Looking back over the articles that I wrote on publicly-traded companies during the past eight months, I realized that I had written only one article on stocks of companies that operate in the healthcare sector.
I hadn't written any articles on medical device companies even though aging populations in most regions of the world suggest that companies that operate in that industry will perform well during the next several years.
Considering that many of those companies and their publicly-traded stocks are often in the news, and that many investors hold some of those stocks in their investment portfolios, I felt that I should write an article on stocks that compose the medical devices industry.
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Therefore, I decided to review all of the leading companies that design and/or manufacture medical devices.
Although many of the 27 companies that I reviewed looked interesting in terms of the products that they provide, my research indicates that the following companies appear to be in a better position to grow their revenues and earnings at a healthy pace over the next few years:
- Globus Medical Inc. (GMED)
- Sirona Dental Systems Inc. (SIRO)
- Thermo Fisher Scientific Inc. (TMO)
- Zimmer Holdings Inc. (ZMH)
So, I decided to focus on those companies and their stocks.
Before I discuss the financial operating results of those companies, and the prospects for their stocks over the months and years ahead, let’s review some general information about each of those companies.
Globus Medical Inc. (GMED)
designs and develops musculoskeletal implants that help physically-disabled people to stand, walk and move. The company focuses on implants that are used to treat people who have spine disorders.
Since the Audubon, Pennsylvania, company’s founding during 2003, Globus Medical has launched more than 120 products for the spinal disorder market. Although the company derives approximately 91 percent of its revenues from sales in the United States, the company’s products are sold in approximately 25 countries around the world.
Sirona Dental Systems Inc. (SIRO)
Sirona Dental Systems
is the world’s leading developer and manufacturer of high-quality, technologically-advanced dental equipment. The company’s products include panoramic and 3D digital imaging systems, treatment chairs, various types of dental instruments, and computer-aided systems that enable dentists to make ceramic restorations (such as crowns and bridges) in their office rather than at a lab.
The Long Island City, New York, company sells its products to dentists around the world. For the company’s fiscal year ended September 30, 2013, Sirona Dental generated 18 percent of its revenues from sales in the Germany, 31 percent of revenues from sales in the United States, and 51 percent of its revenues from sales in other regions of the world.
Although Sirona Dental did not become a publicly-traded company until December 2005, the company’s founding dates back to the year 1882 when one of its predecessor companies, Reiniger, Gebbert & Schall, made the first commercially-available dental electrical drill.
Thermo Fisher Scientific Inc. (TMO)
Thermo Fisher Scientific
develops and manufactures a wide range of analytical instruments, laboratory equipment and diagnostic testing products. It also provides clinical analytical tools, laboratory supplies, and services used in scientific research.
The Waltham, Massachusetts, company sells its products and services to more than 400,000 customers around the globe, including pharmaceutical and biotech companies, hospitals, clinical diagnostic labs, universities and medical research institutions. Approximately 51 percent of the company’s revenues for the year ended Dec. 31, 2013 were generated from sales in the United States, while 7 percent, 6 percent and 4 percent of its revenues were derived from sales in China, German, and the United Kingdom, respectively. The remaining 33 percent of its revenues were generated from sales in other regions of the world.
Thermo Fisher’s goal is to make its customers more productive and to enable them to solve their challenges, from complex research to improved patient care.
The company was founded during 1956 and went public 1967. It has trade on the New York Stock Exchange since 1980.
Zimmer Holdings Inc. (ZMH)
develops and manufactures various types of orthopedic products, including reconstructive implants used in knee and hip replacement surgery, shoulder implants that restore functions in arthritic joints, and bone and tissue grafting materials. The company also makes dental implants, spinal implants to heal aching or injured backs, and trauma products (such as plates, screws, and pins) that help broken bones to heal. In addition, it makes surgical products used in orthopedic surgeries, including tourniquets and devices for wound cleansing.
The Warsaw, Indiana, company has operations in more than 25 countries and markets its products in more than 100 countries.
Zimmer Holdings predecessor company, Zimmer Manufacturing Company, was founded during 1927 in Warsaw, Indiana, where its corporate headquarters are still located. The company went public during 2001.
Financial Operating Results, Stock Valuation, and Frazier’s Investment Advice
Although I was impressed with the vast array of products and services offered by Globus Medical, Sirona Dental Systems, Thermo Fisher Scientific, and Zimmer Holdings, I was not impressed with the financial operating performance of those companies.
For example, none of those companies increased their net income at a rate in excess of 10 percent during 2013, as compared to the prior year. Specifically, Globus Medical’s net income declined by 7.1 percent, while Thermo Fisher’s net income rose by only 8.1 percent and Zimmer Holding’s net income rose by a mere 0.8 percent, for the year ended Dec. 31, 2013. Meanwhile, Sirona Dental’s net income rose by only 9.5 percent for its fiscal year ended Sept. 30, 2013.
Each of those companies continued to grow at a slow rate during the first three months of this year, with Globus Medical’s revenues rising by only 6.3 percent, Sirona Dental’s revenues rising by only 5.8 percent and Zimmer Holdings’ revenues rising by only 2.2 percent, as compared to the same period a year ago. Although Thermo Fisher’s revenues rose by 22.3 percent for the quarter ended March 31, 2014, revenues generated by Life Technologies Corp., which the company acquired on February 3, 2014, accounted for a substantial portion of that increase.
Looking forward, the revenue and earnings guidance provided by Sirona Dental, Thermo Fisher and Zimmer Holdings indicates that those companies will continue to grow their revenues and earnings at a slow pace for the current year.
In contrast, financial guidance provided by Globus Medical, and the company’s Jan. 8, 2014, acquisition of Excelsius Surgical, which is developing a next-generation surgical robotic positioning platform for the spine, brain and therapeutic markets, indicates that its revenues and net earnings will rise sharply for the year ending December 31, 2014.
Meanwhile, Globus Medical’s stock appears to be trading at a reasonable price, in terms of my projections for the company’s earnings growth over the next three years. That’s in direct contrast to Sirona Dental’s, Thermo Fisher’s and Zimmer Holdings’ stock prices, which appear to be over-priced in terms of my earnings projections for those companies.
Therefore, I would advise investors and speculators alike to allocate a portion of their financial market assets to GMED, but to not put any of their money into SIRO, TMO, or ZMH.
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Shares of Globus Medical
fell 36 cents, or 1.6 percent, to close Thursday at $22.56 in NYSE trading. Sirona Dental
fell $1.42, or 1.7 percent, to $80.38 in Nasdaq trading.
lost 20 cents, or 0.2 percent, to $119.02 on the NYSE. Zimmer Holdings
slid $2.08, or 2 percent, to end at $100.71, also on the NYSE.
Another sensible option for investors who want to invest in the medical devices industry would be iShares U.S. Medical Devices ETF (IHI), which holds 42 medical device companies. IHI
fell $1.07, or more than 1 percent, Thursday to end at $100.25.
David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.
In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.
David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.
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