With the Q2 earning season heating up, analysts are once again in distress with the sluggish performance so far from 103 S&P 500 members, representing 25.8% of the index’s total market capitalization, as per the latest Earnings Trends report.
However, with nearly 80% of the medical device majors set to report their performance over the next two weeks, we have some good predictions for investors keen on the space. As per the report, Medical is one of the 7 broader sectors among the 16 Zacks sectors which are expected to report earnings growth. The sector is expected to deliver 1.7% earnings growth on 7.7% higher revenues in the second quarter.
While global economic uncertainties are continuing to hit the economy hard, leaving the conventional heavyweights like Finance, Tech or oil/energy in a position to pull the industry-wide average expectation down, the expected so-called positive second-quarter performance by the broader Medical sector is something investors would like to cheer about.
Beaming Medical Instrument Space
Medical instrument, a niche area under the medical device subcategory within the broader Medical sector holds a lot of promise at this moment. This comes as no surprise, even in the face of severe economic instability, fierce competition, and increasing cost related hazards springing from regulatory complexities. This is because the medical instrument industry continues to remain healthy on successful execution of some top strategic priorities, which include R&D and product development, strategic M&A and alliances and focus on emerging market expansion.
A recent EvaluateMedTech World Preview claims that this space within medical device is positioned for impressive growth in the near term. At a glance, medical device sales worldwide are expected to grow at a CAGR of 4.1% to $477.5 billion by 2020.
Factors like the recent exemption of the Medical Device Excise tax for the next two years have come in as a much-needed breather for these medical instrument stocks. We believe this exemption, albeit temporary, has infused a positive sentiment in the medical device investment world, as most analysts believe it to be adequate for companies to address pressing issues such as a lack of opportunity for R&D, innovation, pipeline development, and to make investments needed to accelerate patient and provider access to innovative health care products.
Apart from these catalysts, other remarkable breakthroughs include information technology, utilization of smart devices, cloud connectivity and personalized medicine. The IT revolution has literally reshaped MedTech, not least the medical instrument subsector. Technology has brought hope for millions suffering from debilitating conditions.
Making the Right Choice
With a wide number of stocks in the medical instrument space that almost always muddle up one’s stock-picking abilities, the Zacks methodology could offer some respite. One can narrow down the choices by focusing on stocks that have the desirable combination of a positive Earnings ESP and a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in 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 a positive earnings surprise is as high as 70%.
Going by these criteria, we present four medical instrument stocks that are poised to beat estimates this quarter. It would be a good idea to add these stocks to your portfolio to ride a likely share price appreciation post-release.
Hologic Inc. (HOLX)
Headquartered in Bedford, MA, Hologic is a provider of diagnostics, medical imaging systems and surgical products which cater to the healthcare needs of women. The company’s strong pipeline of products and solid performance of the GYN Surgical and Diagnostics segments bolster our confidence in the stock.
At present, Hologic is also gaining traction in the domestic breast imaging market despite stiff competition, thanks to a sustained uptake of its Genius 3D mammography device. It’s also encouraging to note that Hologic’s 3D Genius system currently caters to only 20% of the concerned market, indicating scope for market expansion.
Hologic will report third-quarter fiscal 2016 results on Jul 27 after the market closes. We believe the company is poised to beat the Zacks Consensus Estimate given its Zacks Rank #2 and an Earnings ESP of +2.13%.
Thermo Fisher Scientific, Inc. (TMO)
Headquartered in Waltham, MA, scientific instrument maker Thermo Fisher Scientific started the year 2016 on a promising note and expects to sustain the pace led by strong bioproduction and biosciences businesses. We await the integration and synergies from the recently completed mega acquisition of Affimetrix, which is expected to boost Thermo Fisher’s offerings in the fast-growing flow cytometry market. We are also optimistic about the company’s plans to continue to strengthen its foothold in the emerging markets, such as China and India.
Thermo Fisher will report second-quarter fiscal 2016 results on Jul 28. The stock has an Earnings ESP of +0.50% and carries a Zacks Rank #3.
TearLab Corporation (TEAR)
This in vitro diagnostic company develops lab-on-a-chip technologies that enable eye care practitioners to improve standard of care by objectively and quantitatively testing for disease markers in tears at the point-of-care. Its TearLab Osmolarity System, a proprietary in vitro diagnostic tear testing platform, measures tear film osmolarity for the diagnosis of dry eye disease.
We are encouraged by the company’s strong revenue growth prediction of 15%–20% for 2016. Besides, from the beginning of the second quarter, the company expects to start realizing the full impact of an annualized operating expense reduction of $12.9 million from the completion of strategic restructuring and the divestment of its OcuHub subsidiary.
TearLab is scheduled to report second-quarter 2016 numbers on Aug 3. We expect the company to beat our earnings estimates as it has the favorable combination of a Zacks Rank #3 and an Earnings ESP of +11.11%.
Varian Medical Systems, Inc. (VAR)
Headquartered in Palo Alto, CA, Varian Medical Systems Inc. (VAR) is the world’s leading provider of radiotherapy, radiosurgery, proton therapy and brachytherapy for treating cancer and other medical conditions.
We believe that Varian Medical's oncology business has significant growth prospects in the long run. Moreover, China, India, Brazil (despite showing weakness in the second quarter), the Middle East and Africa present significant top-line growth opportunities for Varian. Further, Varian’s strong product pipeline is a key growth catalyst.
Varian is expected to report third-quarter fiscal 2016 numbers on Jul 27. We expect the company to beat our earnings estimates as it has the favorable combination of a Zacks Rank #3 and an Earnings ESP of +0.86%.
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