The market is full of uncertainty now with crisis on top of crisis globally. But that shouldn't make investors skeptical of investing in the stock market. The market will recover sooner or later. And the healthcare industry, loaded with excellent growth stocks, is one industry that won't be losing its importance any time soon.
In fact, the medical devices segment is gaining popularity, making California-based Intuitive Surgical (ISRG -1.69%) and Ireland-based Medtronic (MDT 0.37%) shine. Both stocks have seen healthy gains in the past decade, and with the rising demand for healthcare, both could repeat history. But is one a better buy today? Let's take a look.
The case for Intuitive Surgical
Intuitive Surgical could change the face of the healthcare industry with its state-of-the-art robotic system. Robot-assisted surgery is the future of surgery that has many advantages -- from minimally invasive procedures and reduced pain and scarring to shorter recovery time for patients. The global surgical robots market was valued at $6.1 billion in 2020 and could grow at a compound annual rate of 18% to be worth $22 billion by 2028, according to Verified Market Research.
Intuitive's da Vinci robotic system is already dominating this market. It provides surgeons with 3D high-definition views and the use of tiny instruments for smooth and convenient precision during surgeries. It also reduces the patient's recovery time. In the fourth quarter, worldwide da Vinci procedures increased 19% from the year-ago period.
Intuitive also earns revenue from the sale of disposable instruments and accessories used by the machines. This surged 13% to $843 million from the prior quarter. Total revenue in the quarter was $1.5 billion, a jump of 17% year over year, while net profit increased 4% to $381 million from the comparable quarter a year ago.
Other companies like Johnson & Johnson, Stryker, and even Medtronic have entered the robotic surgery segment, but none has been able to capture the market share that Intuitive has in this field. Additionally, because Intuitive also provides training to surgeons on how to use its system, shifting to a new system is expensive and time-consuming. Thus, high switching costs will also help keep Intuitive's revenue flowing.
The company has been growing its free cash flow (FCF) by nearly 121% in the past five years, which has allowed it to use the money on more innovative products. Intuitive also has a stable balance sheet, which was evident when it ended the quarter with cash and investments of $8.6 billion.
Image source: Getty Images.
The case for Medtronic
Medtronic is bigger business-wise, operating across 150 countries and treating close to 70 health conditions. It operates four product lines under the cardiovascular, medical-surgical, neuroscience, and diabetes segments.
The stability of its business is evident from its consistent quarterly results. In its recent third quarter (ended Jan. 28), revenue totaled $7.7 billion, about the same as a year ago. Meanwhile, adjusted net profits came in at $1.4 billion compared to $1.2 billion the year-ago quarter. Most of its segments saw gains, except for diabetes (down 7.3%) and medical-surgical (off 1%).
Medtronic has high expectations from its emerging markets, which grew 4% year over year to $513 million in Q3. The company expects pandemic-related headwinds to subside by the end of the year. Its fourth-quarter guidance sees adjusted earnings per share landing in the range of $1.56 to $1.58 and organic revenue growth of around 5.5%.
Medtronic paid $2.5 billion in dividends in the fiscal year to date to shareholders. The company's consistent dividend payments for 44 years have earned it the title of Dividend Aristocrat (a company that has paid dividends for at least 25 consecutive years). On March 4, it again hiked its quarterly dividend by 8.6% to $0.63 per share.
Which is the better choice?
Wall Street has high hopes for both these stocks. Analysts see upsides of 25% and 20% for Intuitive and Medtronic, respectively, over the next 12 months. Intuitive might be facing some challenges at the moment given the pandemic situation that has been delaying a lot of elective procedures. But once the pandemic ends, its da Vinci system can revolutionize the surgical robotics segment.
Investors who have the patience for that to happen can buy and hold this stock. That said, Medtronic is a much more stable company with high growth prospects. It dominated the list of top-10 medical device companies in the world in 2021. The company has a range of approved products in various fields of medicine.
Medtronic has also launched its own robotic-assisted device, Hugo, to compete with Intuitive's da Vinci. Recently, its device received the CE mark in Europe authorizing the sale of the system in Europe for urologic and gynecologic procedures. The company plans to submit to the U.S. Food and Drug Administration soon for the system to be available in the U.S.
The cherry on top is that Medtronic is not only a growth but also an income stock that has been paying dividends for quite a while. Its stable business is also proof that dividends aren't stopping anytime soon, making it the better pick for now.
