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Needham: Time to Turn Bullish on These 2 Stocks

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TipRanks
·6 min read
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Sometimes a market rally makes sense, but for many investors, the current run-up just doesn’t. Bouncing back with incredible force, the S&P 500 has gained 50% since plummeting to a low point on March 23, with the index now landing just shy of its 52-week high.

This impressive charge forward has come as investors shrug off COVID-19's devasting impact on the economy. Even the fact that the U.S. only added 167,000 employees to private payrolls in July, compared to the 1 million expected, hasn’t been able to derail this bullish trading action. On top of this, gloomy COVID-19 headlines continue to make the rounds, with the number of new cases spiking in several parts of the world.

Is Wall Street in for a major reality check? With so much uncertainty hanging in the balance, it’s hard to know for sure, but that’s not to say investors should start playing the waiting game.

The pros from investment firm Needham are pounding the table on two stocks, upgrading each based on their strong long-term growth narratives. We ran the names through TipRanks’ database, and found out that both have gotten a thumbs up from other analysts as well.

Surmodics (SRDX)

With innovative surface modification technologies, Surmodics provides intravascular medical devices as well as chemical components for in vitro diagnostic (IVD) tests and microarrays. Given that there are multiple potential catalysts on the horizon, Needham is now counting itself as a SRDX fan.

Following the CE Mark and European launch of the SurVeil drug-coated balloon (DCB) and the U.S. launches of three 510(k) products, 5-star analyst Mike Matson, who represents the firm, is anticipating a major ramp in revenue growth. With the CE Mark, a $6.5 million milestone payment from Abbott was triggered. SRDX is eligible for another $45 million in future milestone payments.

It should be noted that the DCB market could shrink thanks to the concerns over potential paclitaxel-related long-term mortality, and the lack of randomized controlled clinical trial data could limit SurVeil sales. That being said, Matson argues SRDX’s U.S. pivotal TRANSCEND trial might lead to adoption in Europe when 12-month data is presented, which could happen in C1H21. His FY21 and FY22 SurVeil sales estimates aren’t too shabby either, with the figures landing at $3 million and $6 million, respectively.

Adding to the good news, SRDX launched its Telemark microcatheter in F1Q20 through a distribution agreement with Medtronic, with it planning to launch its 0.014” and 0.018” PTA balloon catheters via a distribution agreement with Cook Medical in CY20. Based on the structure of the agreements, SRDX will sell the product to its distribution partner, who will then sell to the end customers.

Expounding on this, Matson stated, “Management expects each product to generate ~$0.5-1 million in revenue in FY20, which we view as conservative, and we think ~$1-2 million per product is achievable in FY21, resulting in a meaningful contribution to SRDX’s revenue growth (with just these three products adding ~2-3% to its FY21 revenue growth). And SRDX continues to work with other potential partners to establish distribution agreements for its other 510(k) products.”

The FDA clearance of SRDX’s Pounce thrombectomy system, slated for C2H20 or C1H21, could also be a key catalyst for shares, given that longer-term, the product’s indications could be expanded to include peripheral venous, pulmonary embolism (PE) and even stroke procedures.

Development milestones for SRDX’s other DCBs, including Avess (for use in arteriovenous or AV fistulas in dialysis patients) and Sundance (for use below-the-knee), could also serve as catalysts. Matson added, “We believe that increased demand in SRDX’s In Vitro Diagnostic business driven by anti-body testing volumes could partially offset headwinds in the Medical Devices business... we believe SRDX is exposed to less elective procedures and could weather a second decline in procedural volumes better than other med tech companies.”

Everything that SRDX has going for it convinced Matson to join the bulls. To this end, he upgraded the rating from Hold to Buy and put a $61 price target on the stock. The implication? Upside potential of 26%. (To watch Matson’s track record, click here)

Do other analysts agree with Matson? They do. Only Buy ratings, 3, in fact, have been issued in the last three months, so the consensus rating is a Strong Buy. At $66.67, the average price target is more aggressive than the Needham analyst’s and implies shares could surge 37.5% in the next year. (See Surmodics stock analysis on TipRanks)

Brooks Automation (BRKS)

As for the second stock on our list, Brooks Automation provides automation, vacuum and instrumentation solutions for semiconductor manufacturing, life sciences and other industries. After delivering a better-than-expected operational performance, Needham is giving this name its stamp of approval.

Much to the surprise of some on the Street, BRKS reported solid FY3Q20 results, with adjusted EPS increasing 60% year-over-year to $0.32 and revenue rising 8.1% year-over-year to $220 million. In addition, operating profit got a boost, growing 15% year-over-year to $30 million, and EBITDA was up as well. Writing for Needham, 5-star analyst Stephen Unger told clients that these results surpassed his forecasts.

Further commenting on the performance, Unger stated, “In particular, we are impressed with the level of customer engagement and new business wins logged by BRKS in FY3Q20, despite the global uncertainty, which bodes well for sustained double-digit revenue growth.”

Going forward, management guided for FY4 Q20 adjusted EPS of $0.32-0.40 on revenues of $229-241 million, which would reflect 15-21% growth. It should be noted that revenues for Semiconductor Solutions Group and Life Sciences are expected to dip.

While COVID-19 has decimated the economy, Brooks’ Life Sciences segment could be a key beneficiary. “In the immediate aftermath of COVID-19, outsourcing for laboratory services (Sanger sequencing, next-generation sequencing, and gene synthesis) is likely to receive a boost in demand given protocols established at customers to limit the congregation of laboratory personnel, while the outsourcing of sample storage can be used as a tool to free up existing laboratory space to decrease laboratory personnel concentration,” Unger explained.

What else is working in the company’s favor? Even though there’s still demand cyclicality within Semiconductor Solutions, product portfolio diversification bodes well for BRKS, in Unger’s opinion. This is especially true when it comes to Contamination Solutions.

Unger added, “The adoption of these solutions is more secular in nature, driven by ongoing advancements in semiconductor complexity and the increased use of contract manufacturing (e.g., Taiwan Semiconductor Manufacturing Company) to fabricate advanced chip designs.”

Based on all of the above, Unger handed out an upgrade, bumping the rating up from Hold to Buy. He also set the price target at $72. This implies shares could jump 27% in the year ahead. (To watch Unger’s track record, click here)    

Looking at the consensus breakdown, opinions are split evenly. 2 Buys and 2 Holds add up to a Moderate Buy consensus rating. In addition, the $57.25 average price target suggests modest upside potential of 0.72%. (See BRKS stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.