Top 3 MedTech Stocks, Poised to Gain on Earnings

The medical devices industry, once acclaimed for its high-paying jobs and research and development opportunities, has been facing the threat of both the 2.3% medical device excise tax since its enactment in the beginning of 2013 and sequestration-related spending cuts to the U.S. federal budget. In fact, these factors have significantly restricted the industry’s bottom-line improvement this past year.

To make matters worse, this year, more spending cuts are expected to come into effect which will last through 2021. The medical devices spending cut, if not repealed, may take a grave turn in 2014, leading to serious consequences like delaying progress in medical breakthroughs, deterioration in job creation, and tempering of economic growth.

The imposition of medical device excise tax as part of the Obamacare roll-out is taking a heavy toll on the medical devices sector, hurting pricing decisions of participants and subjecting them to tremendous margin pressure.

However, as a ray of hope amid this difficult scenario, National Institutes of Health (:NIH) recently won a $1 billion or 3.5% increase in its fiscal 2014 budget from the previous year’s post-sequestration budget (according to fiscal 2014 Omnibus Appropriations bill released on Jan 13, 2014). As per a recent report published in lexology.com, this hike – although not sufficient – is expected to result in 385 million new grant opportunities for researchers.

Apart from NIH, the National Institutes of Standards and Technology and The National Science Foundation (:NSF) are some others who stand to gain from this bill. The U.S. Food and Drug Administration (:FDA) has also managed a $217 million increase in its 2014 budget over the previous year.

However, things are not at all cheery for the Centers for Medicare and Medicaid Services (CMS). While the bill includes $3.7 billion for the CMS, this was $195 million less than what was enacted in the previous fiscal.

Despite the overall negative sentiment, it might be a good idea to bet on a handful of medical device stocks that are likely to beat earnings estimates this quarter. An earnings beat will translate into rapid price appreciation for these stocks. This will give you above-average return as you are getting these stocks at a cheaper price due to the overall negative sentiment in the sector.

How to Choose the Best?
With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings estimates could appear to be a difficult task, but our proprietary methodology makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Zacks Earnings ESP.

Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.

3 Stocks Set to Beat Earnings

Here are three medical stocks that have the right combination of elements to post an earnings beat this quarter:

Henry Schein Inc. (HSIC), based in Melville, N.Y., is a leading distributor of health care products and services to office-based dental, medical and animal health practitioners, dental laboratories, government as well as institutional health care clinics and other alternate-care sites across the globe. The stock carries a Zacks Rank #1 with an Earnings ESP of +1.44%. The Zacks Consensus Estimate for earnings in the fourth quarter is pegged at $1.39.

Henry Schein delivered positive earnings surprises in three of the last four quarters with an average beat of 1.21%. Based on favorable market dynamics, the company’s animal health and dental business is expected to deliver strong sales. Over the past several quarters, the company has demonstrated consistent growth via both organic and inorganic means.

Henry Schein will be reporting fourth-quarter 2013 earnings on Feb 11.

Cyberonics Inc. (CYBX) is a Zacks Rank #2 stock and has an Earnings ESP of +4.08%. The Zacks Consensus Estimate for the fourth quarter is 49 cents.

Cyberonics is a medical technology company with core expertise in neuromodulation. The company provides Vagus Nerve Stimulation (:VNS) therapy for the treatment of refractory epilepsy and treatment-resistant depression (:TRD). The company has delivered positive earnings surprises in the trailing four quarter.

Cyberonics continued to gain from a solid foothold in the epilepsy market and strong overseas business. Further penetration in the still untapped epilepsy market should also catalyze growth. The company’s lucrative pipeline is another upside.

Cyberonics will be reporting fourth-quarter fiscal 2014 earnings on Feb 20.

DexCom, Inc. (DXCM), based in San Diego, Calif., is a Zacks Rank #2 (Buy) stock with an Earnings ESP of +14.29%. The Zacks Consensus Estimate for the fourth quarter is pegged at a loss of 7 cents.

DexCom, Inc. is a medical device company focused on the design, development and commercialization of continuous glucose monitoring systems. These are designed particularly for ambulatory use for people with diabetes and by healthcare providers for the treatment of diabetic and non-diabetic patients. The company has delivered positive earnings surprises in the training four quarters with an average beat of 17.34%.

The company’s G4 Platinum is expected to do well in the fourth quarter. Increased awareness of the need for continuous glucose monitoring, new products and data supporting blood glucose monitoring should help drive sales.

Dexcom will be reporting fourth-quarter 2013 earnings on Feb 20.

The Bottom Line

In order to sustain the current precarious condition within the MedTech space, key players are trying every possible means to change their business models and cost structures. They are undertaking various restructuring initiatives to counter costs associated with the implementation of the new tax. This renewed focus could result in continued mergers and acquisitions (M&A) and expansion to emerging markets going forward. They are also trying to divest their nonpaying operations in order to weather the tax burden. Nevertheless, you could safely rely on the industry outperformers that still possess earnings strength.

Read the analyst report on HSIC

Read the analyst report on CYBX

Read the analyst report on DXCM


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