After facing a decline in sales upon the postponement of elective surgeries during the pandemic, the medical devices industry witnessed a rebound in demand last year upon solid progress on the vaccination front and growing demand for critical surgical procedures. This, along with continued product innovations, integration of new technologies for enhanced precision and accuracy, and robotic assistance in operating rooms, positions the industry well for solid long-term growth.
Investors’ interest in this space is evident from the iShares U.S. Medical Devices ETF’s (IHI) 7.8% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 5.5% returns. The global medical devices market is expected to grow at a 5.4% CAGR to reach $657.98 billion by 2028.
Intuitive Surgical, Inc. (ISRG) and Medtronic plc (MDT) are two prominent players in the medical devices manufacturing industry. ISRG designs, manufactures, and markets primarily the da Vinci surgical system and Ion endoluminal system and related instruments and accessories for invasive surgery worldwide. Ireland-based MDT develops therapeutic and diagnostic medical products and technology and sells them to hospitals, physicians, clinicians, and patients worldwide. The company operates through four segments: Cardiovascular; Neuroscience; Medical Surgical; and Diabetes.
While ISRG lost 20% year-to-date, MDT is up 6.8%. Which of these stocks is a better pick now? Let’s find out.
Latest Developments
On December 15, 2021, the U.S. Food & Drug Administration (FDA) cleared ISRG’s fully wristed, 8 mm SureForm 30 Curved-Tip Stapler and reloads (gray, white, and blue) for use in general, thoracic, gynecologic, urologic, and pediatric surgery. With a 120-degree cone of wristed articulation and a curved tip, this stapler allows different angles for surgeons to approach patient anatomy and provide better visibility during stapling procedures.
On March 9, 2022, MDT entered into a contract with Vizient, Inc., the nation's largest healthcare performance improvement company, to add Touch Surgery Enterprise, the first AI-powered surgical video management and analytics platform for the operating room (OR), to Vizient's offerings. Touch Surgery Enterprise offers a fully integrated hardware and software system connected to the cloud, simplifies the process of recording, analyzing, and sharing surgical video, and works easily with many laparoscopic and robotic scopes, enabling hospitals to digitize their OR while leveraging existing equipment. This should witness high demand in the coming months.
Recent Financial Results
ISRG’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 $1.09 billion for the quarter, up 17.4% from the prior-year period. Its non-GAAP income from operations came in at $587.90 million, indicating a 9.8% rise from the prior-year period. While its non-GAAP net income increased 9.8% year-over-year to $476.50 million, its non-GAAP EPS grew 9.2% to $1.30. As of December 31, 2021, the company had $8.62 billion in cash, cash equivalents, and investments.
For its fiscal 2022 third quarter ended January 28, 2022, MDT’s net sales decreased marginally from the prior-year period to $7.76 billion. The company’s non-GAAP operating profit came in at $2.18 billion, indicating a 5.5% rise from the year-ago period. MDT’s non-GAAP net income increased 5.3% year-over-year to $1.85 billion. Its non-GAAP EPS came in at $1.37, indicating a 6.2% year-over-year improvement. The company had $3.48 billion in cash and cash equivalents as of January 28, 2022.
Past and Expected Financial Performance
Over the past three years, ISRG’s revenue, EPS, and total assets have increased at CAGRs of 15.3%, 13.8%, and 20%, respectively.
ISRG’s EPS is expected to grow 0.8% year-over-year in fiscal 2022, ending December 31, 2022, and 18.2% in fiscal 2023. Its revenue is expected to grow 11.2% in fiscal 2022 and 13.4% in fiscal 2023. Analysts expect the company’s EPS to grow at a 19.1% rate per annum over the next five years.
MDT’s revenue, EPS, and total assets have increased at CAGRs of 1.3%, 0.8%, and 1.1%, respectively, over the past three years.
Analysts expect MDT’s EPS to grow 27.5% year-over-year in fiscal 2022, ending April 30, 2022, and 3% in fiscal 2023. Its revenue is expected to grow 6.4% year-over-year in fiscal 2022 and 4.1% in fiscal 2023. Analysts expect the company’s EPS to grow at a 12.2% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, ISRG is currently trading at 4.22x, 124.5% higher than MDT’s 1.88x. In terms of forward EV/Sales, MDT’s 5.06x compares with ISRG’s 15.09x.
Profitability
MDT’s trailing-12-month revenue is almost 5.6 times ISRG’s. However, ISRG is more profitable, with a 69.3% gross profit margin versus MDT’s 68.3%.
Furthermore, ISRG’s ROE, ROA, and ROTC of 15.9%, 9.2%, and 10.4% compare with MDT’s 9.5%, 4.6%, and 5.4%, respectively.
POWR Ratings
While MDT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ISRG has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
MDT has a B grade for Value, reflecting its lower-than-industry valuation ratios. MDT’s 4.62x forward Price/Sales is 11.3% lower than the 5.21x industry average. ISRG’s D grade for Value is in sync with its overvaluations. ISRG has a 16.15x forward Price/Sales, 210.1% higher than the industry average of 5.21x.
MDT has a B grade for Stability, consistent with its lower volatility compared to the broader market. MDT has a 0.75 beta. ISRG’s C grade for Stability is in sync with its slightly higher volatility. ISRG has a 1.17 beta.
Of the 159 stocks in the Medical - Devices & Equipment industry, MDT is ranked #16, while ISRG is ranked #82.
Beyond what we have stated above, our POWR Ratings system has also rated MDT and ISRG for Stability, Momentum, Sentiment, and Growth. Get all MDT ratings here. Also, click here to see the additional POWR Ratings for ISRG.
The Winner
Integration of the latest technologies in medical devices and rising demand from the aging population should benefit both MDT and ISRG. However, a lower valuation makes MDT 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 Food Makers industry.
ISRG shares were unchanged in after-hours trading Thursday. Year-to-date, ISRG has declined -22.15%, versus a -7.54% 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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