Biotechs and high-tech medical device companies garner most of the attention from healthcare investors. But some less hyped parts of the sector claim solid investing picks. I'm thinking specifically of medical instrument companies.
Three medical instrument companies stand out as potential winners in 2017: Baxter International (BAX -0.35%), Hill-Rom Holdings (HRC), and Luminex Corporation (LMNX). Here's why these three stocks could do well this year.
Baxter: Injecting new growth into the business
Baxter ranks as one of the largest medical instrument companies in the world, with a market cap of close to $28 billion. It markets a broad array of renal and hospital products, including acute and chronic dialysis products, injectables, infusion systems, and biosurgery products.
While Baxter enjoyed revenue and earnings growth last year, 2017 should bring plenty of opportunities for the company. In December, Baxter entered an agreement to acquire Claris Injectables for $625 million. The deal is expected to close in the second half of this year. With Claris, Baxter should be poised to compete even more effectively in the global sterile generic injectables market, which is projected to grow by 10% annually.
The company plans to launch more than 100 new products (including geographic expansions and line extensions) over the next five years. At the same time, Baxter is improving its cost structure and operational efficiency. This combination of growth with lower costs should make Baxter one of the more attractive medical instrument stocks in the years ahead.
Hill-Rom: Solid earnings growth from acquisitions
Hill-Rom currently claims a market cap of more than $4.6 billion. The company has three primary businesses: patient support systems, front line care (which includes respiratory care products and medical diagnostic equipment), and surgical solutions.
Like Baxter, Hill-Rom has its eye on acquisitions. The company bought Welch Allyn in 2015, picking up the smaller company's point-of-care diagnostics products in the process. More recently, Hill-Rom announced plans to acquire Mortara Instrument, a privately held provider of diagnostic cardiology and patient monitoring solutions, technologies, and devices.
Don't look for flashy revenue growth from Hill-Rom. It projects core revenue growth of 3% to 4% this year. However, Hill-Rom expects adjusted earnings per share to increase from 10% to 13%. A more profitable product mix will help with this earnings growth, but Hill-Rom has undertaken some supply chain initiatives that should also make a positive difference.
Luminex: Transforming into molecular diagnostics means higher growth
Luminex is the smallest of the three medical instrument companies, with a market cap of less than $750 million. The company develops and sells biological testing technologies and products to the diagnostics, pharmaceutical, and life sciences industries.
Although it's not as big as Baxter and Hill-Rom, Luminex has also been busy on the acquisitions front. Luminex completed its buyout of molecular diagnostic company Nanosphere in June 2016. In the months following the Nanosphere acquisition, Luminex reorganized, resulting in a reduction of its total workforce by roughly 4%.
In the past, Luminex was known primarily for its xMAP system that allowed analysis of bioassays. With the purchase of Nanosphere, the company's star product is the Verigene system, which allows clinicians to analyze blood for pathogens, and its successors. Wall Street projects that Luminex will grow earnings by more than 50% annually over the next five years with its transition into more of a molecular diagnostics company thanks to the Nanosphere buyout.
Baxter and Hill-Rom should provide steady growth. But bigger wins will likely come from Luminex.
The Nanosphere acquisition has radically changed Luminex and should enable the company to be a high-growth engine for several years to come. Luminex has committed resources to developing the next generation of the Verigene platform, currently referred to as Project Atlas. This effort could pave the way for even bigger earnings growth in the future.