As COVID-19 vaccination rates rise and economies reopen, parts of the healthcare system that have been affected by the pandemic are also gathering steam.
Delayed surgeries and other procedures are being rescheduled, creating demand for hospital services, medical devices, supplies and drugs. More people are visiting doctors offices for non-urgent, but delayed, needs.
Here’s an update on a global medical technology company and a medical devices ETF that stand to benefit as conditions improve.
Medtronic Inc. (NYSE: MDT) Closed Friday at $123.85. All figures in U.S. dollars
Background: Medtronic is the world’s largest medical device company with a market capitalization of $168 billion. It gets 60% of its sales and profits outside the U.S. and employs 90,000 people in 150 countries of whom 10% are research scientists.
Though headquartered in Ireland, Medtronic is operationally based in Minnesota and has four segments. Cardiovascular management devices, including pacemakers are the largest at 40% of sales. Wound closure products and imaging devices are another 28%. Robots, implants and surgical tools are 26%. The remaining 7% is from the diabetes group which makes insulin pumps and other consumables.
Performance: Medtronic shares are are 28.5% in the past 12 months. Year-to-date the shares are up 6.5%.
Recent developments: Medtronic’s fourth quarter results showed a strong end to a year affected significantly by the pandemic. Adjusted quarterly earnings of $2.04 billion were about 2½ times that of the same period a year ago when hospitals were calling off elective procedures and reducing purchases of surgical equipment.
Quarterly revenue rose 36.6% to $8.18 billion from $5.99 billion a year ago.
CEO Geoff Martha noted in a statement that most of its markets have returned to near normal, pre-COVID growth levels. He expects growth to accelerate throughout the year.
Dividend: Medtronic raised its dividend 7.4% to $0.58 per quarter with the April payment, its 43rd consecutive year of increase. The stock yields 1.83% at current prices.
Outlook: Medtronic’s has a trailing 12-month p/e ratio that sits at a lofty 46.9. That means high expectations are built into its share price. But it continues to grow organically and its investment in R&D through its scientific staff is a hidden asset.
As economies reopen Medtronic will benefit while also leveraging existing trends of world aging and emerging market growth.
iShares U.S. Medical Devices ETF (NYSE: IHI) Closed Friday at $337. 52. All figures in U.S. dollars.
Background: This ETF was launched in 2006 and is focused on U.S. manufacturers in the medical device sector. It has $8.6 billion in assets and holds 64 stocks with the top five holdings accounting for 51% of the fund.
The top five are Abbott Labs (14%), Thermo Fisher Scientific (12%), Medtronic (11%), Danaher Corp. (9%), and Intuitive Surgical (5%).
Performance: The ETF is 26.5% higher in the past 12 months and 2.8% year-to-date. The performance of the top holdings led the gains.
Abbott Labs beat expectations in its recent quarter in which sales of COVID-19 tests made up 20% of total revenue. Abbott earned $1.8 billion, or $1 per share, triple the $544 million in the same quarter a year ago. Sales of $10.4 billion were 35% higher. Abbott sells a range of generic drugs as well as medical devices and nutrition products such as Ensure and Similac.
Thermo Fisher also beat first-quarter estimates as strong sales of materials to make COVID-19 vaccines and treatments helped offset slowing demand for tests that detect the virus. Revenue increased 59% year over year to $9.9 billion. Adjusted EPS jumped 145%. It reported $2.9 billion of COVID-19 response revenue in the first quarter, which includes sales related to vaccines and therapies.
Medtronic’s latest sales and earnings (see above) beat analyst expectations.
Key metrics: The ETF has a management fee of 0.42% and a modest trailing 12-month dividend yield of 0.23%. It also has a high p/e ratio of 42.1, which says high expectations are built into the price. Any distributions would be subject to U.S. withholding tax.
This is an edited version of article that appeared in the Internet Wealth Builder on May 31, 2021.
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