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.

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 regulatory authorities and approvals from the regulators.

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.

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.

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.

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.

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's annual 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.

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. 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.

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.

Related Articles
  1. Stock Analysis

    The Top 5 Large-Cap Healthcare Stocks for 2016 (GILD, ANTM)

    Learn about the potential direction for large-cap stocks in the health care sector in 2016, drug pricing headwinds and the continued impact of Obamacare.
  2. Retirement

    Getting Through the Medicare Part D Maze

    Having trouble sorting through your prescription drug coverage options? Try these solutions to finding the right Medicare Part D option.
  3. Home & Auto

    Fighting The High Costs Of Healthcare

    If your employer is cutting medical benefits, a health savings account may be right for you.
  4. Options & Futures

    Long-Term Care: More Than Just A Nursing Home

    Learn what you can do now to keep your options open in the future.
  5. Insurance

    What Does Medicare Cover?

    Don't assume you're insured. Find out what you can expect from this healthcare program.
  6. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  7. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  8. Stock Analysis

    The Biggest Risks of Investing in Celgene Stock (CELG)

    Discover the biggest risks to investing in Celgene Corporation when reviewing fundamental analysis and other external factors that may affect the stock's price.
  9. Insurance

    Jan. 31 is Sunday: Almost No Time to Duck Obamacare Penalty

    If you don't have health insurance, act NOW or you could owe penalties on your 2016 taxes, in addition to this year's.
  10. Insurance

    How High-Deductible Health Plans Work

    It will give you access to a Health Savings Account, but are the limitations worth the benefits?
RELATED FAQS
  1. Does dental insurance cover implants?

    Dental implants have become a widely used procedure in dentistry. Despite their popularity, however, they tend to not be ... Read Full Answer >>
  2. Does dental insurance cover dentures?

    Most full dental insurance policies include some restorative coverage, usually meaning that up to 50% of the cost of dentures ... Read Full Answer >>
  3. Can CareCredit be used for family members?

    CareCredit has become a widely used option when it comes to paying for medical procedures, primarily procedures not typically ... Read Full Answer >>
  4. Can a Flexible Spending Account (FSA) be used for dental?

    Flexible Spending Accounts (FSAs) can be used to pay for dental expenses including deductibles and co-payments with pretax ... Read Full Answer >>
  5. Does dental insurance cover braces?

    Most regular dental plans cover little to none of the costs of braces. The primary focus of regular dental plans is prevention ... Read Full Answer >>
  6. Does dental insurance cover crowns?

    Dental insurance coverage may vary according to the type of plan and the level of benefits that you have elected. Most dental ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center