Medical device companies don't have the flash that biotech stocks or other healthcare stocks do. Their profit margins are often tight, and they can appear boring to the average investor.
Beneath that boring exterior, though, can lie companies with strong, predictable growth. Medtronic(NYSE: MDT), one of the largest medical device companies, has increased revenue by 84% over the past decade, while its shares have gone up 63% in that period.
Patterson Companies(NASDAQ: PDCO) and Merit Medical(NASDAQ: MMSI), on the other hand, aren't as well known as Medtronic but are solid medical device companies with a strong record of earnings growth.
I like all three going forward because elective medical procedures, such as hip replacements and knee surgeries, were put off during the COVID-19 pandemic and are now picking up again. That is bad for insurance companies but good for medical device makers. Statista puts the compound annual growth rate at 4.7% for the medical device market over the next five years, growing from about $164 billion in 2023 to nearly $207 billion by 2028.
Patterson is building something
Patterson is one of the leading distributors of dental and animal health products, supplying everything from crowns, dentist drills, and filling materials to animal medications, vaccines, and surgical supplies. Over the past five years, it has increased annual revenue by 16% and annual earnings per share (EPS) by 138%.
The biggest engine for that growth is the company's huge dental catalog, which includes more than 130,000 products. That selection makes Patterson a leading choice, particularly for large dental practices.
The company just reported fourth-quarter and full-year numbers on June 21. In the quarter, the company said it had sales of $1.7 billion, up 5% year over year, and EPS of $0.77, up 18% over the same period last year. Its dental segment saw the biggest growth in sales, up 8% year over year, in the quarter.
Patterson reported revenue of $6.5 billion for fiscal year (FY) 2023, down 0.4%, but EPS at $2.12 was slightly up from $2.06 in FY 2022 driving profit margins slightly higher. For the next fiscal year, the company guided an EPS between $2.14 to $2.24.
Patterson adds to its value with its above-average quarterly dividend. Though it has kept the dividend the same, at $0.26 per share since 2017, the yield is around 3.20%.
Merit Medical isn't afraid of growth through acquisitions
Merit Medical Systems makes disposable medical devices for interventional, diagnostic, and therapeutic procedures in cardiology, radiology, oncology, critical care, and endoscopy, everything from balloon dilators to stents and catheters. It has grown revenue and EPS over the past five years while operating in a very competitive market.
The medical device company raised annual guidance after a strong first quarter, when it reported revenue of $297.6 million, up 8% year over year, and EPS of $0.36, up 50% over the same period last year.
The company frequently has expanded its catalog through acquisitions, including more than 20 since 2009. It announced on June 8 that it had completed its $100 million purchase of the portfolio of dialysis catheter products and the BioSentry Biopsy tract sealant systems from AngioDynamics. It also bought the Surfacer Inside-Out Access catheter system from Bluegrass Vascular Technologies for $32.5 million. The company said it expects both purchases to be accretive to 2024 annual revenue and EPS.
For this year, management expects annual revenue to grow between 7% and 8%, and annual EPS to grow to between $1.49 and $1.57, up between 15% and 22% after the acquisitions.
Medtronic is buoyed by AI, diabetes growth
Medtronic, after a down fiscal 2023 year, seems to see business picking up again. In the company's fourth-quarter earnings report, it reported revenue of $8.5 billion, up 5.6%, thanks to increased sales in the company's cardiovascular, medical-surgical, and neuroscience portfolios, though EPS fell 20% to $0.88 compared to the same quarter a year ago.
Medtronic, in its guidance, said it sees annual fiscal 2024 revenue growing by 4% to 4.5%.
There are a couple of things that should help drive Medtronic's business. The company has been active in artificial intelligence, and it also has increased its offerings in diabetes-care products. That's a smart move as the world sees an increasing number of diabetics, thanks to rising obesity rates and an aging population.
Medtronic came out with the AccuRhythm AI algorithm technology last year. It improves the accuracy of heart rhythm event data from the company's insertable cardiac monitors to help doctors make better decisions in caring for patients with irregular heartbeats.
On the diabetes side, in April, the company received Food and Drug Administration (FDA) clearance for the MiniMed 780G system with a Guardian 4 sensor, providing diabetics with an insulin pump system that includes meal detection technology, which makes automatic adjustments to sugar levels but doesn't require fingersticks.
Furthermore, the company said in May that it is acquiring EOFlow, which makes a wearable disposal insulin delivery device called the EOPatch. The EOPatch should be an excellent complement to the MiniMed 780G system.
Medtronic, like Patterson, has an above-average quarterly dividend, which it has increased for 46 consecutive years, including a 1.5% bump this year to $0.69 per share, equaling a yield of around 3.16%. It has increased the dividend by 146% over the past decade. The company has also been aggressive in stock repurchases.
All said, these three companies seem poised for steady growth, albeit slowly, for the next few years. Investors should consider their stocks in July.
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Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
