Second Quarter Solid in Medical

Data indicates growing capital spending by medical manufacturers through 2018.

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Gardner Intelligence’s review of the medical industry using its proprietary data—and the second-quarter 2018 financial filings of nearly 70 publicly traded medical firms—reveals an industry experiencing growth in revenues, earnings, free cash flow and capital expenditures. The latest quarterly results signal a slight increase in the growth rate of capital expenditures. The most significant financial improvement in the industry is in earnings growth, which turned positive during the second quarter after contracting during the preceding two quarters. (All quarterly results are calculated based on the trailing twelve months. Comparisons between two quarters one year apart represents a 12/12 rate of change.)

Growth of capital expenditures, which include spending on manufacturing and equipment, increased from 2.8% at the end of the first quarter of 2018 to 3.7% by the end of the second quarter. This reverses the slowing growth trend in capital expenditures that began after capital-spending growth reached a peak of over 17%  in the first half of 2017.  An analysis of quarterly data between the fourth quarter of 2014 and second quarter of Q2018 indicates a statistically significant relationship between revenue change during a given quarter and a subsequent change in capital expenditure two quarters later. From this simple linear regression analysis,  which considers no other factors, and assuming an accurate forecast of revenues based on the consensus Wall Street forecast, this model would predict capital-spending growth of 11.3% during 2018, followed by slowing growth of 6.6% in 2019.

Data from the Gardner Business Index from manufacturers supplying the medical industry is consistent with Wall Street’s near-term optimism. According to Gardner’s survey data in the year-to-date period ending in August, manufacturers serving the medical industry have experienced strong growth in new orders, production and, more recently, supplier deliveries. 

Several of the business components that constitute the Index have experienced unusually long periods of continuous expansion, including backlogs and exports. Backlogs have continued to expand every month since July 2017, representing the longest continuous stretch of medical manufacturing backlog expansion in recorded history. Similarly, one would have to go back to 2012 to find a stretch of time during which medical manufacturing exports expanded for more than eight consecutive months. Ongoing expansion in new orders and production, along with many months of growing backlogs, suggests that manufacturers are highly likely to close out 2018 in very good condition.

 

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