Many of the diversified companies in the medical device sector are favored over some of the sector-specific names due to their position to be able to expand operating margins on a fundamental basis without needing the broader markets’ pickup, says Joanne K. Wuensch, Research Analyst at BMO Capital Markets Corp.
“Also, because of their diversified nature, they are buffered in many ways from a lot of the pressures in hips and knees, spine, ICDs and devices of that nature,” she said. “Finally, they have been relatively resilient to price pressure given that they don’t have high ASP products, which as one executive said to me: Doesn’t put a bull’s eye on their products.”
Wuensch recommends Covidien plc (COV) because it has diversified its medical technology portfolio. She says COV is currently in position to spin out its pharmaceutical division, which should increase the company’s revenue growth rate and expand operating margins.
“With Covidien, I think that they truly get what the business model is and that it’s changed at the hospital level,” Wuensch said. “Since four years ago, when they were spun out from Tyco, they’ve done an excellent job of selling off noncore businesses, making acquisitions and returning 25% to 40% of free cash flow to shareholders.”
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