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4 Medical Products Stocks to Capitalize on the Industry's Recovery

After macroeconomic headwinds impacted the top and bottom lines of Zacks Medical – Products industry participants in 2022, there seems to have been a recovery in the first quarter of 2023. The supply-chain challenges that adversely impacted shipments in 2022 started to dissipate in the last quarter of 2022 and the improvement continues in 2023. As the supply chain eases going forward, top-line growth will continue to improve. The European and international markets are also showing signs of a steady recovery in demand for medical products. Meanwhile, the rising cost of materials and labor shortages that resulted in inflationary pressure in 2022 are likely to continue. However, the impact is likely to be less severe than last year due to a favorable base effect. A gradual increase in pricing of products and services will also help to offset higher costs and expenses.

Several industry players have the potential to ride on the recovery trend within the industry, creating wealth for investors. Industry participants like Stryker SYK, Boston Scientific BSX, Zimmer Biomet ZBH and Insulet PODD are likely to gain from the rebound in demand and new cost-cutting initiatives.

Industry Description

The industry includes companies providing medical products and cutting-edge technologies for diagnosis, observation, consultation, treatment and other healthcare services. The industry players are primarily focused on research and development. The industry participants primarily cater to vital therapeutic areas like cardiovascular, nephrology and urology devices, to name a few. Strengthening dollar and labor shortage are hurting top-line growth. Ongoing disruption due to volume-based procurement policy in China is hurting sales. Recent inflationary pressure and labor shortages are weighing on gross and operating margins of the industry players. The trend is likely to continue in 2023. However, rising demand for medical procedures along with cost-cutting initiatives is likely to drive industry performance going forward.

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Major Trends Shaping the Future of the Medical Products Industry

AI, Medical Mechatronics & Robotics: The rising utilization of minimally-invasive robot-assisted surgeries, self-automated home-based care, use of IT for quick and improved patient care and the shift of the payment system to a value-based model underscore the growing influence of AI in the Medical Products space. In fact, mechatronics — a high-end technology incorporating electronics, machine learning and mechanical engineering — is rapidly becoming a defining characteristic of the space. There are several companies that have shown substantial prowess when it comes to their involvement in AI, robotics and medical mechatronics. Advancements in robot-assisted surgical platforms continue to be crucial with respect to minimally-invasive surgery that helps in reducing trauma associated with open surgery. With respect to Mechatronics, the benefits of the same have been demonstrated in the form of 3D printing, which has altered the face of the medical devices industry. Currently, 3D printing is being utilized to print stem cells, blood vessels, heart tissues, prosthetic organs and skin.

Rising Demand for IVD: Toward the end of February 2020, the COVID-19 outbreak started to spread rapidly and took the shape of a pandemic. This led to a rise in global demand for diagnostic testing kits in order to curb the spread of the virus. Testing became the need of the hour and that led to a shift in the pipeline of IVD products, with a large number of rapid, point-of-care devices going into development. Companies not only received emergency use authorization (EUA) from the FDA but also bolstered production to aid testing shortages. Industry players anticipate significant demand for rapid diagnostic testing in the future as well and are well-poised to capitalize on the same.

Emerging Markets Hold Promise: Given the rising medical awareness and economic prosperity, emerging economies have been witnessing solid demand for medical products. An aging population, relaxed regulations, cheap skilled labor, increasing wealth and government focus on healthcare infrastructure make these markets extremely lucrative for global medical device players.

Zacks Industry Rank

The Zacks Medical Products industry falls within the broader Zacks Medical sector.

It carries a Zacks Industry Rank #96, which places it in the top 38% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few medical products stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Performance

The industry has underperformed its own sector and the Zacks S&P 500 composite in the past year.

Stocks in this industry have collectively declined 28.1% compared with the Zacks Medical sector’s decline of 6.2%. The S&P 500 has lost 1.1% in the same time frame.

One Year Price Performance


Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 23.1X compared with the S&P 500’s 18.2X and the sector’s 22.9X.

Over the last five years, the industry has traded as high as 29.9X and as low as 19.2X, with the median being 23.7X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

 

Price-to-Earnings Forward Twelve Months (F12M)


4 Promising Medical Products Stocks

Insulet: The company is a leading developer, manufacturer and marketer of the Omnipod Insulin Management System. The system is equipped with a self-adhesive, small and lightweight disposable tubeless Omnipod device along with the wireless and handheld Personal Diabetes Manager for pain-free automated cannula insertion and blood glucose meter integration. Insulet earns a huge share of revenues from the Omnipod System in the United States, Canada, Europe and Israel. The company’s performance benefited from record quarterly U.S. and Total Omnipod new customer starts during the first quarter. This was driven mainly by a strong start to the company’s U.S. full market release of the Omnipod 5 automated insulin delivery system.

However, the substantial fall in Drug Delivery sales is discouraging. Contraction in margins does not bode well. On a year-over-year basis, the company expects gross margin to be impacted by higher costs associated with the U.S. manufacturing ramp, product line mix due to the ramp-up of Omnipod 5 and lower drug delivery revenues. Supply chain disruptions and inflationary pressure continue to challenge business operations.

