The 9 Top Value-Creating Medical Device Companies

Warren Buffett's partner, Charlie Munger, once said, "I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."

When corporate boards use bad incentives for management's pay, disaster often ensues. (Think Lehman Brothers.) Incentives based on singular metrics such as revenue growth, EBITDA, ROE, or earning per share are easily manipulated and gamed. Fortunately, there is a better way: EVA momentum.

Creator Bennett Stewart of EVA Dimensions, who also co-created EVA (economic value added), calls EVA momentum "the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."

So what does this mean for investors? A positive EVA momentum reading means a company has created more value by increasing its EVA, while a negative EVA momentum reading means EVA has decreased, signaling less value creation. EVA momentum is one of the few, if not the only, performance measures with such a clear dividing line between good and bad performance.

The best companies, then, create value in excess of their cost of capital, as reflected by positive EVA momentum. The higher the EVA momentum, the faster management is creating value.

Let's look at the health-care equipment industry and see the most effective producers of value as measured by EVA momentum over the past quarter, year, and the three-year trend. The companies are ranked by percentile versus the Russell 3000. The limitations I've set are that the company must have more than a $500 million market cap and be traded on a major U.S. exchange.

 

Company

Russell 3000 Percentile

3-Year Trend

Past Year

Past Quarter

1 Intuitive Surgical (Nasdaq: ISRG  ) 98 21.7% 13.5% 14.8%
2 DexCom (Nasdaq: DXCM  ) 97 3.6% 10.8% 27.7%
3 Cyberonics (Nasdaq: CYBX  ) 97 12.3% 10.3% 5.2%
4 Align Technology (Nasdaq: ALGN  ) 95 11.6% 7.2% 1.4%
5 Insulet (Nasdaq: PODD  ) 94 13.5% 10.5% (3.7%)
6 NxStage Medical (Nasdaq: NXTM  ) 94 6.2% 5.1% 4.9%
7 Thoratec (Nasdaq: THOR  ) 94 5.0% 4.6% 5.1%
8 ICU Medical (Nasdaq: ICUI  ) 93 4.1% 8.6% 4.6%
9 ArthroCare (Nasdaq: ARTC  ) 92 4.6% 3.1% 5.0%

Source: EVA Dimensions.

Intuitive Surgical leads the industry with a 13.5% EVA momentum in the past year as well as a three-year trend of 21.7%, beating more than 97% of the Russell 3000.

Businesses with high EVA momentum are effectively creating value. It will be interesting to see how useful this extremely new metric proves for companies and investors. If it lives up to its promise, EVA momentum will be an essential tool in investors' arsenals.

Another tool for better investing
Most investors don't keep tabs on their companies' fundamental value. That's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home run stocks that provide the market's best returns.

If you are interested in continuing your research on a stock mentioned here, add it to My Watchlist to stay abreast of all of our Foolish analysis.

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak.

Motley Fool newsletter services have recommended buying shares of Nxstage Medical and Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (1)

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.

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: 1560729, ~/Articles/ArticleHandler.aspx, 9/1/2014 4:03:50 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...


Advertisement