Wall Street rose this week so far, boosted by Tesla, Nvidia and other big growth stocks. The reason was a lower-than-expected number of job openings in July, which suggested that the U.S. Federal Reserve might not raise interest rates soon.
The S&P 500 and Nasdaq reached their highest levels in more than two weeks after the Labor Department reported that there were 8.827 million job openings in July, down for the third month in a row. This indicated that the labor market was cooling down and easing inflation pressures.
Meanwhile, lack of hawkish surprises in comments by Fed Chair Jerome Powell at the Jackson Hole symposium last week buoyed stocks. The yield on the 10-year Treasury note fell to 4.11%, while the two-year note yield dropped below 5%. Interest rate futures also showed that investors were betting that the Fed would keep rates unchanged at its September meeting and had a more than 50% chance of doing so until November, per a Reuters article.
Impact of Interest Rates on Medtech Industry
The healthcare industry and medical device companies are not immune to the effects of interest rates.
First, cost and availability of finances are affected by interest rates, making new equipment purchases, facility investments, research, development and acquisitions more expensive, all of which negatively impact healthcare providers and medical device manufacturers. Conversely, lower interest rates make borrowing more economical and convenient, leading to more investment and innovation in the healthcare industry.
Second, higher interest rates may lower the demand for medical resources and healthcare services, as consumers may save more and spend less. This may affect the demand for medical equipment and optional healthcare services that are not covered by insurance or government programs. Lower interest rates may have the opposite effect, as consumers may have more money and spend additionally on healthcare services and elective medical equipment that improve health and lifestyle.
Lastly, higher interest rates lower the present value of healthcare companies’ future cash flows, which may reduce their stock prices and market value. Higher interest rates also make healthcare stocks less attractive, as investors may prefer other assets with higher returns. Lower interest rates have the opposite effect, as they increase the present value of healthcare companies’ future cash flows, which may boost their stock prices and market value. Lower interest rates also make healthcare stocks more appealing, as investors may choose them over other assets with lower returns.
Here we provide three medical device stocks — HCA Healthcare HCA, Alcon Inc. ALC & Select Medical SEM — which are likely to benefit from rate hike pause as it will lower interest expense, provide better financing options for capex for businesses as well as for customers to purchase equipment, and improve present value of cash flows.
These stocks currently carry a Zacks Rank #2 (Buy) each, which makes them an attractive bet for investors.
HCA Healthcare is the largest non-governmental operator of acute care hospitals in the United States. Its leverage (total debt-to-total capital) of 98.8% is higher than the industry’s average of 94%. As of Jun 30, 2023, the company had short-term debt of $2.4 billion, way higher than $862 million of cash and cash equivalents on the balance sheet. A high debt level induces a rise in interest expenses that has increased nearly 19% since the beginning of rate hikes in March 2022. With a potential pause in interest rate hikes, the company will likely see a stabilization in its interest expenses, removing a headwind for earnings.
Earnings per share (EPS) are predicted in the range of $17.70-$18.90 in 2023, the midpoint of which implies 8.3% growth from the 2022 figure. The Zacks Consensus Estimate for earnings in 2023 and 2024 improved 0.9% and 1%, respectively, in the past 30 days. The company delivered an average earnings surprise of 5.42% in the last four quarters. It carries a favorable VGM score of ‘A’.
Alcon Inc. researches, develops, manufactures, distributes and sells a full suite of eye care products. Its leverage (total debt-to-total capital) of 19% is lower than the industry’s average of 30.8%. As of Jun 30, 2023, the company had short-term debt of $100 million. Although the company has a moderate debt level, the company’s interest expenses have gained more than 65% since March 2022. If interest rate hikes stop, the company’s interest expenses may not change, which may aid its earnings.
EPS is predicted in the band of $2.55-$2.65 in 2023, indicating growth of 6-8% at CER from the 2022 level. The Zacks Consensus Estimate for earnings in 2023 and 2024 improved 3.4% and 2%, respectively, in the past 30 days. The company delivered an average earnings surprise of 8.03% in the last four quarters. It carries a favorable VGM score of ‘B’.
Select Medical is a healthcare company that owns long term acute care and inpatient rehabilitation hospitals, as well as occupational health and physical therapy clinics. Its leverage (total debt-to-total capital) of 71.6% is higher than the industry’s average of 40.7%. As of Jun 30, 2023, the company had short-term debt of $89 million and long-term debt of $3.7 billion on its balance sheet. A high debt level induces a rise in interest expenses that have risen more than 36% since the beginning of rate hikes in March 2022. With a potential pause in interest rate hikes, the company will likely see a stabilization in its interest expenses, removing a headwind for earnings.
EPS is estimated in the range of $1.86-$2.03 in 2023, the midpoint of which implies of 58.1% at CER from the 2022 level. The Zacks Consensus Estimate for earnings in 2023 and 2024 improved 2.1% and 1.7%, respectively, in the past 30 days. The company’s earnings missed estimates in two of the trailing four quarters, beat the same in one and met in another, delivering an average negative surprise of 8.56%. The company carries a favorable VGM score of ‘A’.
Alcon (ALC): Free Stock Analysis Report
This article originally appeared on Zacks
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