The medical device sector took a hit this spring when patients were forced to postpone elective surgical procedures due to the coronavirus pandemic, and Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX) fell harder than most in their sector. Year to date, Medtronic's stock is down 17.85% and Boston Scientific's stock fell by 21.85%. That's well below the drops across the medical device industry, as demonstrated by the iShares U.S. Medical Devices ETF (NYSEMKT:IHI) which is down just 4.4% over the same period.
But both companies are poised to make strong comebacks once hospitals begin re-scheduling non-emergency procedures. Since their share prices have fallen, Medtronic and Boston Scientific have low price-to-earnings ratios compared to the industry average, indicating they could be good long-term buys now. While both companies have withdrawn full-year guidance, their management teams project confidence in a rebounding market.
The question is, as people begin going back to the hospital for non-coronavirus reasons, which of the two healthcare stocks is a better buy today?
The case for Medtronic
Medtronic is a larger company that brought in $28.9 billion in revenue in the 2020 fiscal year, which was down 5.4% from 2019. It's divided into four segments: The cardiac and vascular group is the largest, followed by minimally invasive therapies, restorative therapies, and diabetes. Thus, it enjoys the edge of having built-in diversification.
The company was founded in 1949, and its co-founder Earl Bakken made the first battery-operated pacemaker. It has been slowly but steadily building revenue until this past year. Its fourth-quarter revenue was $5.9 billion, down 26.4%, year-over-year, with generally accepted accounting principles (GAAP) earnings per share (EPS) falling 44.8% to $0.48.
Its falling share price didn't stop the company from raising its quarterly dividend 7% to $0.58 a share, with a forward yield of 2.50%. The company is a Dividend Aristocrat, with 43 consecutive years of dividend increases.
Medtronic's CEO Geoff Matha set an optimistic tone at a conference last month:
At a time -- a time when a lot of people in MedTech, a lot of our competitors, even the bigger competitors in MedTech are raising capital, we're raising our dividend. And I think that speaks to two things; the strength, our financial health and our strength of our balance sheet as well as our commitment to shareholders.
The case for Boston Scientific
Boston Scientific's first quarter ended March 31, so its numbers didn't yet show how fully it would be impacted by the pandemic shutdown. The Massachusetts-based company had first-quarter revenues of $2.54 billion, a 2% jump year over year. Its expenses were way up, however, so the company's net income was down 94.4% to $11 million, compared with $424 million in the first quarter in 2019.
Boston Scientific has bought more than 20 companies the past five years and completed two key acquisitions last year that are already paying off. It purchased British interventional medicine company BTG for $4.2 billion, improving the company's oncology division with therapies for liver and kidney cancers. Boston Scientific also spent $465 million to buy Vertiflex, which developed the Superion Indirect Compression System to help patients with lumbar spinal stenosis, which is when the spinal canal narrows and compresses the nerves and blood vessels.
Last year, Boston Scientific's sales increased to $10.7 billion, up 11% from 2018, and net income was $4.7 billion, up 181% in the same time period. It doesn't pay a dividend.
"We continue to balance short-term adjustments to our plans while strengthening our long-term strategy to serve our customers and deliver high performance," said Boston Scientific CEO Mike Mahoney in the first-quarter release.
Boston Scientific should have the bigger bounce
Medtronic and Boston Scientific should both see nice long-term growth, along with the general market for neurostimulator devices and pain-management devices as both companies market products for deep brain therapy and pain therapy through neuromodulation. But of the two, I believe Boston Scientific has higher short-term growth potential.
Boston Scientific's price-to-earnings ratio of 11.58 shows the stock may already be a better buy than Medtronic, which has a P/E of 26.11, though both are better than the sector's average of 29.59. The difference in optimism has to do with Medtronic's dividend, which rewards cautious investors, making it a more popular stock, particularly when the market has seen wild swings. However, it's easy to see that there may be more growth in Boston Scientific's future, as the company has had more consistent growth in the past five years.
Medtronic's revenue growth the past four years has been fairly flat, while Boston Scientific's has averaged 8% or better over the past four years. Boston Scientific's cardiovascular division is particularly strong, with improved sales of 9.3% last year. Many of the procedures involving both companies' devices were only postponed, not canceled, because they are fairly inelastic. A patient who needs a pacemaker can put off the inevitable for only so long.
Healthcare investors looking to capture upside from the bounce of a stock worth holding for the long-term would do well to scoop up shares of Boston Scientific today.