Medical Devices: Cure For Ailing Portfolios?

By Todd Shriber | February 27, 2009 AAA

The healthcare sector is generally viewed as a defensive play during times of market weakness, so it is no surprise that shares of medical device makers have held up relatively well during the current bear market. What may be the most encouraging sign for investors is many of the sector's members look like viable long-term investment options. (Learn to find a medical stock with a clean bill of health in Investing In The Healthcare Sector.)

iShares Medical Devices ETF (NYSE:ITI) was down in 2008, but outperformed the S&P 500, proving that there could be some strength in the sector. These stocks are likely to be market leaders when the market rebounds. Medical Devices ETF has been among the top performing ETFs this year, trailing only the likes of the primary gold ETF and a healthcare ETF.

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Let's take a look at some of the big kahunas of the medical device industry to see what 2009 has in store:


Company 52-Week Performance Forward P/E
Abbott Laboratories
(NYSE:ABT)
-5% 14.6
Baxter International
(NYSE:BAX)
-5% 13.5
St. Jude Medical
(NYSE:STJ)
-15% 12.8
Data as of market close February 25, 2009

King of the Hill
Abbott Laboratories is an $80 billion dollar company, making it larger by market cap than several Dow components, and it is one of the strongest companies in its sector. The shares have not seen much downside in the past year, especially compared to the broader market, and this should be taken as an encouraging sign to potential investors as Abbott's shares looked poised to soar higher when the market moves up again.

Abbott bucked another market trend recently when it raised its quarterly dividend by 11% to 40 cents a share. The company is a consistent dividend raiser, having done so for more than 30 consecutive years. (To learn more about the importance of dividends, read Dividends Still Look Good After All These Years.)

Abbott, best known for its heart stents used to unblock arteries, is also a pharmaceuticals maker, so it does square off against the likes of Pfizer (NYSE:PFE) and Merck (NYSE:MRK). Regardless of how you think of Abbott's business lines, think of it as a superior investment compared to other big pharma plays. Wall Street sure does, as some followers of the stock expect 40% upside in the coming years, a truly exceptional number for a reliable dividend payer and a defensive play like Abbott.

Backing Baxter
Baxter is less than half the size of Abbott by market value, but it is still a force in the medical device arena and worth a gander for your portfolio. Trading at 18 times trailing 12-month earnings and offering a 1.8% dividend yield, some analysts believe the pop to $65 a share from the current level of $57 is possible in the coming months.

Baxter's products are used in the treatment of diseases such as cancer and haemophilia, but the company is becoming known to investors for its rapid profit and sales growth, return on equity, and expanding profit margins. The company said earlier this month that per share earnings for the fourth quarter rose 23% on a revenue increase of 4%. The results are in part fortified by Baxter's position as the world's largest provider of blood plasma products.

Baxter currently trades at less than six times book value and sports over $1 billion in free cash, a key measure of a company's financial health, especially in uncertain economic times.

Hearts for Investors?
St. Jude Medical is a dominant player in the cardiovascular health space. Though it is the smallest of the companies highlighted here with a market cap just south of $13 billion, which should not be a red flag for investors. Like its larger rivals, St. Jude's shares have held up fairly well in the past year and look poised to thrive in a better market environment.

An aging population across the globe could be a boon for St. Jude and its consistent sales growth should be the same for its share price. The company along with rivals Abbott and Medtronic (NYSE:MDT) has been mentioned as a possible buyer of competitors in what is expected to be a consolidating industry.

In an encouraging sign for potential shareholders, Standard & Poor's Ratings Service last week upgraded its outlook for St. Jude to "positive" from "stable," citing solid performance during the recession and stabilization in key markets.

Bottom Line
The medical device sector certainly has proved to be anomaly in the current market and that's a good thing. There are opportunities abound for investors, but this is one time when bigger may prove to be better. Abbott's position as the proverbial 800 pound gorilla in the medical device room is undeniable as are its abilities to churn out consistent profits and dividends. Don't bet against this winner.

Healthcare is one of many sectors that do well during times of economic downturn. For other ideas of recession proof stocks, read Industries That Thrive On Recession.

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