Following the first-quarter results, Insulet raised the total revenue growth guidance to the range of 18-22% on a reported basis (up from the prior projection of 14-19%). Total Omnipod sales are likely to improve by 21-25% in 2023.

For this Acton, MA-based company, the Zacks Consensus Estimate for 2023 revenues suggests an improvement of 16.5%. The consensus estimate for earnings indicates an improvement of 1742.9%. It has a trailing four-quarter earnings surprise of 59.81%, on average. Presently, the company sports a Zacks Rank #1 (Strong Buy).

Price and Consensus: PODD

Stryker: Stryker is one of the world’s largest medical device companies operating in the global orthopedic market. The company has three business segments: Orthopaedics, MedSurg, and Neurotechnology & Spine.

Stryker continues to deliver strong organic sales growth on the back of robust demand for its MedSurg and Neurotechnology businesses, led by Endoscopy, Instruments and Neurocranial. The Orthopedics and Spine businesses are also on an encouraging growth path, reflecting procedural recovery throughout the quarter. The company witnessed strong performance across its segments in the United States. Strong International sales also buoy optimism. It expects the momentum to continue into 2023 on the back of ongoing procedural recovery and a strong order book for capital equipment. Stryker continues to witness strong demand for its robotic-arm-assisted surgery platform — Mako — on the back of its unique features and healthy order book. However, supply-chain challenges and inflationary pressures continue to impede growth.

Following its strong first-quarter 2023 results, the company expects total revenue growth at a constant exchange rate (“CER”) of 8-9% for 2023. Adjusted EPS is now expected to be within $10.05-$10.25, up from the prior guidance of $9.85-$10.15. Currently, the company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For this Kalamazoo, MI-based company, the Zacks Consensus Estimate for 2023 revenues is pegged at $19.9 billion. The consensus mark for earnings stands at $10.12 per share. It has a trailing four-quarter earnings surprise of 1.60%, on average.

Price and Consensus: SYK

Boston Scientific: The company manufactures medical devices and products used in various interventional medical specialties worldwide. It is one of the leading players in the interventional cardiology market with its coronary stent product offerings. Boston Scientific first-quarter 2023 adjusted earnings and revenues exceeded market expectations by decent margins.  The company registered a strong year-over-year improvement in organic sales, indicating a solid rebound in the legacy business even amid several macroeconomic issues. The increased 2023 guidance increases investors’ confidence, indicating that the company is well-poised to handle the industry-wise trend of currency headwinds and global inflationary pressure. However, mounting operating expenses are putting pressure on the company’s gross margin.

Following the strong first-quarter results, Boston Scientific raised total revenue growth guidance to the range of 8.5-10.5% on a reported basis (up from the prior projection of 5-7%). Organic revenue growth is currently expected in the range of 8-10%. The company also raised the lower end of its guidance for adjusted earnings from $1.86-$1.93 to $1.90-$1.96.

For this Natick, MA-based company, the Zacks Consensus Estimate for 2023 revenues suggest an improvement of 9.2%. The consensus estimate for earnings indicates an improvement of 13.5%. It has a trailing four-quarter earnings surprise of 1.88%, on average. Presently, the company carries a Zacks Rank of 2.

Price and Consensus: BSX

Zimmer Biomet: It is a leading musculoskeletal healthcare company that designs, manufactures and markets orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; spine, bone healing, craniomaxillofacial and thoracic products; dental implants; and related surgical products.

Zimmer Biomet ended the first quarter of 2023 with better-than-expected earnings and revenues. Each of the company’s geographic segments and product divisions recorded strong year-over-year sales growth at CER. Management noted continued procedure recovery, solid execution and increasing traction around innovations in the reported quarter.

Even amid the challenging macroeconomic conditions, expansion in the company’s adjusted gross and operating margins is encouraging. The raised 2023 guidance is an indication of the strong growth momentum to continue through the year. Meanwhile, the last few quarters witnessed gradual stability in the global musculoskeletal market with better-than-expected sales growth in certain geographies, banking on improved procedural volume.

Following encouraging first-quarter results, the company expects its revenue and adjusted earnings to grow 5-6% and 7-9%, respectively compared with the 2022 metrics. Currently, the company has a Zacks Rank #2.

For this Warsaw, IN-based company, the Zacks Consensus Estimate for 2023 revenues is pegged at $7.14 billion. The consensus mark for earnings stands at $7.34 per share. It has a trailing four-quarter earnings surprise of 7.38%, on average.

Price and Consensus: ZBH


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Stryker Corporation (SYK) : Free Stock Analysis Report

Boston Scientific Corporation (BSX) : Free Stock Analysis Report

Insulet Corporation (PODD) : Free Stock Analysis Report

Zimmer Biomet Holdings, Inc. (ZBH) : Free Stock Analysis Report

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