-miss" products. Their business models are relatively time-tested, and they often pay a good dividend yield. Below, I review two market leaders and provide my thoughts on recent news about them.

Baxter (NYSE: BAX) still looks attractive

Baxter International, the Deerfield healthcare company, ended 2012 with a bang. Sales and profits grew with a 7% surplus compared to the same period a year before. Net revenue stood at $494 million, which was $31 million more than what was reported in the year ago period and above consensus estimates.

Going forward, Baxter is guiding for EPS of around $4.65 in fiscal year 2013 -- disappointing in light of the consensus $4.85 estimate. The medical device company also has a lot to prove: the $4 billion Gambro acquisition was the company's largest ever. It will merge together the second and third biggest dialysis equipment products.

Altogether, the deal is expected to bring in $300 million worth of synergies by 2017 and start being accretive to earnings by next year.

I also believe that risks relating to Biogen's (NASDAQ: BIIB) hemophilia drug are overblown. Baxter's market leading product Advate does not face any serious risks -- patients are not desirous to switch, and Biogen's product benefits only target 25% of Advate's domestic market. And even if this was a cause for concern, Baxter's Alzheimer's catalyst should more than offset the negative speculation.

However, Biogen investors still have several reasons to be optimistic. The biotech firm has strong liquidity with very little long-term debt, a current ratio of 4. and a quick ratio of 3.8. While the PE multiple is high at nearly 40, growth is in the double-digits and backed by a strong pipeline, which includes a subcutaneous MS treatment and a drug that has demonstrated efficacy with lower intravenous injections compared to substitutes. I am particularly optimistic about the latter product, Eloctate. It been able to control 87% of bleeding with just 1 injection.

Medtronic's (NYSE: MDT) growth story turns bright

Medtronic’s Evera ICDs -- implantable cardioverter defibrillator -- got the green light in Europe, which will allow the medical company to market its next-generation of ICDs that have more than 11 years of added battery life. The Evera will also be smaller in size for better fitting and reducing discomfort. It is expected that Evera will now replace the older versions as Medtronic’s flagship ICD product.

The company also recently gained FDA approval for its AIRvance Bone Screw System, which helps treat obstructive sleep apnea. This came right around the same time that the company gained FDA approval for its Advisa DR MRI SureScan pacing product that enables MRI scans with pacemakers. It is a particularly sensible product for physicians to recommend, since 75% of patients using implanted heart devices require an MRI scan while using the implanted heart device.

At the same time, Medtronic is also expanding their global footprint by purchasing a 26% stake in China's LifeTech Scientific. This comes at a time when recently released fiscal third quarter EPS of $0.93 came out 2 cents ahead of expectations. Disappointingly, however, revenue is only expected to increase by 3%-4% over the next few months.

Conclusion

Baxter and Medtronic are reasonably priced at a respective 18.5 times and 16.4 times past earnings. The latter is considerably cash rich at a current ratio of 4.6. Medtronic is forecasted for mid-single digit growth, whereas Baxter is forecasted for high single-digit growth. With the market on the rise, I recommend weighting your portfolio more towards undervalued investments, and, hence, preferentially buying more shares in Medtronic.

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David Gould 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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