Conmed Stays at Neutral


We are maintaining our Neutral recommendation on Conmed Corporation (CNMD) following its performance in the second-quarter 2012.

Adjusted (excluding one-time expenses) earnings per share improved 23% year over year to 43 cents and revenues rose 3.5% (down 0.4% organically) to $189.7 million. However, both fell short of the Zacks Consensus Estimates.

Revenues grew on the back of solid sales in the Arthroscopy business, while all other businesses partially dampened sales. Conmed also lowered its 2012 guidance based on the softness in the capital equipment market due to global economic headwinds. For 2012, the company expects revenues in the band of $765 million and $775 million while earnings forecast remains in the range of $1.75 to $1.85 per share.

In spite of the downer in the second quarter, we believe that Conmed, through its robust pipeline, is poised to drive its top-line in the years ahead. We are optimistic about the company’s performance going forward, given its recent distribution deal with Musculoskeletal Research Foundation (:MTF), the largest tissue bank in the world, and its acquisition of Massachusetts-based healthcare company Viking Systems.

While the MTF pact is expected to be accretive to Conmed’s earnings for 2012 by roughly 15 cents to 18 cents a share, the takeover of Viking Systems is expected to be accretive to Conmed’s earnings from 2013 onwards.

We derive comfort from the increasing trend of using minimally invasive techniques, as a large percentage of the company’s products are designed for these procedures. Moreover, the initiation of a cash dividend policy reflects positively on its business fundamentals.

However, companies like Johnson & Johnson (JNJ), Medtronic (MDT), Smith & Nephew (SNN) and Stryker Corporation (SYK) with greater resources and larger research and development budgets, pose significant competitive pressure. Further, the shift in hospital capital spending is bound to act as a drag on Conmed’s results in the near-term.

Conmed’s exposure to pricing pressure, economic softness and volatile fluctuations in foreign currency remain additional challenges. However, foreign exchange movements had no impact on the company’s revenues in the most recent quarter due to its hedging policy.

In the end, we remain on the sidelines despite the positives and watch over Conmed’s multiple. Our Neutral recommendation on the stock is backed by a short-term Zacks #3 Rank (Hold).

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