By Sam Stovall
New this week to the -- the list of industries with top Standard & Poor's Relative Strength rankings -- are companies that make health-care equipment. This group has outpaced the broader market recently, with the S&P health-care equipment subindustry index gaining 2% year-to-date through Mar. 7, vs. a 4.6% decline in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600). In 2002, the subindustry index declined 13.4%, compared to the 1500's 22.5% drop.
Robert Gold, who heads S&P's health-care analytical group and follows stocks of medical-device outfits, is bullish on the industry. He believes that it will benefit from new product introductions in cardiology, orthopedics, oncology, and specialized surgical markets.
Gold says a declining U.S. dollar will help the industry's exports. At current rates, most globally exposed device makers expect to see a 2% to 3% revenue boost from foreign exchange in 2003, although the impact on earnings per share will be muted by currency-hedging activities. Investor psychology toward the group should also benefit from favorable comparisons with the market's more economically sensitive areas.
According to Gold's estimates, the group's sales advanced a solid 13% in 2002. His 2003 revenue outlook is even more bullish. Gold sees revenues gaining about 15% to 16%, driven by the expected launch of drug-coated coronary stents. These metal tubes or coils are permanently deployed at a blockage in the coronary artery in angioplasty procedures, and the drug coating should help prevent restenosis (the reclosure of arteries following angioplasty). This could lead to an approximate doubling of the coronary-stent market to about $4.5 billion to $5 billion by yearend 2004, says Gold.
He also expects continued accelerated demand for implantable defibrillators, rising orthopedic sales, and growing use of elective procedures such as plastic surgery.
In orthopedics, Gold thinks demand for hip, knee, and shoulder replacements should stay strong, reflecting favorable global demographics and technological innovation. Rising Medicare reimbursements are an added positive for the group. Another compelling segment, notes Gold, is spinal repair, which is growing at about 25% annually. He believes that many of the orthopedic pure plays represent attractive acquisition targets, and expects consolidation in coming years.
Other positive long-term fundamentals include expanding global demand for quality health care, an aging population, and rising research and development outlays that should lead to a steady flow of new diagnostic and therapeutic products in fields such as cardiology, orthopedics, and surgery. Niche outfits focusing on successful specialty products, particularly in the high-tech segment, should outperform the industry average. Gold anticipates that pressures to reduce health-care costs both in the U.S. and abroad will lead to some industry consolidation.
Gold's top picks in the group include Boston Scientific (BSX ), Medtronic (MDT ), and Varian Medical (VAR ), each ranked 5 STARS (buy). He also likes Biomet (BMET ), St. Jude Medical (STJ ), Stryker (SYK ), and Zimmer (ZMH ), each of which carries a 4-STAR (accumulate) ranking.
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 116 industries in the S&P 1500) as of March 7, 2003.
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief investment strategist for Standard & Poor's