U.S. Markets open in 8 hrs 13 mins

3 Medical Instruments Stocks Likely to Beat Estimates in Q4

Zacks Equity Research

The Medical Instruments stock earnings are likely to grow on rapid innovation and strong R&D focus in the fourth quarter. Further, rampant M&As and the modernization of 510 (k)-clearance pathway is likely to help the dominant Medical Instruments players gain leverage in the space.

Factors to Drive Q4 Earnings

Emerging Economies: Strong performance of Medical Instruments companies in emerging economies, especially in the Asia/Pacific and Western Europe markets, is likely to fuel fourth-quarter results. These companies are likely to benefit from an expanding customer base, relaxed regulations, cheap skilled labor, increasing wealth and government focus on healthcare infrastructure.

Favorable Tax Reforms: Sector participants are expected to gain from the slashed tax rate to 21% from 35%, dropping the U.S. combined rate from 38.9% to 25.7%. This has aided margin growth and the trend is likely to continue in this quarter.

Also, a bipartisan two-year suspension of a 2.3% excise tax on Medical Instruments and Medical Device manufacturers at the beginning of 2018 has encouraged massive investments in the Medical Instruments sector. Both the developments are expected to boost hiring and investment among U.S.-based Medical Instruments manufacturers.

Modernization of 510 (k): Last November, the FDA attempted to modernize the 510(k)-clearance pathway. For investors’ knowledge, the 510(k) is a premarket submission made by MedTech companies to the FDA to validate a medical device as safe and effective. According to a December article published in Investing News, “the changes are meant to create a safer product for patients while holding companies accountable for any safety discrepancies, all while holding on to the FDA’s gold standard for safety.” This is likely to favorably impact fourth-quarter results to some extent.

Increase in Healthcare Expenditure: Favorable consumer behavior and improving expenditure patterns are likely to benefit Medical Instruments manufacturers in the fourth quarter. It is encouraging to note that the U.S. healthcare expenditures are expected to rise from $3.3 trillion in 2016 to $5.7 trillion in 2026 (Mercer Capital), indicating average annual growth of 5.5%.

This apart, America’s exceptional purchasing power along with solid demand for medical products, medical instruments, medical services and lab equipment has provided the nation a leading position in the global Medical Instruments space.

Factor to Worry About

The U.S.-China trade war has triggered a short-term downtrend in the Medical Instruments sector.

According to a survey conducted by the Medical Imaging & Technology Alliance (“MITA”), tariffs will cost Medical Instruments companies nearly $138 million every year. This might show on Medical Instruments companies’ fourth-quarter results.

For instance, Varian Medical VAR reported first-quarter fiscal 2019 results last month. The company’s revenues were negatively impacted by $8 million due to U.S.-China trade war. Total operating earnings and earnings per share were declined by $11 million. Moreover, the core Oncology segment’s operating earnings declined 10% year over year due to tariffs.

Zacks Methodology

Given the high degree of diversity in the Medical Instruments industry, finding the right stocks with the potential to beat estimates might be quite a daunting task.

However, our proprietary Zacks methodology, makes this routine fairly simple for investors.

Investors can narrow down the choices by focusing on stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that for stocks with this combination, chances of a positive earnings surprise are significantly as high as 70%.

Earnings ESP is our proven methodology for identifying stocks that have high chances of surprising with their next earnings announcement. This key element provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Here we present three stocks that are expected to beat earnings estimates in this reporting cycle.

DexCom, Inc. DXCM has an Earnings ESP of +8.93% and a Zacks Rank #2. The company continues to focus on international markets, with strong emphasis on Germany. Currently, it is eyeing the sizeable markets of India, China and Japan. Given the demographic trend and lifestyle in countries outside the United States and Europe, we believe that DexCom has a strong international market opportunity.

The company is slated to release fourth-quarter 2018 earnings results on Feb 21.

The Zacks Consensus Estimate for fourth-quarter earnings stands at 14 cents, mirroring year-over-year growth of 40%. The same for revenues is pegged at $330.6 million, reflecting 49.6% improvement year over year.

DexCom, Inc. Price and EPS Surprise


DexCom, Inc. Price and EPS Surprise | DexCom, Inc. Quote

Masimo Corporation MASI has an Earnings ESP of +1.04% and a Zacks Rank #3. Strong sales in Masimo’s flagship Signal Extraction Technology (SET) pulse oximetry unit is likely to drive the company’s fourth-quarter 2018 results. The platform successfully eliminates the limitations of conventional pulse oximeters. At present, Masimo’s rainbow SET technology is gaining traction owing to rapid product development. The device has been clinically proven to reliably detect critical congenital heart disease in newborns.

The company is slated to release fourth-quarter earnings results on Feb 26.

The Zacks Consensus Estimate for earnings stands at 72 cents, which remains flat year over year. The same for revenues is pegged at $220 million, indicating a 2.3% decline year over year.

Masimo Corporation Price and EPS Surprise


Masimo Corporation Price and EPS Surprise | Masimo Corporation Quote

Wright Medical Group N.V. WMGI has an Earnings ESP of +18.18% and a Zacks Rank #2. Solid performance by the company’s upper and the lower extremity segments buoy optimism. Moreover, the FDA approval of the AUGMENT Injectable Bone Graft is a major positive. The company has also witnessed strong growth by the Perform Reversed Glenoid platform. Further, contribution from the company’s SIMPLICITI shoulder system is noteworthy.

The company is slated to release fourth-quarter 2018 earnings results on Feb 26.

The Zacks Consensus Estimate for earnings stands at 6 cents, mirroring a 40% decline year over year. The same for revenues is pinned at $237.4 million, showcasing a 9.1% decline year over year.

Wright Medical Group N.V. Price and EPS Surprise


Wright Medical Group N.V. Price and EPS Surprise | Wright Medical Group N.V. Quote

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

See Latest Stocks Today >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Varian Medical Systems, Inc. (VAR) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research