October 18, 2022 | 6:05 PM by Fahad Khalid | fkhalid@jaguaranalytics.com

A New Leadership is Emerging

Last week in webinar on October 11th (see HERE), I mentioned to Jags I was buying five stocks for long term in my kids accounts. Stocks that I believe are unfairly beaten to the point that their enterprise value currently is pricing-in more than just recession risk. One of those five stocks is Intuitive Surgical (ISRG) which tonight reported a fabulous quarter with clean beat on top and bottom line and procedural growth of +20% YoY. Stock is guided higher +13% after hours tonight.

Yesterday in chat room, one of Jag’s clients named Mike A., asked about med-tech sector. Here are our thoughts:

Med-Tech (IHI) We believe this Q3 earnings season in Oct-Nov period should be a positive step in rebuilding confidence in med-tech space that has been hurt by 2 years of pandemic disruption, hospital capex cuts, nursing cost inflation and overall just poor market sentiment. Tonight’s ISRG strong earnings report is confirming our bias and we believe the group as a whole will start to gradually rebuild momentum. Here are direct quotes from CEO’s of large cap med-tech companies collected from their presentations in various conferences through out in 3Q22. They all have one thing in common: Environment stabilizing.

Stryker (SYK) CEO: We’re seeing good improvement in procedure volumes getting better. I think hospitals are getting better at sort of managing some of their new staffing realities and being more efficient about how they’re running their ORs, sterile processing, everything that supports that. – I know a lot of people have commented on cycle elongation. I mean we haven’t really felt that yet. We’re still seeing really good order uptake. And then if you want to flip to the cost side of things, I do think that things are less worse.”

Baxter (BAX) CEO: “Generally speaking, is we are seeing sort of stable to improving levels in many of these areas. Now it’s important to note, first of all, we don’t give guidance updates during the quarter. And second, a lot of the benefits that I’m referring to would accrue more to the end of the fourth quarter or the first quarter of next year due to the rollout periods that we’re faced with. I would just say that the environment has been stable to somewhat improving.

Becton Dickinson (BDX) CEO: “I think we certainly see some stabilization. We certainly don’t see continued escalating inflation, and we see some pockets in areas like shipping, obviously, in oil, transportation, oil-related costs starting to head down a bit. Labor inflation, we don’t certainly see that changing, really not reversing at all, and we continue to see tight labor markets, certainly in the U.S., not so much in most of the rest of the world. …I would say we see pockets of generally improving situations in the supply chain but with certainly ongoing pockets of flare-ups.”

Medtronics (MDT) CEO: “So in terms of macro headwinds, obviously, we have several. But in general, I see many of them getting better. I’ll start with our supply chain challenges, which have been the biggest impact for us at least in our Q4 and Q1. And we expect those supply chain challenges to get better sequentially as we move through the year. Particularly in our Surgical Innovations business, mostly from a resin shortage and packaging tray, sterile packaging tray shortage, we expect that acuteness to get a lot better as we exit the second quarter.

Boston Scientific (BSX) CEO: “So on the macro side, we haven’t signed the staffing piece. I guess it hasn’t gotten worse. It hasn’t gotten much better, I would say, but it may be stabilized. There’s still a big staffing challenges and hospitals continue to do a remarkable job… In terms of other matters, some of the fuel price and the shipping have stabilized and got a little bit better. We’re still seeing a lot of challenges with the cost of our products that make up our manufacturing footprint.”

Intuitive Surgical (ISRG) CEO: “So capital placements in Q2 in Europe grew 24% year-over-year. Procedure growth was where we expect it to be. Procedure growth in Europe has and was accretive to global procedure growth. So there’s no slowdown that we have seen so far. It’s really just what you read in the news with respect to where inflation might go, the impact of energy in Europe and how that may have a derivative impact on both the economy and/or our business.”

I often tweet that it pays to do fundamental research. There are no charts here in this post. I am not flagging any unusual option activities. Jag’s core research is always driven by focusing on leading incoming data, such as mid-quarter management presentations, channel checks, survey findings, spending trends, etc. It’s just boring fundamental work, how we typically do things in Jag and come out on the winning side with confidence. These CEOs are hinting that business is improving. Tonight’s solid ISRG earnings report confirms this view and it may set the sector in motion as other companies join after their earnings in coming weeks. Next thing you know, investors sentiment is improving in Med-tech, a sector that has been rocked by 2 years of disruptions, but also filled with cutting edge breakthroughs and provides a perfect balance between growth and value.

Cheers to Jag clients who bought ISRG common and call options along side with me last week at $185/share. Giddy up!

Fahad

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