Stock Analysis & Ideas

Shortages a Boon for These 2 Medical Device Stocks

Story Highlights

Cost pressures and supply gaps are two issues hurting medical device companies like Baxter International and Abbott Industries presently. However, these also open up the potential for business improvement.

Supply-chain tentacles have held the medical device-making industry in a tight grip. However, this may present upside potential for industry players like Baxter International (NYSE:BAX) and Abbott Labs (NYSE:ABT).

The pandemic saw large numbers of patients deferring key medical and surgical procedures due to the lockdowns and the scare of visiting hospitals, which were the hubs of the virus. Now, medical-device manufacturers are struggling to meet the inflated pent-up demand. The sporadic resurgences of COVID cases in the U.S. have kept up the demand for medical devices as well.

The journey from glut to shortage of medical devices has been accelerated by the supply-chain snarls. Moreover, inflated costs have been making it difficult for companies to procure electronic chips to run the devices, even if they overcame the supply hurdles.

The burgeoning demand and higher costs are forcing medical device makers to raise product prices and look for other sources of supply of raw materials. Although this may look like a problem at first glance, this is exactly where the ray of hope for recovering the profit shrinkages lies.

BAX and ABT are making maximum use of the surging demand and increased prices.

Baxter International (BAX)

Higher demand for acute therapy devices to treat the rise in COVID-19 cases, as well as continuous renal replacement therapies and devices, are driving Baxter’s Acute Therapies business. The company’s robust product portfolio and pipeline of therapies and products are also a positive.

With increases in the prices of medical devices, the company can recover some of the losses till the run lasts. Also, despite being a considerably leveraged company, Baxter has enough cash to finance its short-term obligations.

The company’s shares have declined by 36% this year thus far, and the price-to-sales ratio is hovering around 2%, making the stock potentially attractive to those who have faith in the stock.

Is BAX Stock a Buy, According to Analysts?

Wall Street is cautiously optimistic about BAX stock, with a Moderate Buy rating based on seven Buys, two Holds, and one Sell. The average price target on Baxter stock is $63.50, indicating 15.6% upside potential from current levels.

Abbott Labs (ABT)

One of the most popular products of medical device maker Abbott Labs is its Libre blood-sugar monitoring device. However, Bernstein analyst Lee Hambright pointed out that sales in several emerging markets had been affected due to the company being unable to get the desired volume of semiconductors for first-generation Libre devices.

Nonetheless, Abbott’s FreeStyle Libre exceeded $1 billion in revenues in the third quarter. Moreover, the company also expects supply constraints to moderate over the next couple of months.

Is ABT a Good Stock to Buy, According to Analysts?

Abbott enjoys a Strong Buy consensus rating on Wall Street, based on 10 Buys and three Holds. The stock price is expected to increase by 12% over the next year to arrive at $116.08.

The Takeaway

With every problem, new solutions are discovered. Demand for medical devices is strong, creating upside potential. People will keep needing surgeries, medical procedures, and tests. This can alleviate some of the cost pressures of companies in this field, adding to the upside potential.

Also, older semiconductors are difficult to procure even with eased chip shortages, which is a problem when the demand for older device models is high. To bridge this gap, many companies are investing in R&D to develop the same models with new chips, as newer semiconductors are more abundant.

These will not only help the industry narrow the gap between supply and demand but also lead to improved margins and, subsequently, value recovery.

Disclosure

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