Rebounding demand for elective surgeries helped the medical devices industry recover and witness good sales last year. Given the rising investments in R&D, integration of new technologies, deployment of robotic assistance in operating rooms, and other breakthroughs, the industry is well-positioned to grow.
Investors’ interest in this space is evident from the SPDR S&P Health Care Equipment ETF’s (XHE) 1.4% gains over the past week. The global medical equipment market is expected to grow at a 10.1% CAGR to reach $939.98 billion by 2026.
Abbott Laboratories (ABT) and Stryker Corporation (SYK) are two prominent players in the medical devices industry. ABT discovers, develops, and sells healthcare products focused on cardiovascular, diabetes care, diagnostics, neuromodulation, nutrition, and medicine. Its products are sold directly to wholesalers, distributors, government agencies, health care facilities, pharmacies, and independent retailers. SYK is a medical technology company that offers orthopedic, medical, surgical, neurotechnology, and spine products. The company serves doctors, hospitals, and other healthcare facilities through company-owned subsidiaries and branches and third-party dealers and distributors.
Year-to-date, ABT has lost 18% and has fallen 12%. Which of these stocks is currently a better investment?
Click here to checkout our Healthcare Sector Report for 2022
Latest Developments
On May 4, 2022, ABT received FDA clearance for its Alinity m STI Assay, which simultaneously detects and differentiates four common sexually transmitted infections (STIs), which, when left untreated, can lead to increased risk of getting certain cancers and infertility, among other severe health complications. The Alinity m STI test takes one swab sample or a urine sample that will be run on ABT’s Alinity m system, which then uses polymerase chain reaction (PCR) technology with high sensitivity to detect infectious diseases. This test can help healthcare providers save time, increase efficiency, and better serve patients. It should gain high demand in the coming months.
On January 6, 2022, SYK announced a definitive merger agreement to acquire Vocera Communications, Inc. (VCRA), a MedTech company that offers communication systems and solutions for healthcare professionals and patients, for a total equity value of $2.97 billion and a total enterprise value of approximately $3.09 billion. VCRA’s highly developed software competency, unique and innovative hardware solutions, and the ability to securely enable remote communication, are seen to have reduced cognitive overload for caregivers, which in turn complements SYK’s Advanced Digital Healthcare offerings.
Recent Financial Results
ABT’s net sales for its fiscal 2022 first quarter ended March 31, 2022, increased 13.8% year-over-year to $11.90 billion. The company’s adjusted gross profit came in at $7.03 billion, representing a 15.4% rise from the year-ago period. Its adjusted pre-tax earnings came in at $3.60 billion, up 29.2% from the prior-year period. While its adjusted net income increased 29.9% year-over-year to $3.08 Billion, its adjusted EPS grew 31.1% to $1.73. As of March 31, 2022, the company had $7.68 billion in cash and equivalents.
For its fiscal 2022 first quarter ended March 31, 2022, SYK’s net sales increased 8.2% year-over-year to $4.28 billion. The company’s adjusted gross profit came in at $2.74 billion, indicating a 6% rise from the year-ago period. Its adjusted operating income came in at $934 million, representing a 0.7% year-over-year improvement. SYK’s adjusted net earnings came in at $752 million, up 2% from the year-ago period. Its adjusted EPS came in at $1.97, indicating a 2.1% year-over-year improvement. As of March 31, 2022, the company had $1.46 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, ABT’s revenue, net income, and EPS have increased at CAGRs of 13.2%, 43.4%, and 43.4%, respectively.
ABT’s EPS is expected to decrease 6.3% year-over-year in fiscal 2022, ending December 31, 2022, and 0.2% in fiscal 2023. Its revenue is expected to decline 3.1% in fiscal 2022 and 1.7% in fiscal 2023. Analysts expect the company’s EPS to rise at an 11.5% rate per annum over the next five years.
Over the past three years, SYK’s net income and EPS have declined at CAGRs of 17% and 17.2%, respectively. Its revenue has increased at a 7.9% CAGR over the next three years.
Analysts expect SYK’s EPS to grow 6.1% year-over-year in fiscal 2022, ending December 31, 2022, and 12.2% in fiscal 2023. Its revenue is expected to grow 7.7% year-over-year in fiscal 2022 and 7.1% in fiscal 2023. Analysts expect the company’s EPS to grow at an 8% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward P/E, SYK is currently trading at 24.35x, 4.8% higher than ABT’s 23.24x. In terms of forward EV/Sales, ABT’s 4.98x compares with SYK’s 5.50x.
Profitability
ABT’s trailing-12-month revenue is almost 2.6 times SYK’s. ABT is also more profitable, with a 30.3% EBITDA margin versus SYK’s 26.4%.
Furthermore, ABT’s ROE, ROA, and ROTC of 22.3%, 8.6%, and 12% compare with SYK’s 14.1%, 6.6%, and 8.1%, respectively.
POWR Ratings
While ABT has an overall A grade, which translates to Buy in our proprietary POWR Ratings system, SYK has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
ABT has been graded an A in terms of Growth, which is in sync with its higher-than-industry growth rates over the past year. ABT’s EBIT has grown 42.9% over the past year, 205.6% above the industry average of 14%. SYK’s B grade for Growth reflects its relatively lower growth rates. SYK’s EBIT has grown 23.7% over the past year, 68.8% lower than the 14% industry average.
ABT has been graded a B for Stability, which is in sync with its lower volatility compared to the broader market. ABT has a 0.72 beta. SYK’s C grade for Stability is consistent with its higher volatility. SYK has a 1.00 beta.
Of the 150 stocks in the Medical - Devices & Equipment industry, ABT is ranked #3, while SYK is ranked #44.
Beyond what we have stated above, our POWR Ratings system has graded SYK and ABT for Sentiment, Quality, Momentum, and Value. Get all SYK ratings here. Also, click here to see the additional POWR Ratings for ABT.
The Winner
The rising demand for efficient medical devices and the integration of advanced technologies should benefit ABT and SYK substantially. However, higher profitability and relatively lower valuation make ABT a better buy.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical - Devices & Equipment industry.
ABT shares were trading at $116.32 per share on Friday afternoon, up $1.45 (+1.26%). Year-to-date, ABT has declined -16.73%, versus a -12.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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