With the slowdown in COVID-19 cases, the growing demand for critical surgical procedures made the medical devices industry rebound last year. This, along with continued product innovations, integration of new technologies for enhanced precision, accuracy, and predictions, and robotic assistance in operating rooms, positions the industry well for solid growth.
Investors’ interest in this space is evident from the iShares U.S. Medical Devices ETF’s (IHI) 6.6% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 5% gains. The global medical devices market is expected to grow at a 5.4% CAGR to reach $657.98 billion by 2028.
Abbott Laboratories (ABT) and Zimmer Biomet Holdings, Inc. (ZBH) are two prominent players in the medical devices manufacturing industry. ABT discovers, develops, and sells healthcare products focused on cardiovascular, diabetes care, diagnostics, neuromodulation, nutrition, and medicine. Its products are sold directly to wholesalers, distributors, government agencies, health care facilities, pharmacies, and independent retailers. ZBH operates in the musculoskeletal healthcare business that designs, manufactures, and markets orthopedic, dental, and spinal reconstructive implants, bone cement, and related surgical products. It serves orthopedic surgeons, neurosurgeons, oral surgeons, dentists, hospitals, stocking distributors, healthcare dealers, other specialists, agents, healthcare purchasing organizations, or buying groups.
While ZBH lost 10.8% over the past six months, ABT rose 0.1%. Which of these stocks is a better pick now? Let’s find out.
Latest Developments
On April 4, 2022, the U.S. FDA approved ABT’s Aveir single-chamber (VR) leadless pacemaker for treating patients in the U.S. with slow heart rhythms. Unlike traditional pacemakers, the Aveir leadless pacemaker has a unique mapping capability to assess correct positioning and is implanted directly inside the heart’s right ventricle via a minimally invasive procedure. This marks a significant advancement in patient care and brings new, never-before-seen features to patients and physicians.
On March 10, 2022, ZBH announced the release of WalkAI, a dynamic artificial intelligence (AI) model that identifies patients who are predicted to have a lower gait speed outcome 90 days after hip or knee surgery. WalkAI integrates with the mymobility Care Management Platform to collect patient gait data. Using a proprietary AI algorithm, it adds powerful predictive analytic capabilities to its ZBEdge Connected Intelligence Suite to deliver transformative data-powered clinical insights to improve patient outcomes. This should gain widespread recognition in the coming months.
Recent Financial Results
ABT’s total revenue for its fiscal 2021 fourth quarter ended December 31, 2021, increased 16.7% year-over-year to $1.55 billion. The company’s non-GAAP gross profit came in at $6.62 billion, representing a 5.8% rise from the prior-year period. Its non-GAAP pre-tax earnings from continuing operations came in at $2.85 billion, indicating a 6.3% decline from the prior-year period. While its non-GAAP net income decreased 9.4% year-over-year to $2.37 billion, its non-GAAP EPS fell 9% to $1.32. As of December 31, 2021, the company had $9.80 billion in cash and cash equivalents.
For its fiscal 2021 fourth quarter ended December 31, 2021, ZBH’s net sales decreased 2.3% from the prior-year period to $2.04 billion. The company’s adjusted gross profit came in at $1.41 billion, indicating a 5.3% decline from the year-ago period. Its adjusted operating profit came in at $527 million, down 6.7% from the prior-year period. ZBH’s adjusted net earnings increased 7.2% year-over-year to $409.20 million. Its adjusted EPS came in at $1.95, indicating a 7.6% year-over-year decline. The company had $3.48 billion in cash and cash equivalents as of December 31, 2021.
Past and Expected Financial Performance
Over the past three years, ABT’S revenue, levered free cash flow, and total assets have increased at CAGRs of 12.1%, 16.7%, and 3.8%, respectively.
ABT’s EPS is expected to grow 11.4% year-over-year in the fiscal 2022 first quarter ended March 31, 2022. Its revenue is expected to grow 3.1% in the same quarter. Analysts expect the company’s EPS to grow at a 12.1% rate per annum over the next five years.
ZBH’s revenue levered free cash flow, and total assets have decreased at CAGRs of 0.4%, 9.3%, and 0.9%, respectively, over the past three years.
Analysts expect ZBH’s EPS to decline 17% year-over-year in the fiscal 2022 first quarter ended March 31, 2022. Its revenue is expected to decline 9.5% year-over-year in the same quarter. Analysts expect the company’s EPS to grow at a 9.8% rate per annum over the next five years.
Valuation
In terms of forward EV/EBITDA, ABT is currently trading at 18.7x, 28.7% higher than ZBH’s 14.53x. In terms of forward EV/Sales, ZBH’s 4.9x compares with ABT’s 5.3x.
Profitability
ABT’s trailing-12-month revenue is almost 5.5 times ZBH’s. Also, ABT is more profitable, with a 16.4% net income margin versus ZBH’s 5.1%.
Furthermore, ABT’s ROE, ROA, and ROTC of 20.5%, 7.8%, and 10.7% compare with ZBH’s 3.2%, 3.5%, and 4.1%, respectively.
POWR Ratings
While ABT has an overall A grade, which translates to Strong Buy in our proprietary POWR Ratings system, ZBH has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
ABT has a B grade for Stability, consistent with its lower volatility compared to the broader market. ABT has a 0.73 beta. ZBH’s C grade for Stability is in sync with its slightly higher volatility. ZBH has a 1.20 beta.
ABT has a B grade for Sentiment, consistent with analysts’ expectations of a solid increase in revenue. ABT’s revenue is expected to grow 3.1% year-over-year to $11.02 billion for its fiscal 2022 first quarter ended March 31, 2022. ZBH’s C grade for Sentiment is in sync with its lower revenue estimates. The consensus revenue estimate of $1.59 billion for ZBH’s fiscal 2022 first quarter represents a 9.5% decline from the prior-year period.
Of the 159 stocks in the Medical - Devices & Equipment industry, ABT is ranked #4, while ZBH is ranked #54.
Beyond what we have stated above, our POWR Ratings system has also graded ABT and ZBH for Value, Momentum, Quality, and Growth. Get all ABT ratings here. Also, click here to see the additional POWR Ratings for ZBH.
The Winner
Although supply chain constraints could mar the industry’s growth, integrating AI and other latest technologies in medical devices and rising demand from the aging population should benefit both ABT and ZBH in the coming months. However, relatively higher profit margins make ABT a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical - Devices & Equipment industry.
ABT shares were trading at $115.77 per share on Monday afternoon, down $1.92 (-1.63%). Year-to-date, ABT has declined -17.12%, versus a -7.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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