Goldman Remains Constructive on MedTech, Sees 'New Opportunities' Amid Selloff

• Medical Technology stocks are down in the single-digit to low-double-digit range over the last five trading days.
• Goldman Sachs' David Roman upgraded the ratings for Boston Scientific Corporation BSX and C R Bard Inc BCR from Neutral to Buy.
• Roman said that he favored companies that had balance sheet flexibility, product cycles and U.S. exposure.

Analyst David Roman wrote, “We remain constructive on MedTech heading into the balance of the year.” He cited the reasons as:

1. Improving U.S. utilization and hospital capex spending – Top ideas being CR Bard, Intuitive Surgical, Inc. ISRG [rated Buy; PT $637] and Stryker Corporation SYK [rated Buy; PT $117]
2. New product cycles are driving incremental top-line growth, which is supporting organic revenue growth of 5-7 percent – Top ideas being Boston Scientific, Edwards Lifesciences Corp EW, Stryker and Zeltiq Aesthetics Inc ZLTQ [rated Buy; PT $43]
3. Balance sheet flexibility and strong FCF provide flexibility to grow returns via share repurchases, dividends and M&A – Top ideas being Baxter International Inc BAX [rated Buy; PT $45] and Stryker

Roman upgraded Boston Scientific to Buy, with a price target of $20, saying that the recent selloff in the sector had left the company’s shares presenting a “more compelling” risk/reward. The company’s organic top-line growth is expected to accelerate from 3.9 percent in 3Q15 to 5.0 percent by 4Q16E, backed by new product launches across all three operating divisions.

Roman also expects Boston Scientific to achieve EBIT margin expansion from 22.7 percent in 2015E to 25.3 percent by 2018, in view of synergies from the American Medical Systems transaction and underlying mix improvements. Robust FCF and EBITDA growth should “allow the company to de-lever rapidly, supporting further capital allocation activities (resumption of share repurchase in 2017E+),” the Goldman Sachs report stated.

The analyst CR Bard to Buy, with a price target of $220, saying that share price outperformance is likely to be driven by “(1) outsized domestic exposure relative to peers provides leverage to US cyclical recovery; (2) harvesting past investments should support sustained organic growth in the 5%-6% range as well as drive EBIT margin expansion of 200bp from 2015E to 2018E; and (3) balance sheet flexibility.”

Roman also expects CR Bard to deploy capital mostly toward M&A and growth opportunities.