Medical device manufacturers are some of my favorite investments, as the top names in this sector are always on the cutting edge of health care. These companies offer products or services that can positively impact the quality of life for consumers and patients.
Because of this, these companies often have strong financial results over long periods of time. This can allow for long streaks of dividend growth. This article will discuss my two favorite companies in the medical device sector.
Abbott Laboratories
I discussed Abbott Laboratories (ABT, Financial) back in February after I had recently added to my position. The company was founded in 1888 and has, over time, become a leader in the health care industry. While the company also sells nutritional products and generic pharmaceuticals, it is Abbott Laboratories’ medical devices and diagnostic testing devices that interest me as an investor.
For example, Abbott Laboratories’ FreeStyle Libre helps patients with diabetes measure their glucose levels without the use of finger sticks. The FreeStyle Libre is a self-applied continuous glucose monitoring device that can be worn for 14 consecutive days, making it the longest lasting continuous glucose monitor on the market. Sales for the device, which was first approved for 10-day use in Europe before receiving approval for its current system in the U.S. in 2017, grew 70% to $2 billion last year.
In heart care, Abbott Laboratories has several innovative products showing strong growth rates. The company’s MitraClip is a minimally invasive treatment for a leaky mitral heart valve. This is a relatively new procedure that doesn’t require open-heart surgery, reducing risk and recovery time for patients. MitraClip had sales growth of 29% in 2019.
The company’s HeartMate 3 is a device that assists the left ventricle, which is the main pumping chamber of the heart, with transporting blood throughout the body. This product is used for patients with heart failure and has proven successful at reducing death rates. While sales for HeartMate 3 weren’t broken out on the last conference call, Abbott Laboratories’ Heart Failure business improved 20% year-over-year, likely due in large part to the device.
In more recent news, Abbott Laboratories announced on March 27, 2020 that it was launching a test that could detect if a patient was infected with Covid-19, the novel coronavirus, in as little as five minutes. The test, which is small and portable, is being mass-produced, and the company expects to supply 50,000 tests per day by the beginning of April. Considering the current testing for Covid-19 requires anywhere from a day to a full week or more to get test results due to backlog, this new test could be a game changer for the health care sector as the fight to stop the spread of the virus continues. Between this system and the company’s ID Now system, the most commonly used test for Covid-19, Abbott Laboratories plans to produce five million or more tests per month.
These are just but a few examples of Abbott Laboratories’ ability to bring new and innovative products to market. Each of these devices works to improve and save lives. This has helped make Abbott Laboratories one of the best investments to hold over the long-term and has allowed the company to grow its dividend for the past 47 years.
Abbot Laboratories yields just 1.9% as of Friday and trades at 20.8 times analysts’ EPS estimates for 2020, which is slightly below the five-year average price-earnings ratio of 21.
Stryker Corporation
My other favorite name in the medical device sector is Stryker Corporation (SYK, Financial). Stryker was founded in 1941 by Dr. Homer Stryker, who was dissatisfied with the medical devices of the time period. He set out to design and manufacturer medical devices that would more appropriately meet the needs of his patients. Since then, Stryker has become a recognized leader in medical devices. The company operates three segments: Orthopaedics, MedSurg and Neurotechnology and Spine.
Stryker has routinely produced higher organic growth rates than the med tech industry. From 2013 through 2018, the company has averaged 6.4% organic growth to the industry average of 4.1%. This has shown that Stryker’s products and services are in much greater demand than the rest of the industry. The company had 8% organic growth in 2019 overall, with 8.8% organic growth in the fourth quarter alone.
Stryker received contributions from all three segments during 2019. MedSurg and Neurotechnology and Spine both had 8.9% organic growth, with Orthopaedics adding 6.7%.
MedSurg saw a variety of products categories contribute to growth, led by a 10.2% improvement in instruments. Waste management, smoke evacuation and steri shield, which are digital sensors used in dentistry to capture x-rays, all saw higher demand. Endoscopy grew by a mid-teens rate on the strength of the company’s video, camera and lights businesses. Neurotechnology and Spine benefited from gains in stroke related products and neuro-powered instruments.
In Orthopaedics, Stryker’s Mako robot continues to shine. The company has always been very adept at making acquisitions to fold into its existing businesses. The Mako robot is a good example of this. The robot, which Stryker acquired in 2013 with its purchase of Mako Surgical Corporation, is a revolutionary product. Surgeons can use the robot to perform a joint replacement surgery with a higher degree of precision and accuracy than by hand alone.
Acceptance of Mako took time, but Stryker installed 89 Mako robots in Q4, an increase of 35 from the same quarter in 2018. Stryker has an install base of ~860 robots worldwide, with 700 in the U.S. For the year, the company installed a total of 214 robots. More than 1,600 surgeons were trained on how to use the robot last year and many of the installed robots in 2019 were in accounts where Stryker had no previous presence. This shows that the Mako robot is becoming more widely accepted for joint replacement procedures.
In the fourth quarter alone, total Mako procedures increased almost 50% to more than 36,000 in the U.S. Knee procedures increased 59% in the fourth quarter and 66% for the year. Mako hip procedures grew 40% in 2019.
Hip and knee replacements will be a key category of growth for Stryker in the coming years. The total market for joint replacement surgery is expected to grow more than 42% to $27 billion by 2026 from 2018 levels. Nearly 9% of the world’s population is above the age of 65. This is the highest percentage this age category has ever achieved in the history of the world. In developed nations like the U.S., the U.K., Germany, France and Japan, this category represents 15% to 28% of the total population. This age group is more likely that others to require joint replacement surgery, setting Stryker to continue to grow this portion of its business.
The Mako purchase isn’t the only acquisition that has benefited the company. The purchase of K2M in 2018 added a collection of minimal invasive spinal products to Stryker’s portfolio. This acquisition drove nearly 13% of organic growth in the fourth quarter.
In early November of last year, Stryker announced its $4 billion purchase of Wright Medical Group. Stryker is a market leader in knee and hip procedures, but Wright Medical Group specializes in shoulder, foot and ankle procedures. This acquisition will enhance Stryker’s capabilities in these areas, making the company a one stop shop for doctors and hospitals looking for expertise and products to meet patients’ needs.
Stryker has increased its dividend for 27 consecutive years, often by a low to mid-double-digit rate over the last decade. Stryker’s dividend yield of 1.4% is on the low side. Shares trade with a forward price-earnings ratio of 18, which is a significant discount to the stock’s five-year average price-earnings ratio of 25.3.
Stryker’s ability to add acquisitions to its business have proven quite fruitful over the years. This should bode well for the future of the company.
Final thoughts
Abbott Laboratories and Stryker Corporation are my two favorite companies in the medical device sector. Both companies offer innovative products that have shown high rates of growth. Given each company’s history of producing life improving and life saving devices, it seems highly likely that both Abbott Laboratories and Stryker Corporation will continue to be at the forefront of their industry. I consider both names to be a core holding and look to add when either is trading below its five-year average price-earnings ratio.
Disclosure: Author is long Abbott Laboratories and Stryker Corporation
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