Health Care Equipment

The S&P health care equipment index has underperformed alongside most other long-duration sectors, but the share price ratio has reached a point where buying interest should emerge. Sales have been running at a healthy double-digit clip, and new order growth remains firm, providing conviction that the outlook remains bright. Even exports are contributing positively, despite the high level of the U.S. dollar. The IFO survey of German medical equipment demand suggests that a solid undercurrent of foreign uptake exists. The recent contraction in valuation multiples suggests that sales are expected to disappoint in the coming year, an outlook that appears overly cautious, especially within the context of the nascent improvement in industry return on equity. We reiterate our overweight allocation. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, DHR, SYK, BDX, BSX, BAX, ISRG, EW, STJ, ZBH, BCR, HOLX, VAR. Buy Weakness In Health Care Equipment Buy Weakness In Health Care Equipment

The previous Insight showed that top-line growth for medical equipment companies was accelerating. It is notable that manufacturers' inventories of medical supplies are contracting at their steepest rate since 2009, which bodes well for factory utilization and pricing power. Moreover, medical equipment wage inflation has turned sharply lower. Higher sales, rising backlogs and a lack of cost inflation imply that there is scope for profit margin expansion. The latter is not factored into valuations, nor earnings growth expectations. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, DHR, BDX, SYK, BSX, ISRG, BAX, ZBH, EW, STJ, BCR, HOLX, VAR. bca.uses_in_2016_09_15_002_c1 bca.uses_in_2016_09_15_002_c1

Health care equipment stocks are pulling back, but this is a correction from overbought levels rather than a trend change. Profit margin prospects remain upbeat. The surge in consumer spending at hospitals has encouraged an expansionist mindset, as highlighted by the surge in health care facility construction activity. The latter is highly correlated with medical equipment new orders, as a larger footprint will add to the volume of procedures performed over and above the increase from faster health care spending. Importantly, revenue gains also reflect global factors. U.S. medical equipment exports are set to return to a growth track, based on the upbeat message from the German IFO survey of medical equipment demand. Wage inflation is also in retreat, please see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, DHR, BDX, SYK, BSX, ISRG, BAX, ZBH, EW, STJ, BCR, HOLX, VAR. bca.uses_in_2016_09_15_001_c1 bca.uses_in_2016_09_15_001_c1

Health care equipment stocks are overbought relative to the broad market, and a corrective pullback is inevitable. We had been concerned that the latest leg up might represent the final outperformance phase for this group, given rising wage inflation and a cooling in revenue growth indicators, but our conviction in the longevity of the cyclical bull market has been reinforced. Medical equipment demand is accelerating on a number of fronts. Domestic uptake is being driven by a rising number of procedures, as evidenced by double-digit strength in consumer spending at hospitals. That is a sustainable trend given rising income growth and broader health insurance coverage. Medical equipment exports have also reaccelerated. That is notable because it has occurred within the context of a flat, rather than weak, U.S. dollar. The implication is that demand from abroad is also on the upswing, as confirmed by the surge in the German IFO survey of medical equipment orders. As a result, backlogs should continue to build, ensuring that output growth stays on a solid footing. We recommend staying overweight. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, SYK, BDX, BSX, BAX, ISRG, EW, STJ, ZBH, BCR, VAR. Health Care Equipment: Correction, But No Trend Change Health Care Equipment: Correction, But No Trend Change

Shift to a small vs. large cap bias as a stealth way to play the overall equity market overshoot. The oversold bounce in banks is not worth chasing, and buy dips in medical equipment stocks.

A spate of mergers in the medical equipment space has helped propel relative performance to new cyclical highs. In our latest update, we noted our expectation for another upleg, but some niggling concerns about the future revenue outlook caused us to put the group on downgrade alert. However, recent data are supportive of a continuation of the uptrend. The medical equipment shipments-to-inventory ratio is trending steadily higher. Importantly, investment in medical equipment has reaccelerated, as has new health care facility construction. That bodes well for future equipment demand, and should keep factories operating at optimal rates. Consequently, we recommend maintaining overweight positions for a while longer, especially since value is not problematic. The ticker symbols for the stocks in this index are: BLBG: S5HCEP - MDT, ABT, SYK, BDX, BSX, BAX, ISRG, EW, STJ, ZBH, BCR, HOLX, VAR. Health Care Equipment Gets A New Lease On Life Health Care Equipment Gets A New Lease On Life

Equities are back in overshoot territory. We added the health care sector to our high-conviction overweight list, boosted managed care to overweight and put health care equipment on downgrade alert. Buy cable stocks.