Healthcare Robotics

Medtronic adds to its surgical robot tools

Canada has very few home-grown heavyweights in the medical technology sector, so you have to look elsewhere for investment opportunities.

Canada has very few home-grown heavyweights in the healthcare sector, so you have to look elsewhere for investment opportunities. The S&P/TSX Capped Health Care Index has 11 stocks, five of which are cannabis companies.

In the U.S. the healthcare sector is under pressure, with insurers and pharmaceuticals most affected. Medicare has become a topic for discussion in the 2020 presidential race and while it’s unlikely the U.S. will ever introduce Canadian-style healthcare, changes may be in the wind.

Surgical device and supply companies are one place to look because they thrive in any climate. They are taking advantage of new technologies to create tools that are making surgery faster, cheaper and less invasive. They tend to be large and well capitalized with a wide array of businesses that enable them to fund expensive R&D. They also pay dividends and offer conservative growth. If the sector is out of favour the stocks are that much cheaper.

Here are two recommendations for readers to consider.

Medtronic Inc. (NYSE: MDT)  Recent: $97.51.

Background: Medtronic was founded in Minneapolis in 1949 as a medical equipment repair company. It is now the world’s largest medical device company, headquartered for tax reasons in Dublin. It gets 60% of its sales and profits outside the U.S. and employs 86,000 people in 140 countries. More than 10% of its employees are research scientists, which ensures a steady stream of new products.

Medtronic operates in four segments. Cardiac and Vascular makes heart management devices, including pacemakers and defibrillators (38% of sales). The Minimally Invasive Therapies group makes stapling and wound closure products as well as devices for imaging and neurological problems (29%). Restorative Therapies makes robots, implants, and tools for conditions relating to the musculoskeletal system and brain (26%). The Diabetes group makes insulin pumps and other consumables (7%).

 Performance: Medtronic shares hit a record of $100.15 in September 2018 and then retreated during the year-end market sell-off. They bottomed out in April at $84 and have recovered since.

Year-to-date the shares are up 3.79%.

Recent developments: On May 23, Medtronic reported its 2019 fiscal year-end. Performance beat expectations. Annual revenues were $30.56 billion, up 5.5% on an organic basis. Net earnings were $4.63 billion or $3.41 per diluted share.

In the fourth quarter, U.S. sales rose 2.3% year-over-year, while other developed markets rose 1.7% when using a constant exchange rate (CER).  Emerging market revenues, which are now 16% of the total, rose 12% when using a CER.

The fourth quarter performance was led by the Restorative Therapies group, which includes its surgical robots.

ibm glucose monitor
IBM Watson Health and Medtronic worked together to create a mobile app to help track patient data and better manage diabetes. Credit: Medtronic

Acquisition: In May, Medtronic announced a deal to buy Titan Spine Inc., a privately held Wisconsin company that makes a line of titanium implants for spinal surgery. The implants are spacers that are inserted between the vertebrae during spinal fusion surgery to relieve pressure on nerves and hold the vertebrae in place. The purchase complements its earlier acquisition of Mazor.

Dividend:  Medtronic is a dividend aristocrat, having increased its payment for 41 years in a row through 2018. The last increase was in April 2018. The $2 annual rate yields 2.15% at current prices.

Outlook: Medtronic has a market capitalization of $124.7 billion and a trailing 12 months p/e ratio of 17.74, which is below most of its peers. It continues to grow organically and its investment in R&D through its scientific staff is a hidden asset.

The trends of first world aging and emerging market growth will continue with the former needing more procedures and the latter able to afford more. Medtronic is poised to profit from these tailwinds, offering investors rising dividends, safety and growth.

 iShares U.S. Medical Devices ETF (NYSE: IHI)   Recent: $234.17.

Background: This large ETF has $3.34 billion in assets and was launched in 2006. It holds 56 stocks – including Medtronic – which are narrowly focused on U.S. manufacturers in the medical device sector. In the last decade, it performed significantly better than the S&P 500 and marginally better than the Dow Jones U.S. Medical Equipment Index, which it mirrors.

 Performance:  IHI was the strongest performer among all U.S.  health care-focused ETFs in 2018, according to Investopedia rankings. Its average annual total return over one, three, and five years is 25.5%, 24.1%, and 19.3% respectively. Since inception, the fund has an average annual return of 13.11%. The MER is 0.43%.

 Holdings: Five holdings account for about half the fund. The biggest is Abbott Labs (13.74%), which sells a range of generic drugs as well as medical devices, diagnostic tools, and nutrition products such as Ensure and Similac. Next is Medtronic (12.68%), followed by Thermo Fisher, a leading provider of genetic testing and precision lab equipment (11.1%). Danaher (8.42%), which makes diagnostic tools for labs is next and Stryker is fifth at 4.23%. The top 10 holdings account for 70% of the fund. About 85 % of the companies are device manufacturers and another 11% provide life science tools and services, including instruments and consumables.

This ETF has had a good run and the p/e ratio of 37 suggests high growth expectations are built in to it. It is not suited to income investors, with a trailing 12-month dividend of 0.23%. But if you believe in the trend and can cope with market pullbacks, the underlying assets are gold standard.

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A version of this article appeared in the June10, 2019  issue of the Internet Wealth Builder.

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