Medical equipment companies offer investors excellent long-term potential, especially if you can identify the best companies to acquire. There are a number of features that make medical companies especially attractive, whether you are a growth or value investor. Of course, there are also risks.

Features of Medical Equipment Companies
Medical equipment companies possess several features that give them unique advantages over other companies. In many ways, medical equipment companies are similar to the pharmaceutical industry.

Patents
The company that is first to the market with a new product, especially if it can obtain a patent, can win substantial market share. Patents are important to protect key design elements that make the product unique and deserving of a premium price. Companies that receive a premium price for their products generate higher margins, which in turn give investors a superior return on their money. (Learn more in Patents Are Assets, So Learn How To Value Them.)

For some, medical equipment innovation is important in offering a competitive product. Many government authorities, such as the U.S. Food and Drug Administration (FDA) recognize that they must adapt to the rapid innovation in medical products. Companies that are able to innovate rapidly will benefit most, and so will investors who can identify these companies. To identify these companies, monitor the companies' research and development activities, their filings with regulator authorities and approvals from the regulators. (Learn more in Financial Regulators: Who They Are And What They Do.)

Aging Population
Many countries are experiencing an aging population. This growing segment of the population is a positive influence on the future performance of medical equipment companies. Essentially, the rising tide of an aging population helps all the medical equipment companies grow. (See how people's movements, ages, deaths and buying patterns affect portfolios worldwide, read Demographic Trends And The Implications For Investment.)

Health insurance, including government assistance such as Medicare, covers the cost of many medical care products. Usually, the patient does not have to pay for the full cost of the product. In fact, many patients do not even know the cost of the products they are provided. On the other hand, these same agencies set the price they will pay for a product, which could limit the price received by the medical equipment company.

As a discretionary spending item, medical equipment purchases are not tied to the vagaries of the economic cycle. As a result, medical products companies are normally able to perform well during the boom times and when the economy is slowing down.

With these special advantages, medical equipment companies offer investors some advantages that are not available to other companies. Like any investment, it pays to understand the features offered by the company. (Find out how certain securities can protect you from a market bust, check out Guard Your Portfolio With Defensive Stocks.)

What Type of Investor are You?
Growth and value investors can find investing in medical equipment companies lucrative. Knowing the type of investor you are goes a long way to defining what to look for and when to make an investment. (You might know about different asset types, but do you know how each type contributes to a particular goal? Read more in Basic Investment Objectives.)

Growth
In every industry, a healthy balance sheet is essential for growth, and the same applies to medical equipment companies. Companies that have sufficient cash or cash equivalents on hand to pay for their investments, such as research and development, have a much better chance of sustaining their growth. Preferably, they have minimal debt. If companies do have debt, they are able to cover the cost of this debt from current operations. Moreover, the company should be generating profits and achieving positive free cash flow. (Learn about the components of the statement of financial position and how they relate to each other in Reading The Balance Sheet.)

As already mentioned, it helps if these companies have a strong culture of innovation. Innovation is vital to future growth, which benefits investors. Moreover, assess the company's research and development efforts and their filings with appropriate government agencies to evaluate the potential of new products in the pipeline.

The price to earnings (P/E) ratio is a popular tool used by investors to assess the promise of a company. For growth companies, look for a P/E ratio that is at or near the growth rate of the company's earnings. This is the PEG ratio, which compares the P/E ratio with the growth rate of the company'sannual earnings per share. It's even more promising if you can find a company, with an accelerating growth rate.

Value
Value investors look for good businesses that earn more, relative to the price paid. Ideally, the share price has fallen out of favor with many investors, yet the company possesses good fundamentals. When you find such a company, look for reasons why it will grow its revenues and earnings more than is currently expected. Medical equipment companies that experience periodic dips in the price of their share price might offer a good value. If the reasons for the share price dip are temporary, such as a lull between product cycles or temporary bad news, then this company could offer a good value. (Learn the technique that Buffett, Lynch and other pros used to make their fortunes in The Value Investor's Handbook.)


A large segment of the medical equipment industry sells consumable items that are used each day by hospitals and medical professionals. Companies that manufacture these products tend to experience high levels of free cash flow. Since use of these items is non-discretionary, the revenues tend to be steady despite the cycles of the economy. Moreover, with an aging population, the use of these items tends to grow faster than the overall economy.

Risks
In addition to market and sector risk, investors in the medical equipment sector should watch for company and product risks. While use of debt can help a company grow, too much debt can consume cash generated from sales, reducing profitability. (If you want to use leverage to your advantage, you must know how many contracts to buy Reducing Risk With Options.)

Medical equipment companies possess three main risks you will want to consider:

• A promising product may not prove to be as valuable as once thought.
• A product may not get approval from the regulator authorities.
• A current product could become a liability should it cause harm to patients. (Learn how to find a healthy pharmaceutical investment in a market full of weak drugs in Measuring The Medicine Makers and A Checklist For Successful Medical Technology Investment.)

The Bottom Line
The medical equipment sector is well positioned to take advantage of a growing demand for healthcare if the elderly become a larger percentage of the overall population. Moreover, innovations offer ways to improve the lives and welfare of everyone. The best time to buy depends on the type of investor you are. Growth investors can take advantage of the rapid innovation that many companies can accomplish. While value investors might find good buying opportunities on temporary dips in the price of a company's stock. In each case, investors should assess the long-term opportunities as well as the risk of the company and its products. (Perform a thorough checkup to uncover a medical stock with a clean bill of health, read Investing In The Healthcare Sector.)

by Hans Wagner, (Contact Author | Biography)

As a long time investor, Hans Wagner was able to retire at 55 by following a disciplined process using sound investment principles. After his children and their friends graduated from college, Hans began helping them to invest in the stock market. Soon, friends and acquaintances also began to seek advice, so Hans created a website, Trading Online Markets, which provides information on investing topics, along with sample portfolios that consistently beat the market.