Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Congress Fails Medical Device Stocks

Washington may have found common ground to boost the debt ceiling and fund the government into mid-January, but repeal of the 2.3% medical device tax ended up on the cutting room floor.

The medical device industry has been fighting tooth and nail for repealing the tax assessed to help pay for the Patient Protection and Affordable Care Act, commonly known as Obamacare. The argument for the tax -- that device makers stand to make millions from a larger insured population -- is being contested by the medical device industry on the grounds that it will stifle innovation and cause job cuts.

One of the most vocal opponents of the tax has been AdvaMed, an industry trade group representing 80% of the industry, including Zimmer Holdings (Zimmer's CEO David Dvorak also serves as chairman of AdvaMed's board), Abbott Labs, Baxter International, Boston Scientific, C.R. Bard, and others.

Given the tax remains in place, should you risk adding any of these large medical device players to your portfolio?

Debating earnings
Analysts remain optimistic on earnings. Despite the tax overhang, Abbott Labs  (NYSE: ABT  ) , C. R. Bard (NYSE: BCR  ) and Boston Scientific (NYSE: BSX  ) are expected to grow earnings more than 10% next year. Baxter (NYSE: BAX  ) and Zimmer Holdings (UNKNOWN: ZMH.DL  ) earnings should climb 9.4% and 8.7%, respectively.

Of the five, only C.R. Bard has beaten analysts' estimates in each of the past four quarters. That suggests analysts are likely to play catch up and support the company with upward revisions and ratings upgrades. However, only Boston Scientific has seen the average analyst earnings forecast for next year get lifted in the past few months. Analysts have taken expectations for Boston Scientific up to $0.51 from $0.47 90 days ago.

Source: Yahoo! Finance.

Debating valuation
Across these five medical device players, Abbott, Baxter, and Boston Scientific all have price-to-sales ratios below the broader industry average. Abbott and Zimmer have PEG ratios below industry levels, and Baxter and Zimmer have the lowest forward P/E ratio.

Comparing the the forward P/E ratio against the five-year P/E low suggests that Baxter and C.R. Bard are inexpensive based on how investors have valued their earnings in the past.

Source: Yahoo! Finance.

Fool's final take
Across these five medical device companies, in my opinion C.R. Bard has the edge. The company offers investors the highest potential earnings growth and best history of beating analysts' expectations. 

Among the other four companies, you end up with a mixed bag. Boston Scientific's spotty profit history makes determining valuation tricky. Abbott's solid earnings growth and history of earnings beats is intriguing, but valuation is hard to quantify given historical P/E ranges reflect the company prior to its spin-off of AbbVie. And, Zimmer offers a mid-range P/E and below-industry PEG and price-to-sales ratio, suggesting that there may be an opportunity there, too.

More ways Obamacare could change your finances
Health care as we know it is about to change. Do you know how the changes in the health care law will affect you and your portfolio? If not, we're here to help: The Motley Fool has compiled a special new report filled with Everything You Need to Know About Obamacare. This report is a free offer from us to help you get educated on this important subject. Please click here to access your free copy.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2689278, ~/Articles/ArticleHandler.aspx, 9/25/2016 10:27:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:00 PM
ABT $42.19 Down -0.03 -0.07%
Abbott Laboratorie… CAPS Rating: *****
BAX $47.49 Down -0.71 -1.47%
Baxter CAPS Rating: ****
BCR $229.91 Down -1.44 -0.62%
C.R. Bard CAPS Rating: ****
BSX $23.71 Down -0.02 -0.08%
Boston Scientific CAPS Rating: ***
ZMH.DL $0.00 Down +0.00 +0.00%
Zimmer Holdings CAPS Rating: ****