Medical stocks, in general, make good long-term investments; the U.S. national spending on healthcare is expected to keep growing because of an aging population. The level of spending on healthcare as a percentage of the U.S. Gross Domestic Product (GDP) has risen from 5.27% in 1962 to 19.7% by 2020.
Within that sector, medical device companies have a trickier path than pharmaceutical and biotech stocks because their products generally have a short shelf life due to the pace of innovation in medical devices. On top of that, margins are often tighter for medical device companies.
Though vastly different in size and scope, InMode (INMD 0.70%) and Medtronic (MDT 0.62%) operate as medical device manufacturers, with one of them being a better buy right now.
1. The case for InMode
InMode specializes in making and servicing machines that will allow physicians to do minimally invasive aesthetic procedures. The company focuses on selling and servicing radio frequency (RF)-based devices to physicians who specialize in dermatology, plastic surgery, gynecology, otolaryngology (ear, nose, and throat), and ophthalmology.
The company's main advantage over Medtronic is its high rate of growth, rising from only $23.1 million in revenue in 2016 to $357.6 million in revenue in 2021. In 2022, the company said it expects between $445 million and $450 million in annual revenue. While that's good news, even at the high end, it means that the rate of sales increases is slowing. The company saw a revenue rise of 73.5% in 2021 over 2020, but this year, at best, it will be 25.8% if company guidance holds.
The stock is down more than 37% over the past year, driving the company's price-to-earnings ratio (P/E) down to 17.4, making it a more attractive buy.
In the third quarter, InMode reported revenue of $121.2 million, up 29% year over year, with net income of $48.8 million, up 9% over the same period last year, and earnings per share (EPS) of $0.58, compared to $0.52 in the third quarter of 2021. There's plenty of potential for growth in the industry, and InMode holds a unique position in it with its RF technology. According to a report by Market Research Future, the global aesthetics market is expected to have a compound annual growth rate of 13.92% between 2022 and 2030, becoming a $320 billion market by 2030. The report added that the biggest areas of growth are in minimally invasive procedures such as those done by InMode machines.
The company is in a strong position to expand because it has no debt.
What I like about InMode is that it is profitable, and as long as its sales continue to climb, its service revenue will also grow, and there are greater margins to be made in servicing its equipment than in making the machines. At 18 times earnings, the stock appears to be a good deal, though, in the long run, the company could use a little diversification.
2. The case for Medtronic
Medtronic has at least one thing that InMode doesn't -- an attractive dividend. The company has raised its quarterly dividend for 45 consecutive years, including a boost in 2022 of 7% to $0.68, which equals a yield of around 3.4%.
Two other things Medtronic has over InMode are size and diversity. It operates in over 150 countries and has more than 95,000 employees, and roughly 50,000 patents for its products, which range the gamut from stents and catheters to high-end robotic surgery platforms. The company made nearly $32 billion in revenue last year, more than 10 times InMode's market cap.
Medtronic stock is down 24% this past year, and the company is trading for around 25 times earnings. The company had a strong fiscal 2022 but is coming off a down second quarter for fiscal 2023. It reported revenue in the quarter of $7.6 billion, down 3.3%, year over year, and EPS of $0.32, down 67% compared to the second quarter of 2022.
The other problem is the company said it is still experiencing supply issues, and the levels of elective procedures still haven't returned to pre-COVID levels.
MDT Revenue (Annual) data by YCharts.
The growth is too good to pass up
While InMode isn't likely to keep up the same pace of growth that it had the past five years, the company's sales still have better prospects of increasing than Medtronic's. The desire for less-invasive aesthetic procedures will likely grow as an alternative to cosmetic surgery, and InMode is already profitable and is really selling for a bargain, considering its P/E ratio.
Medtronic's current problems with supply issues and pricing will likely subside. But the company, being more mature, has less chance for growth unless it buys it through acquisitions, but it already has more debt than InMode. The company's strong dividend makes the decision more difficult, but for now, InMode appears the better buy for growth investors.
