As medical facilities around the world divert their resources and manpower to the fight against the coronavirus pandemic, it was only inevitable that surgery-related stocks would suffer a disproportionate loss along the way.
With elective surgeries put on hold, healthcare companies saw their top-lines tank, as sales of equipment rapidly dried up, and cash flows dwindled to a trickle.
But as with all things, the tide appears to be turning, and the success of pan-national vaccine roll-outs promises an end to nearly two years of ongoing misery.
Given the constant demand for healthcare and medical services – and the difficulty for new businesses to break into the industry – could a resurgence be on the cards for already established companies in the field? We look at three high-performing surgical robotics stock, and evaluate whether they’re still worth buying in today’s market environment.
Intuitive Surgical
As a pioneer in the advancement of minimally invasive surgical techniques, Intuitive Surgical has positioned itself as one of the most important and in-demand healthcare equipment manufacturers on the market.
The company specializes in providing surgeons with high-definition 3D vision, computer assistance, data analytics through its My Intuitive app, and the use of its precision-engineered instrumentation and accessories.
By the end of the third quarter 2021, ISRG had already installed 6,525 of its robotic da Vinci systems in 66 countries across the globe. A further 385 were shipped in the fourth quarter, and, altogether, the company supplied 1,347 of its modular systems last year, improving its 2020 total of 936 by a healthy margin of 44%.
The suspension of elective surgical procedures due to the onset of the Covid-19 pandemic hit Intuitive particularly hard; the business lost revenue and sales of its products dropped across the board.
However, ISRG appears to be rebounding from its woes, with an earnings and top-line beat in Q3, and preliminary remarks by CEO Gary Guthart at the JPMorgan 40th Annual Healthcare Conference, suggesting that the firm’s fourth quarter results should be pleasing for investors.
Indeed, if comments by Guthart prove correct, Intuitive will have recorded a 19% up-tick in procedures for the period compared to its previous year’s numbers, as well as seeing full year 2021 worldwide procedures grow 28% to over 1.5 million.
Furthermore, fourth quarter revenue is slated to have increased 17% from $1.33 billion in 2020, to $1.55 billion this time round. The firm also expects to declare preliminary revenue of approximately $5.71 billion for 2021, an increase of 31% on the $4.36 billion it made in 2020.
Intuitive’s stock looks attractively priced right now, with its trailing twelve month EBITDA margin of 33% a welcoming high for a company operating in the notoriously difficult healthcare sector.
The firm does suffer from an excessive valuation, however, as its P/E multiple of 66x goes to show. But the business does justify a steep premium, not least because of its dominant position in the surgical robotics field.
With recent approval from the U.S. Food and Drug Administration for its 8 mm SureForm 30 Curved-Tip Stapler, and an expectation that the company will benefit from a roughly 11-15% increase in procedures this year, the future’s looking bright for Intuitive Surgical in 2022.
Source: Unsplash
Medtronic
Medtronic is one of the world’s most highly-diversified medical device makers, with a reputation for aggressive acquisition and expansion, and a proven track record of returning value back to investors over the course of many decades.
While the company is a veritable megalith in the healthcare industry, its business has suffered a series of knock-backs lately, with its share price falling constantly throughout the last calendar quarter of 2021, and the firm receiving a rare warning letter from the FDA about the standard of its MiniMed™ insulin pumps.
Despite these sour points, MDT still remains a highly sought-after stock. The company’s reliable 2.32% dividend yield alone is enough for many investors, not to mention its 44-year unbroken streak of pay-out increases, as well as the cash flows to keep the brand a Dividend Aristocrat for many years to come.
Indeed, Medtronic’s management team has committed to returning at least 50% of free cash flow to investors through both share buyback schemes and its annual dividend. The firm also keeps its payout ratio relatively low at around 44%.
The company is a pure-play business in the medical equipment space, enjoying a deep moat by virtue of its aforementioned broad portfolio diversification, in which it operates across four different segments in 150 separate countries.
Medtronic also has a strong pipeline which promises plenty of growth potential in the future, with prospective devices such as its Closed-Loop Deep Brain Stimulator and the Nellcor™ OxySoft Neonatal Sensor primed for market launch soon.
MDT is firing on all fronts in its research work, and has candidate products in each of its Neuroscience, Diabetes, Medical Surgical and Cardiovascular segments.
But Medtronic’s poor share price performance beginning last September cannot be ignored, and investors looking for capital appreciation will want to see some improvement there. The stock lost over 8% of its value the previous twelve months, but has staged something of a recovery in 2022, rising more than 5% in the first few weeks of the new year.
One positive benefit for potential MDT shareholders is that the company is cheaply valued at the moment, with a forward price-to-sales multiple of just 4.5x – a relative low when compared to the healthcare sector median as a whole.
This is compounded by solidly high margins too, with gross profit and EBITDA fractions sitting at a very nice 68% and 30% respectively.
Stryker
In an ever-changing healthcare market environment, medical technology company Stryker truly stands out from the crowd. The firm’s strategy to focus resolutely on the launch of new product lines to drive organic top-line growth has seen the business thrive this year, when many of its rival large-cap medical device manufacturers floundered.
Stryker goes about implementing this approach not just by creating its own new devices, but also by targeting other profitable companies with a raft of merger and acquisition bids.
One of its most audacious takeover successes of late was the Wright Medical deal at the end of 2020, which saw SYK increase organic net sales by 4.5% from 2020, and 8.4% from 2019 – in the third quarter of 2021.
Its latest M&A venture is the purchase of Vocera Communications in early 2022, for a price believed to be in the region of $3.1 billion. The deal comes with some risks, however: SYK expects to only add about 1.5% to its sales tally initially from the acquisition, and Vocera didn’t come cheap. Nevertheless, Stryker reckons that Vocera will provide significant synergies to its business as the “most advanced communication system” in the healthcare setting today.
Not surprisingly for a company of its stature and size, SYK offers a pretty reliable dividend, which it has increased every year since 2009. However, Stryker’s dividend is on the low side at a yield of just 1.04% – but the company did recently raise its quarterly pay-out by 10.3%, from $0.630 to $0.695.
While this is good news for investors already holding SYK stock, it’s not so promising for potential buyers. With an uncompetitive dividend yield coupled with a recent rise of such large magnitude, it might seem that future increases would be underwhelming by comparison.
But on a trailing twelve month basis, the firm’s payout ratio has come down from its last quarter high of 54% to 49%, which should assuage any fears of the company overburdening itself with a dividend commitment it cannot keep. Furthermore, Stryker is a cash generating machine, with more than double the free cash flow of one of its nearest comparable rivals, Zimmer Biomet, at $1.94 billion as of September 2021.
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