Two Ways to Invest in Medical Devices

02/04/2020 5:00 am EST

Focus: HEALTHCARE

Adam Mayers

Editor, The Internet Wealth Builder and The Income Investor

The healthcare sector is benefiting from trends that are creating products and services we all need in good times and bad, explains Adam Mayers, editor of the Adam Mayers Blog.

Aging populations in developed economies need more drugs and procedures, emerging market economies are expanding public health and health insurance and new technologies are creating new products and services.

iShares U.S. Medical Devices ETF (IHI) is narrowly focused on U.S. manufacturers in the medical device sector. In the last decade, it has performed significantly better than the S&P 500. The ETF was launched in 2006 and has $4.84 billion in assets. It holds 56 stocks, but the top five holdings account for about half of its value.

These are Medtronic (MDT), Abbott Labs (ABT), Thermo Fisher Scientific (TMO), Danaher Corp. (DHR) and and Stryker (SYK).

Medtronic’s latest earnings beat expectations for the 14th consecutive quarter as it benefitted from purchases aimed at beefing up its robotic surgery businesses. Medtronic expects 2020 performance to be strong.

Abbott Labs increased its dividend 12.5% in December, capping a year which also saw strong profit growth. Abbott sells a range of generic drugs as well as medical devices and nutrition products such as Ensure and Similac.

Over the last three years, Abbott’s stock is up 122%. One area of strength is demand for heart devices and its glucose monitoring system that uses sensors to track blood sugar levels.

The ETF is up 19.6% since being recommended in June and had a total one-year return to Dec. 31 of 32.72%. The strong performance of the top holdings explains the gains. It has a management fee of 0.43% and modest trailing 12-month dividend yield of 0.32%.

The ETF also has a very high p/e ratio of 46.48, which says high growth expectations are built into the price. It is not suitable for income investors, but the underlying assets are strong and the trends are favorable for long term capital appreciation.

Stryker Corp. (SYK) is a Fortune 500 medical technology company with a market capitalization of $79.4 billion. It is based in Michigan but operates in 100 countries and employs more than 33,000 people.

The company has three main products lines. The orthopedics segment provides hip and knee implants.

The medical surgical segment sells surgical equipment, including robots and other navigational aids, as well emergency medical equipment and disposable products. The neurotechnology segment provides products for brain and skull surgery.

Like Medtronic, Stryker is expanding its robotic surgery systems. Its focus is hips and knees and it has sold more than 800 of its Mako systems, which assist surgeons.

More than three-quarters of the sales are in the U.S., with Japan and China being Stryker’s geographic priorities for expanding sales. Hip replacement procedures in the U.S. using robots were up approximately 40% year-over-year.

Mako helped Stryker to an overall revenue gain of 8.6% in its latest quarter. Sales rose 10.6% to $3.6 billion with adjusted earnings per share increasing 13%.

Looking ahead to its 2019 year-end, Stryker anticipated organic sales growth to be a healthy 7.5% to 8%. The dividend was increased by 11% in December to  $0.575 quarterly ($2.30 annually) to yield 1.1%.

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