The Value Deepens for Medtech Stocks: Reversal Imminent

Key Points

• Johnson & Johnson and Abbott Laboratories results show strength in the MedTech industry. 
• Analysts are raising targets, but the consensus figures are still low, suggesting outperformance in Q3. 
• The value deepens in this market, with some stocks offering a 3.5% yield or better. 

Results from Johnson & Johnson NYSE: JNJ and Abbott Laboratories NYSE: ABT foreshadow good news for MedTech investors. Both companies outperformed on the top and bottom lines, driven by broad strength in their MedTech units. 

Based on procedure volume data and the outlook for procedure growth, both companies should continue producing solid results over the next few years, which goes for the industry at large. Because the MedTech stocks are beaten up with a chance of outperforming consensus estimates, and many are trading at significant or critical support levels, a reversal looks imminent for the MedTech market. 

Intuitive Surgical Pulls Back on Tepid Comps Despite Business Strength 

Intuitive Surgical NASDAQ: ISRG already reported for Q3 compared to Baxter International NYSE: BAX, Medtronic NYSE: MDT, and Stryker NYSE: SYK, which are slated to report in November. Its report was tepid relative to the analysts' expectations, but that is as far as the bad news goes. The company produced 12% revenue growth and better-than-expected earnings results compounded by news favorable to the outlook. 

The company’s installed base of da Vinci surgical systems grew by 13% to outpace the top-line growth. This has the company set up to accelerate growth in the coming quarters, as seen in the consensus figure for Q4. 

Tepid results or not, the analysts are bullish on this stock. The 21 analysts tracked by Marketbeat have the stock pegged at a firm Moderate Buy with a price target 29% above the current action. The price target is also trending higher and may continue to do so following the Q4 release in January. Shares of ISRG trade at a high multiple, about 48X earnings, so the value is relative. High, it may be compared to the average stock, but a robust outlook for growth supports the valuation. Earnings growth is expected to accelerate to the 20% range in 2024 and sustain at a high level beyond that.

Stryker has a Low Bar to Hurdle 

Stryker reports in early November and has a low bar to beat despite most analysts raising their revenue and EPS targets. The company is expected to post a sequential decline in revenue and earnings contrary to procedure trends and forecasts for competitors. Stryker will likely deliver another quarter of low-double-digit growth and further cement its dividend growth outlook. This company pays a low 1% yield but has a robust potential for distribution increases. The company pays only 30% of its earnings, has a history of annual increases, and has a solid balance sheet. 

Analysts are bullish on Stryker stock and see it moving up by double-digits. The consensus of 17 is a firm and steady Moderate Buy with a price target 17% above recent action and trending higher. Aside from earnings strength, a possible catalyst is the next dividend increase, which is expected in calendar Q4. 

Medtronic Offers High Yield and Deep Value

Medtronic offers a deeper and a deep-value compared to the broad market and its peers. The stock trades at a reasonable 15X earnings, with the market at a multiyear low. The takeaway is that this stock is under significant pressure despite analysts raising targets for revenue, earnings, and the stock price. As it is, the consensus figures for Q3 results expect a mere 4.5% top-line growth, far below the competition and an easy beat.

Medtronic also provides a healthy 3.8% dividend yield, the highest it has offered in years. The payout is reliably safe at 50% of earnings and includes an outlook for distribution growth. Analysts rate the stock a Hold but see it trading about 25% above the recent action. This price target is down compared to last year but has risen since hitting its low earlier in the year. 

Baxter International has Nowhere to go but Up 

Baxter International is in the same position as its competitors, with analysts setting a low bar for Q3 results. The biggest difference is that the analysts see this stock as deeply oversold and trading well below the lowest price target.

The low price target of $41 implies about 25% upside for the market, and the consensus figure, which has seen downward movement, implies about 50%. Baxter International reports on November 2nd along with Stryker and will likely outperform the analysts. The stock trades at the deepest value, only 12X earnings, and pays a healthy and sustainable 3.55% yield with shares near a decade low.