Sir Winston Churchill once characterized private enterprise as a “healthy horse, pulling a sturdy wagon.” In these challenging times, health care might well be the strongest horse in a sluggish economy. After all, the sector escaped the wrath of Standard & Poor’s this week, which decided to keep the credit ratings of many health systems the same — even though it downgraded their biggest benefactor: the federal government.
Medical device and supply companies might be even better positioned for growth: At $105.8 billion, the U.S. is the largest medical device market in the world, Espicom Business Intelligence says. While there are many companies in this sector that boast growth opportunities, here are three stocks to consider for a healthy portfolio:
Mako Surgical Corp.
Mako Surgical Corp.’s (NASDAQ:MAKO) second-quarter revenue soared to $18.6 million — an 81% jump over the $10.3 million it reported same quarter in 2010 thanks to an increase in robotic knee replacement surgeries. The stock price tanked, however, on news that MAKO’s net loss grew to $9.9 million from $8.5 million last year.
But if we take a look at the big picture, MAKO’s opportunity is significant. Worldwide robotics are projected to be a $14 billion market by 2014. And MAKO has acquired exclusive rights to Immersion’s (NASDAQ:IMMR) touch feedback patents for use in its orthopedic robotic products, giving surgeons a hands-on feel during procedures.
MAKO set a new 52-week high of $35.90 on May 27 and, at $26.61, is trading nearly 187% above its 52-week low of $9.28 last October. With a market cap of $1.09 billion, has a price/earnings-to-growth ratio of -1.49, which indicates earnings will decline — at least in the short term. The company has total cash of $69.13 million and virtually no debt.
Covidien Plc.
Covidien Plc.‘s (NYSE:COV) third-quarter revenue grew 14% to $2.93 billion, led by a 22% increase in medical device sales. The company’s earnings for the quarter were even more impressive: $535 million ($1.07 per share) — 47% higher than the $364 million (74 cents per share) the company reported in 2010.
COV has a solid business model, has launched new products and is controlling costs. Covidien set a new 52-week high of $57.65 on May 19 and, at $44.70, still is trading 27% above its 52-week low of $35.12 last August. With a market cap of $22.06 billion, the stock pays a nice 1.8% dividend yield and has a PEG ratio of 1.02, meaning it’s valued about right. COV has total cash of $1.76 billion compared to total debt of $4.17 billion.
Baxter International
In July, Baxter International (NYSE:BAX) beat analysts’ estimates with $3.5 billion in revenue — 9.6% over the same quarter in 2010. Earnings grew 15% from $535 million (90 cents per share) for the second quarter 2010 to $615 million ($1.07 per share). Analysts had forecast earnings of $1.02 per share and revenue of $3.38 billion.
BAX’s bioscience sales are promising. The company expects those operations (which include biosurgery and adult stem-cell therapies) to grow 5% to 6% this year — above earlier expectations. BAX set a new 52-week high of $62.50 on July 21 and, at $50.49, still is trading nearly 19% above its 52-week low of $42.47 last August. With a market cap of $28.69 billion, it has a PEG ratio of 1.29 and a nice dividend yield of 2.50%. BAX has total cash of $2.02 billion and total debt of $4.40 billion.
Bottom Line
With an aging population and the health care reform law still on track to expand the universe of Americans with health insurance by 32 million, that’s a much bigger pool of prospective consumers for medical supply and device solutions. These three companies have significant upside, strong fundamentals and are well positioned to take advantage of growth in this increasingly profitable niche.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
