A number of medical device companies tend to have lower P/E multiples than where ArthroCare is trading. Medtronic, Inc. (NYSE:MDT) and Stryker Corporation (NYSE:SYK), for example, have trailing earnings multiples in the teens. These companies are also expected to grow their earnings in 2013. As our reading of ArthroCare is that its recent growth in net income is the result of more or less one-time events a year ago, we don’t expect its growth rate to be sustainable (particularly since revenue growth has been limited). As a result these two larger companies look like better values. Intuitive Surgical, Inc. (NASDAQ:IRSG) is priced higher- it carries trailing and forward P/E multiples of 34 and 30, respectively- but that company has been more of a growth player in the industry with revenue and earnings rising at least 20% in the third quarter versus a year earlier.
Of course, these three companies are much larger in terms of market cap than ArthroCare, so it’s also useful to consider orthopedic medical device company Wright Medical Group, Inc. (NASDAQ:WMGI). Wright’s profits are low, both on a trailing basis and in terms of consensus for 2013, and its sales have actually been slipping. Despite this, the stock is up 41% in the last year. At first glance it doesn’t seem like a good stock to buy, and there’s considerable short interest in the company as well.
It’s interesting that SAC is buying ArthroCare. However, we think that larger medical device companies such as Medtronic and Stryker are not only larger and safer businesses to invest in, they also trade at a considerable discount to ArthroCare’s pricing on a forward earnings basis. With little growth advantage at the smaller company, we’d avoid following Cohen and his team here.