Piper Jaffray Sees Medtech Fundamentals Improving and Sector Underowned (BSX) (MDT) (PODD) (SPNC)
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Piper Jaffray Med Tech analyst Brooks West issued a 2nd-half outlook for the sector, where he sees fundamentals improving and the sector underowned. West has three primary conclusions: 1) despite the run in large cap medtech the group is still largely underowned by generalist fund managers while presenting an investment profile unmatched in the last decade; 2) market fundamentals (in terms of procedure volumes) and company fundamentals (in terms of organic growth and leverage opportunities) continue to improve; and 3) the “Cash, Cliffs and Consolidation” dynamic described in their January 4, 2016 Outlook note appears to be in its early stages driven by continued gaps in large cap product portfolios and low global interest rates (both an incentive for deals and penalty for holding cash).
West started the year with BSX & EW as top picks in large cap, LIVN & TFX in mid cap, and SPNC in small cap. Collectively this group is up an average of 20.4% through June 30 vs 10.7% for the IHI medtech index, and -0.5% for the broader XLV healthcare index (2.7% for the broader S&P). Looking forward they are shifting to MDT & BSX as their top picks in large cap (with multiple reversion story MDT our top pick overall), PODD in mid cap, and sticking with SPNC in small cap (as the stock has major 2H catalysts despite a significant run in the 1H). Honorable mentions include BSX & EW in large cap and CRY in small cap.
The analyst also sees the combination of still reasonable small cap valuations with strong large cap balance sheets (and a low interest rate environment) will push the consolidation trend in the sector further.
The firm raised price targets on a handful of stocks in the sector:
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