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Why is Cyberonics Downgraded to Sell?

Zacks Equity Research

On Jul 8, Zacks Investment Research downgraded Cyberonics Inc. (CYBX) to a Zacks Rank #4 (Sell).

Why the Downgrade?

Despite several recent strategic initiatives to boost growth, Cyberonics posted an unimpressive fourth-quarter fiscal 2014 with earnings in line with the Zacks Consensus Estimate and revenues missing the same.

Although earnings per share (EPS) rose 19.6% year over year to 55 cents, the results were merely on par with the Zacks Consensus Estimate. Revenues increased 9.5% year over year to $74.8 million in the quarter, but missed the Zacks Consensus Estimate of $77 million.

Sales in the U.S. remained sluggish with mere 3.7% growth year over year. Although gross profit climbed 8.8% year over year, gross margin of 90.1% in the fourth quarter contracted 61 basis points (bps) to 90.1%, impacted by the medical device tax and associated costs effective since Jan 2014.

Also, per management’s expectation, fiscal 2014 gross margin came in at 90.3% representing a downside of about 150 bps from fiscal 2013 due to the impact of the medical device tax, the introduction of Cyberonics’ tablet programmer and higher costs associated with the Costa Rica facility. Moving on, the fiscal 2015 gross margin expectation in the range of 90% to 91% also nullifies any probability of margin improvement in the near term. The CMS decision on TRD indication also stands as a major downside for the company.

Overall, an uninspiring performance forced the company to provide an average revenue and EPS guidance for the next fiscal, which has naturally failed to boost investor sentiment.

Notably, the Zacks Consensus Estimate for fiscal 2015 earnings slipped 0.4% to $2.37 per share over the last 30 days. For fiscal 2016, the Zacks Consensus Estimate declined by more than 1.7% to $2.80 per share.  

Other Stocks to Consider

However, some better-ranked stocks in the medical instrument sector that look promising at the moment are Masimo Corporation (MASI), Hologic Inc. (HOLX) and Intuitive Surgical, Inc. (ISRG). While MASI sports a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on ISRG
Read the Full Research Report on HOLX
Read the Full Research Report on MASI
Read the Full Research Report on CYBX

Zacks Investment Research