3 Medical Device Stocks to Buy Right Now

NEW YORK (TheStreet) -- With the Supreme Court set to decide the fate of Affordable Health Care Act in June 2015, we decided to look at the medical devices industry, which has been an above-trend growing sector generating substantial exports for the economy.

As a sector, it has been growing at 5% per year from 1997 to 2013, compared to 4% for the rest of the economy. The largest component, surgical appliance and supplies manufacturing, grew at 6%, and ophthalmic goods manufacturing grew at 8% per year in the same period. Moreover, the sector is considered recession-proof, as customers don't tend to buy fewer medical supplies during economic downturns.

So what are the best health care equipment companies investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Check out which health care equipment companies made the list. And when you're done, be sure to read about which biotech companies to buy now. Year-to-date returns are based on May 22, 2015, closing prices. The highest-rated stock appears last.

STJ ChartSTJ data by YCharts
3. St. Jude Medical, Inc. (STJ)

Rating: A

Market Cap: $21 billion
Year-to-date return: 14.2%

St. Jude Medical, Inc., together with its subsidiaries, develops, manufactures and distributes cardiovascular medical devices for cardiac rhythm management, cardiovascular, and atrial fibrillation therapy areas worldwide.

"We rate ST JUDE MEDICAL INC (STJ) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, notable return on equity, reasonable valuation levels and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • ST JUDE MEDICAL INC has improved earnings per share by 5.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ST JUDE MEDICAL INC increased its bottom line by earning $3.45 versus $2.50 in the prior year. This year, the market expects an improvement in earnings ($3.95 versus $3.45).
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Health Care Equipment & Supplies industry and the overall market, ST JUDE MEDICAL INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • The debt-to-equity ratio is somewhat low, currently at 0.91, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Despite the fact that STJ's debt-to-equity ratio is low, the quick ratio, which is currently 0.69, displays a potential problem in covering short-term cash needs.

MDT ChartMDT data by YCharts
2. Medtronic plc (MDT)

Rating: A

Market Cap: $111 billion
Year-to-date return: 7.8%

Medtronic plc, a healthcare solutions company, provides medical technologies, services, and solutions worldwide. It operates through three segments: Cardiac and Vascular Group, Restorative Therapies Group, and Diabetes Group.

"We rate MEDTRONIC PLC (MDT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, solid stock price performance, good cash flow from operations and growth in earnings per share. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MDT's revenue growth has slightly outpaced the industry average of 0.6%. Since the same quarter one year prior, revenues slightly increased by 3.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Powered by its strong earnings growth of 30.66% and other important driving factors, this stock has surged by 25.73% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MDT should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • Net operating cash flow has slightly increased to $1,767.00 million or 9.61% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -10.82%.
  • MEDTRONIC PLC has improved earnings per share by 30.7% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MEDTRONIC PLC reported lower earnings of $3.01 versus $3.38 in the prior year. This year, the market expects an improvement in earnings ($4.39 versus $3.01).

TFX ChartTFX data by YCharts
1. Teleflex Incorporated (TFX)

Rating: A+

Market Cap: $5.4 billion
Year-to-date return: 13%

Teleflex Incorporated designs, develops, manufactures, and supplies single-use medical devices for common diagnostic and therapeutic procedures in critical care and surgical applications worldwide.

"We rate TELEFLEX INC (TFX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, reasonable valuation levels, good cash flow from operations and expanding profit margins. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • TELEFLEX INC has improved earnings per share by 7.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, TELEFLEX INC increased its bottom line by earning $4.09 versus $3.46 in the prior year. This year, the market expects an improvement in earnings ($6.25 versus $4.09).
  • Net operating cash flow has increased to $41.23 million or 27.12% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -10.82%.
  • The gross profit margin for TELEFLEX INC is rather high; currently it is at 57.56%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, TFX's net profit margin of 8.93% significantly trails the industry average.

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