Growth Continues in Medical Market

Free cash-flow improvement exceeds reduction in capital expenditures, signaling continued medical industry growth.

The medical market continues to perform well, despite a myriad of economic concerns, both domestic and international. This is based on Gardner Intelligence’s review of 67 publicly traded firms in the medical-devices and medical-instruments and supply industries, in which we evaluated fourth-quarter data from one year ago, as well as on a 12/12 rate-of-change basis (comparing the last 12 months with the preceding 12 months).

In fact, top-line revenue growth was more than double overall U.S. economic growth. Among the firms analyzed (roughly 40% of the 67 firms had reported fourth-quarter data at press time), the average year-on-year fourth-quarter revenue growth was nearly 9%, and the median was 6%. This is more than double the expected rate of overall U.S. economic growth for that quarter of 2.4%.

During the fourth quarter of 2018, our sample of firms experienced strong free cash-flow growth, raising the 12/12 rate of change to 15%. An examination of individual corporate results indicates that the median 12/12 rate of change was slightly less than 7%. Total free cash held by the industry firms in our research sank to the most recent low during the third quarter of 2017; but they reversed course and have since increased quarterly free cash flows, culminating in a multi-year high at the end of 2018.

Part of the explanation for the fourth-quarter growth in free cash flow is attributable to a simultaneous reduction in capital expenditures. Free cash flow, in its simplest calculation, is defined as cash flow from operating activities less capital expenditures. Of the $1 billion increase in free cash flow among the firms Gardner Intelligence studied, the reduction in capital expenditures accounted for approximately 20% of the change. In the fourth quarter, the average firm increased its capital expenditure 0.4% from the same quarter a year ago—a 3/12 rate of change—while the median result for the same time period was a 1.6% contraction. This fourth-quarter investment behavior belies the encouraging capital-expenditure growth experienced earlier in 2018.

That current and projected revenue growth are both well above overall economic growth levels should give suppliers to the industry reason for hope. Retained cash generated in recent quarters may quickly be deployed in the future if business sentiment changes.

 

ABOUT THE AUTHOR: Michael Guckes is the chief economist for Gardner Intelligence, a division of Gardner Business Media, Cincinnati. He has performed economic analysis, modeling and forecasting work for nearly 20 years among a wide range of industries. Guckes received his BA in political science and economics from Kenyon College and his MBA from The Ohio State University. mguckes@gardnerweb.com.

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