Medical Devices Stock Review - Feb. 2010 - Industry Outlook

The global medical devices industry is fairly large, with annual worldwide sales in excess of $200 billion. The U.S. accounts for approximately 41% of this market. The industry is divided into different categories such as Cardiology, Oncology, Neuro, Orthopedic, Aesthetic Devices, Healthcare IT, etc.

We recommend companies providing life-sustaining products to investors in the medical devices space. These companies provide a strong recurring stream of revenues as patients are unable to forego these products due to their life-sustaining nature. Furthermore, investors should allocate funds to companies with high-earnings-quality profiles.

Large companies with a wide portfolio of products are also better poised for improved returns. These companies have a greater capability of withstanding a downturn in the economy.

Another area which is interestingly poised for growth these days is Healthcare IT. The landscape has changed since the Obama Administration passed as part of the Stimulus Package initiatives to encourage hospitals and physicians to modernize their health record keeping. Names in this area include Allscripts-Misys Healthcare Solutions, Inc. (MDRX) and Omnicell Inc. (OMCL). However, neither of these companies have the above-mentioned attributes that differentiate them from the others. As such, we have a Neutral rating on these stocks.

We advise investors to avoid companies that have grown historically through acquisitions. These companies may find it difficult to fund acquisitions in the future. Also, they face increasing challenges in delivering operational synergies from these acquisitions, which are considered to be the prime reason for failures of Mergers & Acquisitions. Additionally, the financial statements of these companies have a large number of one-time items that affect the quality of earnings.

OPPORTUNITIES

In our portfolio, we see growth potential in companies dealing with cardiovascular devices and surgical equipment, Neuro, blood-related and disposable products. Names in this list include Medtronic, Inc. (MDT), Haemonetics Corporation (HAE), Intuitive Surgical, Inc. (ISRG), Boston Scientific Corporation (BSX), St. Jude Medical Inc. (STJ) and Becton, Dickinson and Company (BDX). These are all producers of life-sustaining products and are less affected by economic turbulence. Among these names, Medtronic has a diversified presence in Cardiovascular, Neuro, Spinal, Diabetes, ENT, etc.

The above-mentioned names are all leaders in their respective fields and are potential winners in the long run. Although Becton, Dickinson is the only Buy-rated stock according to the Zack Rank at this time, we will closely monitor their performances in the current quarter. They are all strong candidates for upgrades.

WEAKNESSES

We advise investors to avoid companies in the orthopedic domain until we see a complete economic recovery. Companies in this space have suffered from the economic downturn as patients deferred their elective procedures. Names on this list include Conmed Corporation (CNMD), Symmetry Medical, Inc. (SMA), Wright Medical Group, Inc. (WMGI) and Hanger Orthopedic Group Inc. (HGR).

With the economic recovery underway, all these names have already been upgraded to Neutral in the past few months. However, the economic indicators are pointing that the economy is not out of the woods yet. Hence, we recommend investors to avoid these companies until the second half of 2010 when we hope to see a complete recovery.

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