The medical-device and life-science industries are still giving off a healthy glow. The trouble for investors is stock prices match the optimism.
A broad index of device stocks is up about 30% over the past year, beating the S&P 500 Health Care index by about 14 percentage points. That outperformance has been backed by strong underlying business trends. Scientific advances in key areas have bolstered demand for products like glucose monitors for diabetics and minimally invasive heart-valve replacement techniques. A strong economy, coupled with increased availability of insurance coverage, has meant a steady stream of patients for elective surgeries such as hip or knee replacement.
It certainly doesn’t hurt that politicians complaining about high health care costs have mostly focused on other sectors such as drug manufacturers. Efforts to permanently repeal the medical-device tax, originally enacted as part of the Affordable Care Act, also could succeed eventually.
Early results from the current earnings season suggest that business is still strong. Industry blue chip Abbott Laboratories reported 2019 sales growth of 11% from a year earlier in its device business last week. The company said it expects similar results this year. Intuitive Surgical, which specializes in robotic-assisted surgery, reported 22% sales growth for 2019. Other major companies such as Edwards Lifesciences, Stryker and Thermo Fisher Scientific, are slated to report earnings this week.
That growth doesn’t come at a bargain, though. The iShares Medical Device exchange-traded fund trades at nearly 46 times trailing earnings, according to the fund’s website. Even that figure is understated, since the calculation excludes companies with negative earnings.
At those levels, even modestly bad news can hit prices: Edwards shares fell 5% on Thursday after analysts at Jefferies said in a research note that demand for its heart procedure may have slowed in December.
Investors have punished other highflying stocks in the sector when growth has decelerated. Shares of heart-pump manufacturer Abiomed are down more than 50% from the 2018 high.
There is little reason to doubt that fundamentals will remain attractive over the long term. Populations in developed countries are aging, while the incidence of obesity is on the rise. That should mean a steady stream of patients in need of medical services. Emerging markets could become a valuable source of growth in the future as living standards and lifespans increase.
But the short term could be a little more bumpy. A strong earnings season is needed for these highflying stocks to maintain, much less gain, altitude.
Write to Charley Grant at charles.grant@wsj.com
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January 27, 2020 at 06:33PM
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Medical-Device Stocks Risk Short-Term Heartbreak - Wall Street Journal
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