Congress Fails Medical Device Stocks


Washington may have found common ground to boost the debt ceiling and fund the government into mid-January, but repeal of the 2.3% medical device tax ended up on the cutting room floor.

The medical device industry has been fighting tooth and nail for repealing the tax assessed to help pay for the Patient Protection and Affordable Care Act, commonly known as Obamacare. The argument for the tax -- that device makers stand to make millions from a larger insured population -- is being contested by the medical device industry on the grounds that it will stifle innovation and cause job cuts.

One of the most vocal opponents of the tax has been AdvaMed, an industry trade group representing 80% of the industry, including Zimmer Holdings (Zimmer's CEO David Dvorak also serves as chairman of AdvaMed's board), Abbott Labs, Baxter International, Boston Scientific, C.R. Bard, and others.

Given the tax remains in place, should you risk adding any of these large medical device players to your portfolio?

Debating earnings
Analysts remain optimistic on earnings. Despite the tax overhang, Abbott Labs , C. R. Bard and Boston Scientific are expected to grow earnings more than 10% next year. Baxter and Zimmer Holdings earnings should climb 9.4% and 8.7%, respectively.

Of the five, only C.R. Bard has beaten analysts' estimates in each of the past four quarters. That suggests analysts are likely to play catch up and support the company with upward revisions and ratings upgrades. However, only Boston Scientific has seen the average analyst earnings forecast for next year get lifted in the past few months. Analysts have taken expectations for Boston Scientific up to $0.51 from $0.47 90 days ago.

Source: Yahoo! Finance.

Debating valuation
Across these five medical device players, Abbott, Baxter, and Boston Scientific all have price-to-sales ratios below the broader industry average. Abbott and Zimmer have PEG ratios below industry levels, and Baxter and Zimmer have the lowest forward P/E ratio.

Comparing the the forward P/E ratio against the five-year P/E low suggests that Baxter and C.R. Bard are inexpensive based on how investors have valued their earnings in the past.

Source: Yahoo! Finance.

Fool's final take
Across these five medical device companies, in my opinion C.R. Bard has the edge. The company offers investors the highest potential earnings growth and best history of beating analysts' expectations.

Among the other four companies, you end up with a mixed bag. Boston Scientific's spotty profit history makes determining valuation tricky. Abbott's solid earnings growth and history of earnings beats is intriguing, but valuation is hard to quantify given historical P/E ranges reflect the company prior to its spin-off of AbbVie. And, Zimmer offers a mid-range P/E and below-industry PEG and price-to-sales ratio, suggesting that there may be an opportunity there, too.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC, a research firm serving professional money managers. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC, a high net worth advisory firm. Gundalow's clients do not own shares in the stocks mentioned. The Motley Fool recommends Baxter International. The Motley Fool owns shares of Zimmer Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published