Medical-Equipment Makers Shine in a Tough Environment

Wednesday, 13 Apr 2011 01:34 PM

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Running a medical-equipment company might be as tough as running a drug maker.

Medical-device companies must deal with reimbursement issues, as payments from government bodies like Medicare and Medicaid vary from commercial payers, both in the United States and abroad.

There are different tax burdens these companies must endure, and changes in Food and Drug Administration regulations can make bringing products to market more cumbersome and expensive.

Now Obamacare has led to a less-flexible pricing environment for such suppliers, according to Zacks Investment Research.

That doesn't mean run away. "We continue to recommend companies providing life-sustaining products, given their strong recurring stream of revenues as patients are unable to forgo these products," Zacks reports in an industry outlook.

"Furthermore, investors should look at companies with strong earnings quality and liquidity profiles. These companies appear attractive considering their ability to leverage strong balance sheet and cash flows in maximizing shareholder value," Zacks suggests.

Medtronic (MDT) and Becton, Dickinson & Company (BDX) are two such companies.

Medtronic, the “undisputed leader” in the space, boasts an attractive product pipeline, Zacks reports.

"Although the company lost some U.S. ICD (implantable cardioverter defibrillator) market share in the most recent quarter due to competition, new products should gradually contribute to growth and help it maintain/gain ICD share," Zacks notes.

New products, including pacemakers, catheters and spinal products, will boost the company's revenues, while business restructuring, including cuts to its work force, will help the company.

At a 13.35 P/E ratio, Medtronic trades below its 200-day moving average. It also pays a 2.23 percent dividend.

Meanwhile, the ratings agency Moody's has assigned Becton an A2 rating on the firm's $1 billion in senior unsecured notes.

The rating "reflects the company's good size, relatively diverse offerings and leading market positions in several medical, diagnostic and bioscience product areas. Although the company does face near-term challenges stemming from pricing pressure and declining use rates due to the economy, we believe that financial strength and leverage metrics should remain adequate to support the ratings," Moody's says.

Becton trades at a higher P/E, at 16.3 percent, and has bounced above its recent moving averages. But represents a potential buy if the market dips and pays a 2 percent dividend.

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