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Zacks Industry Outlook Highlights: Johnson & Johnson, Medtronic and Smith & Nephew

For Immediate Release

Chicago, IL – March 22, 2016 – Today, Zacks Equity Research discusses the MedTech, part 1, including Johnson & Johnson (JNJ), Medtronic (MDT) and Smith & Nephew ( SNN).

Industry: MedTech, part 1

Link: http://www.zacks.com/commentary/75628/medtech-industry-stock-outlook---march-2015

Since mid-2015, whatever instability the rest of the world might have been suffering through, it left the MedTech industry alone. MedTechs continued to witness a positive run. While the powerful long-term tailwinds, including mergers & acquisitions, emerging market expansion, positive demographic trends and new product innovation have been the vital forces behind the continued uptrend of the sector’s performance, the recent suspension of the controversial 2.3% medical device excise tax for two years has come up as a big bonus for both behemoths and small players alike.


After several prior attempts to suspend the tax, this temporary freeze, albeit for just two years, has marked a great victory for the entire medical device industry. This tax, which was commonly referred to as “fund of the Affordable Care Act (ACA),” simply took a toll on the entire medical device industry, since its enactment in 2013. Data published in a report in FierceMedical Device stated that in 2014, Johnson & Johnson (JNJ) made a payment of $180 million in medical device tax payments, while Medtronic (MDT), legacy Covidien and Smith & Nephew ( SNN) paid $112 million, $60 million and $25 million, respectively.

While the industry frontrunners were unhappy with their earnings being curtailed significantly, the position of the smaller companies was much worse. They were not only out of profit, hit by this 2.3% excise tax, but many were also struggling to survive. According to Bruce Carlson, the publisher of Kalorama Information, “a top-20 device company can pay tens of millions and post a note in their annual report. A small company with one device needs all [the] money from their sales."

Accordingly, the recent suspension of this excise tax, an unexpected step taken by bipartisan members of the U.S. House of Representatives, has made the MedTech players more than happy. However, with the presidential election around the corner, this legislative action smells of something more political – the drive to gain more popularity within the House following this suspension.

A Temporary Reprieve?

Half a loaf is better than none. In fact, we believe this two-year relief is quite adequate for MedTech companies to address pressing issues like a lack of opportunity for research and development, innovation, pipeline development and to make investments needed to accelerate patient and provider access to innovative health care products. This will also help in boosting job creation and the quality of patient care, enabling companies to strengthen their position to cope with newer challenges that will crop up once the two-year respite is withdrawn.

Impressive Prospects Ahead

Let us now put aside the tax issue and look at what investors might gain from the MedTech world, a sector that is generally not in the limelight from an investment perspective. The primary fact which compels us to bet on MedTech, especially in this extremely volatile world market, is its fundamentally defensive nature. Products of this sector are mostly essential and hence less sensitive to business cycle fluctuations.

And we’ve found some pretty impressive data in this respect:

A recent EvaluateMedTech World Preview claims that the MedTech space is positioned for impressive growth in the near term. At a glance, worldwide, MedTech sales are expected to grow at a CAGR of 4.1% to $477.5 billion by 2020.

Steering ahead of Cardiology and Diagnostics, In Vitro Diagnostics (IVD) is expected to emerge as the sector leader in 2020. Neurology, meanwhile, holds promise as the fastest growing division among the top 15 segments by 2020. On the other hand, Orthopedics, which is already shaky, may prove to be one of the slowest growing segments in 2020 with a CAGR of 3.2% per year.

While Johnson & Johnson was the largest device maker of 2014 with MedTech sales of $27.5 billion, the honor may go to Medtronic by 2020 with its business consolidated following the Covidien acquisition. Medtronic is expected to steal the show with revenues mounting to $34.9 billion in 2020.

While Medtronic’s growing Cardiac and Vascular portfolio lends it a sharp competitive edge, J&J’s forte lies in its orthopedic capability, which unfortunately is not gaining much traction among investors (CAGR of 2.4% between 2014 and 2020, lower than the expected market growth rate).

Zacks Industry Rank

Within the Zacks Industry classification, Medical Device is grouped under the Medical sector (one of 16 Zacks sectors) and further sub-divided into four industries at the expanded level: med instruments, med products, med/dental-supp and medical info systems.

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for medical info systems is #47, med instruments is #57, med products is #89, while the med/dental-supp is #154. Analyzing the Zacks Industry Rank for different Medical Device segments, it is obvious that the outlook for medical info systems and med instruments is positive while it is Neutral for med products and med/dental-supp.

Earnings Trend of the Sector

Of the S&P 500 members, almost all of the Medical companies have reported their fourth quarter results as of Mar 11, which was fairly good with respect to year-over-year growth rates. The Medical sector’s earnings growth rate was 9.3%, while the revenue growth rate was 9.4% in the fourth quarter.

In fact, in the first quarter of 2016, only 5 among all the 16 Zacks sectors are expected to report positive year-over-year earnings growth, Medical being one of them (increase of 0.7%). With respect to the quarter’s revenues, year-over-year growth is expected to remain strong at 7.7% for Medical.

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JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
 
MEDTRONIC (MDT): Free Stock Analysis Report
 
SMITH & NEPHEW (SNN): Free Stock Analysis Report
 
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