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Here's Why You Should Retain Surmodics (SRDX) Stock for Now

Zacks Equity Research

Surmodics, Inc. SRDX is well poised for growth on the back of persistent efforts to bolster research and development (R&D) functionalities and continued strength at Medical Devices unit. However, weak performance at Surmodics’ In Vitro Diagnostics (IVD) unit remains a concern.

Shares of Surmodics have gained 3.1%, compared with the industry’s growth of 2.1% in the past six months. Notably, the S&P 500 Index rallied 9.7% in the same timeframe.

The company, with a market capitalization of $574 million, is a leading provider of medical device and IVD technologies to the healthcare industry. It anticipates earnings to improve 10% in the next five years. Moreover, it has a trailing-four quarter positive earnings surprise of 501.9%, on average.

Let’s take a closer look at the factors that substantiate the company’s Zacks Rank #3 (Hold).



What’s Deterring the Stock?

Weak performance at Surmodics’ IVD unit, thanks to lower volume of sales of the company’s distributed antigen products, has been adversely impacting performance over a considerable period of time.

Factors to Bolster Surmodics

Surmodics continues to gain from core Medical Devices unit, which witnessed significant contribution from its SurVeil agreement with Abbott. In fact, the company’s fiscal fourth-quarter 2019 revenues of $24.8 million included $7.6 million contribution from the same. The company expects the trend to contribute significantly to the expected revenue growth in fiscal 2020.

The company’s persistent efforts to bolster R&D stature have been a key catalyst. The company’s whole product solutions pipeline and sirolimus-based below-the-knee DCB program deserve a mention in this regard. Moreover, it has been working through the preclinical studies for the data package that will be utilized to determine the readiness for first in-human clinical trial.

Given the company’s strength in the R&D prospects, it has long-term goals of generating EBITDA margins at or above 30% by fiscal 2021.

Strong outlook for fiscal 2020 instills optimism in the stock. Notably, the company initiated fiscal 2020 revenue expectation of $87-$91 million. This outlook includes revenues between $5.1 million and $5.5 million associated with the SurVeil-Abbott agreement.

Which Way Are Estimates Headed?

For fiscal 2020, the Zacks Consensus Estimate for revenues is pegged at $89.4 million, indicating a decline of 10.7% from the prior-year reported figure. The same for earnings stands at a loss of 25 cents per share.

Stocks to Consider

Some better-ranked stocks from the broader medical space are Cardinal Health, Inc. CAH, West Pharmaceutical Services, Inc. WST and DENTSPLY SIRONA, Inc. XRAY, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cardinal Health has an expected long-term earnings growth rate of 6.2%.

West Pharmaceutical has an estimated long-term earnings growth rate of 14%.

DENTSPLY SIRONA has a projected long-term earnings growth rate of 11.6%.

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