When you think of medical devices stocks, you don’t think of cloud-connected watches. You want to invest in more prosaic companies, large and small, which offer discrete devices for specific conditions, with Food and Drug Administration (FDA) approvals and positive clinical trials.
Still, this may be a good time for long-term investors to find bargains in medical device stocks, with the trade war hurting many smaller companies and casting a pall over the rest of the group.
The long-term prognosis for medical devices is good, but many companies need to deal with short-term problems to get there, so look for strength – financial strength or strength within a winning niche – when you shop for investments.
Medtronic (NYSE:MDT) is the big dog of the medical devices space, with a market cap of almost $134 billion, and nearly $30 billion in revenue per year.
The company has had over $2.7 billion in operating cash flow during the first two quarters, and results have beaten analyst estimates for two of the last three quarters.
Medtronic mainly grows by acquisition. Its latest move is swallowing Mazor Robotics, a robotic surgery company competing with Intuitive Surgical (NASDAQ:ISRG), for $1.6 billion. Medtronic already owned a hunk of Mazor, and paid $58.50 per share, well below the $75-per-share peak reached in March.
Mazor joins a long list of Medtronic acquisitions, the largest being its 2014 acquisition of Covidien. Each new deal gives the company a new niche to grow into. Mazor specializes in spinal surgery, and helps with planning surgery and imaging as well as surgery itself.
Of 26 analysts following Medtronic stock, about half rate it as a buy, and half as a hold. That’s partly valuation — the shares have nearly doubled in value over the last year.
Glioblastoma, a form of brain cancer, is the disease that eventually took out Senators Ted Kennedy and John McCain. Brain cancers hit almost 24,000 people a year and kill almost 17,000.
Novocure (NASDAQ:NVCR) makes Optune, which creates an electrical field that can slow the division of those cancer cells. The company says it can double the five-year survival rate over chemotherapy alone.
This has given the company solid growth since the device was approved in 2015. Revenue in 2017 was $177 million, and for the first two quarters of 2018, the company already had revenue of $112 million. As a result, the stock is up 51% so far in 2018 and 33% in August alone, bringing its market cap to $4.7 billion.
Analysts think Novacure can do $250 million in business this year, and $364 million in 2019 — a growth rate of over 40%. The fast growth, and the relatively modest market cap, mean the stock can get a little ahead of itself, and analysts bounce between buy and hold recommendations on its valuation. Right now, however, five out of six are in the buy camp.
Through the first half of the year, the company had revenue of $354 million, putting it well on pace to beat last year’s $593 million. Net income of over $126 million had already beaten 2017’s $112 million, and operating cash flow has been exploding, to $192 million for the fiscal year ending in March.
The company has been putting this cash to work, with an app that lets doctors monitor patients from their smartphones. It now bills itself as “the leader in heart recovery” and is rolling out an “augmented reality simulator” that can help doctors position the device, manage it, and wean patients off it.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.