- Medical device industry set to grow 4.4% annually, outpacing drug industry.
- Good chance for a repeal of the medical device excise tax in 2014.
- MDT, SI, GE and SIMH offer investors a good way to play the industry.
Patent-winning drugs often steal the headlines but medical devices include some of the greatest inventions of our time.
Pacemakers, replacement heart valves, artificial joints and brain scanners are all examples of medical devices that have changed our world and helped shape the pharmaceutical industry into what it is today.
In this article I look at the medical device industry as a whole and give my 4 top medical device stocks for 2014.
Much of the world's population is aging and in the United States, one-in-five Americans will be over 65 by the year 2050. It's one of the reasons why the industry is in good shape and why the US is currently the largest market in the world for medical devices.
However, 2013 was a pretty disappointing year for those involved in the medical device industry.
As part of ObamaCare, a new 2.3% excise tax was levied on all medical device sales (not profits) from Jan 1 2013. For some firms this was enough to put them out of business and it's thought the tax could lead to the loss of some 43,000 jobs by 2023.
On the bright side, there is now increasing momentum to repeal the tax from both Republicans and Democrats. While the White House has indicated no plans to change the bill, the tax was one of the most hotly contested issues of the last year.
The chances for a repeal appear to be good and this would be a real boost for medical device companies in the US.
Medtronic Inc (MDT)
Medtronic is the clear global leader when it comes to heart rhythm devices and the company is the fourth largest medical device company in the world. It also holds leading market share in nearly all of the product areas in which it operates and boasts an enormous range of products, treating over 9 million people worldwide.
As I mentioned earlier, the world's population is aging, even in developing countries, and MDT is positioning itself to take advantage of that fact through a number of acquisitions.
Recent alliances with Chinese companies, LifeTech Scientific and Kanghui Holdings, and Indian company, Apollo Hospitals, show MDT's willingness to ride the expected growth in emerging markets.
MDT is also attractively valued, particularly when compared to its competitors. PE is 16.94, ROE is 20.7% and profit margin is 22.7%. The balance sheet is healthy with a current ratio of 3.50 and $13 billion in cash.
Siemens AG (SI)
Siemens is a German multinational and is the second largest medical device company by yearly revenue ($18.7 billion). Siemens also deal in electronics with the healthcare division generating around 12% of total sales.
Siemens is probably my favorite pick on this list at the moment as a result of the company's current financial situation. Indeed, Siemens passes on a number of financial measures that I look for when valuing a company.
For starters, PE is reasonable at 18.31 and the current ratio is healthy at 1.30. The company pays a reasonable dividend (2.35%) and price to sales is above my threshold of 0.5 (at 1.04).
ROE is good, at 16.20%, and the company has been able to drive EPS at over 20% over the past 5 years.
Last quarter's results were also promising with orders rising 9% year on year and revenues improving by 3%.
In general, Siemens' other business segments were able to support its healthcare division comfortably in 2013, helping it to grow despite the problematic excise tax on devices. That alone should see it in good stead, for further progress in 2014.
General Electric Co (GE)
In terms of medical devices, General Electric Co. offers 6 business units involving global diagnostic imaging services, clinical systems, and surgery, and GE is the third largest in the world with total revenues of $18.3 billion.
The stock is down around 8% so far this year but there may be reason enough for investors to cautiously accumulate holdings in this diversified multinational.
The broad scope of GE's business means that, like Siemens, it is largely sheltered from industry specific pressures. The dividend yield of 3.43% is also attractive, having been raised last December, and this is the highest dividend paid out by GE in 5 years.
The company has also seen a number of high profile insider purchases recently with over 150,000 shares having been bought since January 2014.
Insider Transactions, source: Yahoo! Finance.
Aside from medical devices, GE is making big strides in its take up of natural gas. Indeed, CEO Jeff Immelt has spoken enthusiastically of GE's plans for clean energy and for positioning itself right in the centre of the 'age of natural gas'.
Sanomedics International Holdings Inc (SIMH)
The last pick on this list belongs to Sanomedics, a medical technology holding company that essentially buys businesses producing "game changing products, services and ideas".
It's thought that 70 million Americans suffer from chronic sleep deprivation, a trend that has increased dramatically over recent years and SIMH have already targeted a number of opportunities for acquisition in this field.
As an OTC, small cap stock, SIMH is significantly higher risk than the other companies presented here and requires ongoing financing in order to grow organically.
Nevertheless, SIMH have shown plenty of potential and intent with a couple of well timed acquisitions and by teeing up $5 million in credit with a global provider.
The company also purchased Prime Time Medical in 2013 for $3 million (a $2 million discount to annual revenues), and have recently announced a letter of intent to purchase another leading provider of healthcare services and solutions.
Sanomedics' long term plan is to continue to acquire innovative medical device companies and strike a path towards being one of the main intermediaries in the medical device world. The company could be an early Integra LifeSciences Holdings Corporation (NASDAQ:IART) and is worth consideration for those looking for a speculative biotech.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article but may receive additional compensation for writing the article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.