Top 4 Medtech Picks From Merrill Lynch

Currently, medical technology, or medtech, is barely outperforming the S&P as health care is struggling despite what is seen as low valuations. Although these valuations are attractive, the backdrop for health care is not as attractive, and Merrill Lynch believes that there are more catalysts needed.

The brokerage firm has some ideas about how to take advantage of this trend going forward, including: Boston Scientific Corp. (NYSE: BSX), Intuitive Surgical Inc. (NASDAQ: ISRG), Medtronic PLC (NYSE: MDT) and Zimmer Biomet Holdings Inc. (NYSE: ZBH).

Merrill Lynch sees two issues having an impact on health care. First is the concern around the U.S. election and the rhetoric on drug prices, and second is the concern that the two major drivers of value creation in health care from 2013 to 2015 are now much less pronounced. According to the firm:

Those drivers of value creation had been improving volumes due to ACA and the improving economy, and a material increase in M&A across multiple healthcare sectors. Offsetting the less favorable macro backdrop are attractive valuations, but in our view, low valuations are not enough to drive stocks in this environment. There needs to be a catalyst.

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The catalyst that Merrill Lynch thinks will drive Boston Scientific higher in 2016 is better-than-expected revenue growth driven by Watchman, among other things. In order to hit consensus, this company’s organic revenue growth in 2016 needs to be around 5.5%. Shares of Boston Scientific ended last week’s trading at $17.93, with a consensus analyst price target of $20.91 and a 52-week trading range of $14.18 to $19.06.

Catalysts for Intuitive Surgical include the upcoming June 6 analyst day for Medtronic. In Merrill Lynch’s view, Medtronic will not provide the kind of detail that the street needs to have conviction that its system is a near-term threat to Intuitive Surgical. Merrill Lynch thinks Medtronic remains 18 to 24 months away from any launch and that the message from the analyst day will be that its system is less of a direct threat than investors think. Shares of Intuitive Surgical were last trading at $583.31, with a consensus price target of $625.82 and a 52-week range of $447.00 to $595.99.

As for Medtronic, the catalyst is viewed as capital allocation. Merrill Lynch expects close to a 25% increase in the dividend in June, and for Medtronic to front end load $5 billion to $7 billion of buyback early in fiscal 2017, which begins in May 2016. Shares of Medtronic closed most recently at $73.97. The stock has a consensus price target of $82.79 and a 52-week range of $55.54 to $79.08.

Merrill Lynch expects Zimmer Biomet’s revenue growth acceleration to approach 2%, which the firm thinks could drive 15% to 20% upside in the stock. The catalyst for Zimmer Biomet is quarterly reports. Its shares closed at $103.74 on Friday. The consensus price target is $120.96, and the 52-week trading range is $88.27 to $119.10.