Though most analysts in their respective industries have been taking a more conservative approach to rating companies under their coverage, Zacks senior medical devices & supplies analyst
Christopher Titus, CFA has been upgrading several names that he follows recently. To find out what, we asked him a series of questions about his industry.
Despite a difficult environment for the markets and the U.S. economy, you are growing more bullish on the medical devices sector, is that true?
True enough. Medical device stocks should provide investors with opportunities for solid, lower-risk returns over the coming six to twelve months. The recent slide in the market has left many strong companies looking very attractive. In the coming year, investors should allocate funds to companies with high earnings quality profiles.
What factors help you decide which companies are the strongest ones in the space?
For one thing, larger companies will find it easier to survive any future liquidity issues and acquire new technologies at cents on the dollar. Also, companies providing life-sustaining products should remain insulated from the current economic crisis, as targeted patients are unable to forego these procedures.
Avoid companies that have historically grown by acquisition. These companies may find it difficult to fund acquisitions, diminishing underlying growth. Additionally, the financial statements for these companies are often clouded by one-time charges, lowering their quality of earnings.
Do you have any specific Buy recommendations for us today?
Areas within our coverage that should perform well include cardiovascular devices and surgical equipment, blood related products, and associated consumables. Specific names to consider include St. Jude Medical (STJ), Baxter (BAX), Becton Dickinson (BDX), Boston Scientific (BSX) and CR Bard (BCR). Many of these companies have complimentary businesses that should also perform well.
As the third quarter unfolds, we anticipate upgrading some other names to BUY should they not appreciate significantly before the quarter's results are released, such as Haemonetics (HAE) and Medtronic (MDT).
Where would you advise investors to stay away from, at least for the near term?
Increases in unemployment will reduce the ranks of insured patients. Therefore, we remain cautious on products for which the related procedures may be delayed. One such group is orthopedics, where pricing has been weak. Specific names include ArthroCare (ARTC), Conmed (CNMD), Symmetry Medical (SMA), Stryker (SYK) and Zimmer (ZMH).
Other areas include medication dispensing, delivery, and software. Names in this area include Omnicell (OMCL) and AllScripts (MDRX). Orthotics and prosthetic services are an area where we believe consumers will cut spending during difficult economic times.
Christopher Titus, CFA is a senior analyst covering the medical devices and supplies industry for Zacks Equity Research.
