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Johnson & Johnson (NYSE:JNJ) agreed to buy Pennsylvania based medical device maker Synthes Inc. for $21.3 Billion. The sale price is 11.2 times the company's 2011 forecasted EBITDA. "Orthopaedics is a large and growing $37 billion global market and represents an important growth driver for Johnson & Johnson. Synthes is widely respected for its innovative high-quality products, world-class R&D capabilities, its commitment to education, the highest standards of service, and extensive global footprint," JNJ's CEO Bill Weldon said.

Investing is all about valuation and one of the ways of valuing stocks is looking at the multiples comparable stocks are sold. We applied Synthes' EBITDA multiple to other medical device companies with market caps of at least $1 Billion. The data is sourced from Yahoo. Here are the most undervalued and overvalued medical device stocks.

Company

Market Cap

EBITDA

Potential Upside

Kindred Healthcare Inc. (NYSE:KND)

1.1

205.8M

110%

Boston Scientific Corporation (NYSE:BSX)

11.1

1.862B

88%

Teleflex Incorporated (NYSE:TFX)

2.5

368.3M

65%

Becton, Dickinson and Co. (NYSE:BDX)

18.8

2.159B

29%

Hill-Rom Holdings, Inc. (NYSE:HRC)

2.6

282.3M

22%

Integra LifeSciences Holdings (NASDAQ:IART)

1.4

151.0M

21%

CareFusion Corporation (NYSE:CFN)

6.6

710.0M

20%

Baxter International Inc. (NYSE:BAX)

33

3.515B

19%

Covidien plc (NYSE:COV)

27.5

2.875B

17%

Stryker Corp. (NYSE:SYK)

22.7

2.278B

12%

CR Bard Inc. (NYSE:BCR)

8.8

865.7M

10%

Haemonetics Corp. (NYSE:HAE)

1.7

160.3M

6%

Thermo Fisher Scientific, Inc. (NYSE:TMO)

22.7

2.125B

5%

The Cooper Companies Inc. (NYSE:COO)

3.4

312.9M

3%

DENTSPLY International Inc. (NASDAQ:XRAY)

5.2

457.6M

-1%

PerkinElmer Inc. (NYSE:PKI)

3.1

261.7M

-5%

Thoratec Corp. (NASDAQ:THOR)

1.8

126.4M

-21%

Mettler-Toledo International, (NYSE:MTD)

5.8

372.5M

-28%

NuVasive, Inc. (NASDAQ:NUVA)

1.1

68.8M

-30%

Mindray Medical International (NYSE:MR)

3.1

182.6M

-34%

Heartware International Inc. (NASDAQ:HTWR)

33.8

-27.5M

NA

Unilife Corporation (NASDAQ:UNIS)

1.9

-37.2M

NA

DexCom, Inc. (NASDAQ:DXCM)

1

-42.9M

NA

Most stocks seem to be undervalued by the market. Kindred Healthcare is the most undervalued stock according to this metric. The stock trades at less than six times its EBITDA. Cliff Asness and Chuck Royce have small position in KND at the end of December. Boston Scientific also trades at a significant discount to its intrinsic value. John Paulson has the biggest position in BSX among prominent investors with $189 Million invested at the end of December.

The most overvalued stock seems to be Heartware. The stock has a negative EBITDA with a market cap north of $33 Billion. Phill Gross' Adage Capital is the biggest investor in this name with a $55 Million position at the end of December. It isn't a very popular stock among hedge funds. Mindray Medical trades at a 50% premium to its intrinsic value. Eric Mindich's Eton Park and Robert Karr's Joho Capital own around 4% of this company.

Using EBITDA multiples is one way of valuing companies. In practice investors had to use several other multiples (i.e. earnings, revenue, etc.) and take into account expected growth rates to arrive at a valuation. Nevertheless, EBITDA multiple tells us that most medical device stocks are undervalued at the moment.

Source: The Best and Worst Medical Device Stocks